Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Amendment No. 1 to Draft Registration Statement as confidentially submitted to the Securities and Exchange Commission on June 16, 2023.
This registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein remains strictly confidential.
File No. 001-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
WK Kellogg Co
(Exact name of Registrant as specified in its charter)
Delaware | 92-1243173 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) | |
|
| |
One Kellogg Square Battle Creek, Michigan |
49016-3599 | |
(Address of Principal Executive Offices) | (Zip Code) |
(269) 961-2000
(Registrants telephone number, including area code)
Copies to:
Robert M. Hayward, P.C.
Robert E. Goedert, P.C.
Ashley Sinclair
Kirkland & Ellis LLP
300 North LaSalle Street
Chicago, IL 60654
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class to be so registered |
Name of each exchange on which each class is to be registered | |
Common Stock, par value $0.0001 per share | New York Stock Exchange |
Securities to be registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | |||
Non-accelerated Filer | ☒ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
WK Kellogg Co
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
Certain information required to be included herein is incorporated by reference to specifically identified portions of the body of the information statement filed herewith as Exhibit 99.1 (the information statement). None of the information contained in the information statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference.
Item 1. | Business. |
The information required by this item is contained in the sections Summary, Risk Factors, Cautionary Statement Concerning Forward-Looking Statements, The Spin-Off, Capitalization, Unaudited Pro Forma Combined Financial Statements, Managements Discussion and Analysis of Financial Condition and Results of Operations, Business, Management, Compensation Discussion and Analysis, Certain Relationships and Related Party Transactions, Where You Can Find More Information and Index to Financial Statements (and the statements referenced therein) of the information statement. Those sections are incorporated herein by reference.
Item 1A. | Risk Factors. |
The information required by this item is contained in the sections Risk Factors and Cautionary Statement Concerning Forward-Looking Statements of the information statement. Those sections are incorporated herein by reference.
Item 2. | Financial Information. |
The information required by this item is contained in the sections Summary, Risk Factors, Capitalization, Unaudited Pro Forma Combined Financial Statements, Managements Discussion and Analysis of Financial Condition and Results of Operations and Index to Financial Statements (and the statements referenced therein) of the information statement. Those sections are incorporated herein by reference.
Item 3. | Properties. |
The information required by this item is contained in the section BusinessProperties of the information statement. That section is incorporated herein by reference.
Item 4. | Security Ownership of Certain Beneficial Owners and Management. |
The information required by this item is contained in the section Security Ownership of Certain Beneficial Owners and Management of the information statement. That section is incorporated herein by reference.
Item 5. | Directors and Executive Officers. |
The information required by this item is contained in the section Management of the information statement. That section is incorporated herein by reference.
Item 6. | Executive Compensation. |
The information required by this item is contained in the sections Compensation Discussion and Analysis and Management of the information statement. Those sections are incorporated herein by reference.
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Item 7. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this item is contained in the sections Certain Relationships and Related Party Transactions, Management, Compensation Discussion and Analysis and Security Ownership of Certain Beneficial Owners and Management of the information statement. Those sections are incorporated herein by reference.
Item 8. | Legal Proceedings. |
The information required by this item is contained in the section BusinessLegal Proceedings of the information statement. That section is incorporated herein by reference.
Item 9. | Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters. |
The information required by this item is contained in the sections Summary, Risk Factors, The Spin-Off, Dividend Policy, Capitalization and Description of Our Capital Stock of the information statement. Those sections are incorporated herein by reference.
Item 10. | Recent Sales of Unregistered Securities. |
The information required by this item is contained in the section Description of Our Capital Stock of the information statement. That section is incorporated herein by reference.
Item 11. | Description of Registrants Securities to Be Registered. |
The information required by this item is contained in the section Description of Our Capital Stock of the information statement. That section is incorporated herein by reference.
Item 12. | Indemnification of Directors and Officers. |
The information required by this item is contained in the section Description of Our Capital Stock of the information statement. That section is incorporated herein by reference.
Item 13. | Financial Statements and Supplementary Data. |
The information required by this item is contained in the section Index to Financial Statements (and the statements referenced therein) of the information statement. That section is incorporated herein by reference.
Item 14. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Not applicable.
Item 15. | Financial Statements and Exhibits. |
(a) Financial Statements
The information required by this item is contained in the sections Unaudited Pro Forma Combined Financial Statements and Index to Financial Statements (and the statements referenced therein) of the information statement. That section is incorporated herein by reference.
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(b) Exhibits
The following documents are filed as exhibits hereto:
Exhibit Number |
Exhibit Title | |
2.1 | Form of Separation and Distribution Agreement between Kellogg Company and WK Kellogg Co. | |
3.1 | Form of Amended and Restated Certificate of Incorporation of WK Kellogg Co. | |
3.2 | Form of Amended and Restated Bylaws of WK Kellogg Co. | |
10.1 | Form of Employee Matters Agreement between Kellogg Company and WK Kellogg Co. | |
10.2* | Form of Supply Agreement between Kellogg Company and WK Kellogg Co. | |
10.3* | Form of Master License Agreement Regarding Patents, Trade Secrets and Know-How between Kellogg Company and WK Kellogg Co. | |
10.4* | Form of Master License Agreement Regarding Trademarks and Certain Related Intellectual Property between Kellogg Company and WK Kellogg Co. | |
10.5 | Form of Tax Matters Agreement between Kellogg Company and WK Kellogg Co. | |
10.6* | Form of Transition Services Agreement between Kellogg Company and WK Kellogg Co. | |
21.1* | Subsidiaries of the Registrant. | |
99.1 | Preliminary Information Statement dated June 16, 2023. | |
99.2* | Form of Notice of Internet Availability of Information Statement Materials. |
* | To be filed by amendment. |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
WK KELLOGG CO | ||
By: | ||
Name: Gary Pilnick | ||
Title: President |
Date: , 2023
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Exhibit 2.1
SEPARATION AND DISTRIBUTION AGREEMENT
BY AND BETWEEN
KELLOGG COMPANY
AND
WK KELLOGG CO
DATED AS OF [], 2023
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
TABLE OF CONTENTS
Page | ||||||
ARTICLE I DEFINITIONS |
2 | |||||
ARTICLE II THE INTERNAL REORGANIZATION |
14 | |||||
2.1 |
Transfer of Assets and Assumption of Liabilities | 14 | ||||
2.2 |
WKKC Assets; Kellanova Assets | 16 | ||||
2.3 |
WKKC Liabilities; Kellanova Liabilities | 20 | ||||
2.4 |
Approvals and Notifications. | 21 | ||||
2.5 |
Novation of Liabilities | 23 | ||||
2.6 |
Release of Guarantees | 24 | ||||
2.7 |
Termination of Agreements | 25 | ||||
2.8 |
Treatment of Shared Contracts | 26 | ||||
2.9 |
Bank Accounts; Cash Balances | 27 | ||||
2.10 |
Ancillary Agreements | 28 | ||||
2.11 |
Disclaimer of Representations and Warranties | 28 | ||||
2.12 |
WKKC Financing Arrangements | 29 | ||||
2.13 |
Financial Information Certifications | 29 | ||||
ARTICLE III THE DISTRIBUTION |
30 | |||||
3.1 |
Sole and Absolute Discretion; Cooperation | 30 | ||||
3.2 |
Actions Prior to the Distribution | 30 | ||||
3.3 |
Conditions to the Distribution | 31 | ||||
3.4 |
The Distribution | 33 | ||||
ARTICLE IV MUTUAL RELEASES; INDEMNIFICATION |
35 | |||||
4.1 |
Release of Pre-Distribution Claims | 35 | ||||
4.2 |
Indemnification by WKKC | 37 | ||||
4.3 |
Indemnification by Kellanova | 38 | ||||
4.4 |
Indemnification Obligations Net of Insurance Proceeds and Other Amounts | 39 | ||||
4.5 |
Procedures for Indemnification of Third-Party Claims | 39 | ||||
4.6 |
Additional Matters | 42 | ||||
4.7 |
Right of Contribution | 43 | ||||
4.8 |
Covenant Not to Sue | 44 | ||||
4.9 |
Remedies Cumulative | 44 | ||||
4.10 |
Survival of Indemnities | 44 | ||||
ARTICLE V CERTAIN OTHER MATTERS |
44 | |||||
5.1 |
Insurance Matters | 44 | ||||
5.2 |
Late Payments | 47 | ||||
5.3 |
Treatment of Payments for Tax Purposes | 47 | ||||
5.4 |
Inducement | 47 | ||||
5.5 |
Post-Effective Time Conduct | 47 | ||||
5.6 |
Distribution Center Sublease Agreements | 47 |
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
ARTICLE VI EXCHANGE OF INFORMATION; CONFIDENTIALITY; OTHER COVENANTS |
48 | |||||
6.1 |
Agreement for Exchange of Information | 48 | ||||
6.2 |
Ownership of Information | 49 | ||||
6.3 |
Compensation for Providing Information | 49 | ||||
6.4 |
Record Retention | 49 | ||||
6.5 |
Limitations of Liability | 49 | ||||
6.6 |
Other Agreements Providing for Exchange of Information | 49 | ||||
6.7 |
Production of Witnesses; Records; Cooperation | 50 | ||||
6.8 |
Privileged Matters | 50 | ||||
6.9 |
Confidentiality | 53 | ||||
6.10 |
Protective Arrangements | 54 | ||||
6.11 |
Restrictive Covenants | 54 | ||||
ARTICLE VII DISPUTE RESOLUTION |
55 | |||||
7.1 |
Transition Committee | 55 | ||||
7.2 |
Good-Faith Officer Negotiation | 56 | ||||
7.3 |
CEO Negotiation | 56 | ||||
7.4 |
Arbitration | 56 | ||||
7.5 |
Emergency Relief | 58 | ||||
7.6 |
Conduct During Dispute Resolution Process | 58 | ||||
ARTICLE VIII FURTHER ASSURANCES |
59 | |||||
8.1 |
Further Assurances | 59 | ||||
ARTICLE IX TERMINATION |
59 | |||||
9.1 |
Termination | 59 | ||||
9.2 |
Effect of Termination | 60 | ||||
ARTICLE X MISCELLANEOUS |
60 | |||||
10.1 |
Counterparts; Entire Agreement; Corporate Power | 60 | ||||
10.2 |
Governing Law | 61 | ||||
10.3 |
Assignability | 61 | ||||
10.4 |
Third Party Beneficiaries | 61 | ||||
10.5 |
Notices | 61 | ||||
10.6 |
Severability | 62 | ||||
10.7 |
Force Majeure | 62 | ||||
10.8 |
No Set-Off | 62 | ||||
10.9 |
Expenses | 62 | ||||
10.10 |
Headings | 63 | ||||
10.11 |
Survival of Covenants | 63 | ||||
10.12 |
Waivers of Default | 63 | ||||
10.13 |
Specific Performance | 63 | ||||
10.14 |
Amendments | 63 | ||||
10.15 |
Interpretation | 63 | ||||
10.16 |
Limitations of Liability | 64 | ||||
10.17 |
Performance | 64 | ||||
10.18 |
Mutual Drafting; Precedence | 64 |
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
SCHEDULES
Schedule 1.1 | Distribution Centers | |
Schedule 1.2 | Restricted Business Excluded Countries | |
Schedule 1.3 | Non-Shared Contracts | |
Schedule 1.4 | Transferred Entities | |
Schedule 1.5 | Extended Requirements Brands | |
Schedule 1.6(a)(i) | Cereal Brands | |
Schedule 1.6(a)(ii) | Granola Brands | |
Schedule 1.6(a)(iii) | Cereal Bites Brands | |
Schedule 1.6(a)(iv) | Cookies Brands | |
Schedule 1.6(a)(v) | Core Brands | |
Schedule 1.6(b) | WKKC Licensing Arrangements | |
Schedule 1.7 | Excluded WKKC Contracts | |
Schedule 1.8 | Certain WKKC Contracts | |
Schedule 1.9 | Distribution Centers Fully Subleased to WKKC | |
Schedule 2.1(a) | Internal Reorganization Step Plan | |
Schedule 2.2(a)(iv) | WKKC Owned Real Property | |
Schedule 2.2(a)(vi) | WKKC Permits | |
Schedule 2.2(a)(viii) | WKKC Tangible Personal Property | |
Schedule 2.2(a)(xiii) | WKKC Information Technology | |
Schedule 2.2(a)(xvi) | WKKC Data | |
Schedule 2.2(a)(xvii) | Certain WKKC Assets | |
Schedule 2.2(b)(v) | Certain Kellanova Assets | |
Schedule 2.3(a)(vii) | Certain WKKC Liabilities | |
Schedule 2.3(a)(viii) | Certain WKKC Claims | |
Schedule 2.3(b)(v) | Certain Kellanova Liabilities | |
Schedule 2.7(b) | Surviving Intercompany Agreements | |
Schedule 3.2(c) | Directors and Officers | |
Schedule 4.3(e) | Specified Kellanova Information | |
Schedule 10.9 | Allocation of Certain Costs and Expenses | |
EXHIBITS | ||
Exhibit A | Form of Amended and Restated Certificate of Incorporation of WKKC | |
Exhibit B | Form of Amended and Restated Bylaws of WKKC | |
Exhibit C | Form of Distribution Center Sublease Agreement |
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
SEPARATION AND DISTRIBUTION AGREEMENT
This SEPARATION AND DISTRIBUTION AGREEMENT, dated as of [], 2023 (this Agreement), is by and between Kellogg Company, a Delaware corporation (Kellanova), and WK Kellogg Co, a Delaware corporation (WKKC and each of Kellanova and WKKC, a Party, and collectively, the Parties). Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Article I.
R E C I T A L S
WHEREAS, the board of directors of Kellanova (the Kellanova Board) has determined that it is in the best interests of Kellanova and its stockholders to create a new publicly traded company that shall operate the WKKC Business;
WHEREAS, in furtherance of the foregoing, the Kellanova Board has determined that it is appropriate and desirable to separate the WKKC Business from the Kellanova Business (the Internal Reorganization) and, following the Internal Reorganization, make a distribution of all of the outstanding WKKC Shares, on a pro rata basis, to holders of Kellanova Shares on the Record Date (the Distribution);
WHEREAS, WKKC has been incorporated solely for these purposes and has not engaged in activities except in connection with the Internal Reorganization and the Distribution;
WHEREAS, for U.S. federal income Tax purposes, the contribution by Kellanova of the WKKC Assets to WKKC in exchange for the Cash Transfer, the assumption of the WKKC Liabilities and the actual or deemed issuance of additional WKKC Shares (the Contribution) and the Distribution, taken together, are intended to qualify as a transaction that is generally Tax-free for U.S. federal income Tax purposes under Sections 355, 361 and 368(a)(1)(D) of the Code;
WHEREAS, for U.S. federal income Tax purposes, this Agreement (including the Internal Reorganization Step Plan attached hereto as Schedule 2.1(a)) is intended to be, and is hereby adopted as, a plan of reorganization within the meaning of Section 368 of the Code and Treasury Regulations Sections 1.368-2(g) and 1.368-3(a);
WHEREAS, WKKC and Kellanova have prepared, and WKKC has filed with the SEC, the Form 10, which includes the Information Statement, and which sets forth disclosure concerning WKKC, the Internal Reorganization and the Distribution;
WHEREAS, each of Kellanova and WKKC has determined that it is appropriate and desirable to set forth the principal transactions required to effect the Internal Reorganization and the Distribution and certain other agreements that will govern certain matters relating to the Internal Reorganization and the Distribution and the relationship of Kellanova, WKKC and the members of their respective Groups following the Distribution; and
WHEREAS, the Parties acknowledge that this Agreement and the Ancillary Agreements represent the integrated agreement of Kellanova and WKKC relating to the Internal Reorganization and the Distribution, are being entered into together, and would not have been entered into independently.
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
For the purpose of this Agreement, the following terms shall have the following meanings:
Action shall mean any demand, action, claim, dispute, suit, countersuit, arbitration, inquiry, subpoena, proceeding or investigation of any nature (whether criminal, civil, legislative, administrative, regulatory, prosecutorial or otherwise) by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal.
Affiliate shall mean, when used with respect to a specified Person, a Person that, directly or indirectly, through one (1) or more intermediaries, controls, is controlled by or is under common control with such specified Person. For the purpose of this definition, control (including, with correlative meanings, controlled by and under common control with), when used with respect to any specified Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or other interests, by Contract, agreement, obligation, indenture, instrument, lease, promise, arrangement, release, warranty, commitment, undertaking or otherwise. It is expressly agreed that, prior to, at and after the Effective Time, solely for purposes of this Agreement and the Ancillary Agreements, (a) no member of the WKKC Group shall be deemed to be an Affiliate of any member of the Kellanova Group and (b) no member of the Kellanova Group shall be deemed to be an Affiliate of any member of the WKKC Group.
Agreement shall have the meaning set forth in the Preamble.
Ancillary Agreements shall mean all agreements (other than this Agreement) entered into by the Parties or the members of their respective Groups (but only agreements as to which no Third Party is a party) in connection with the Internal Reorganization, the Distribution, or the other transactions contemplated by this Agreement, including the Transition Services Agreement, the Tax Matters Agreement, the Employee Matters Agreement, the HQ Lease Agreement, the Non-Brand IP Agreement, the Brand IP Agreement, the Manufacturing and Supply Agreement, the Management Services Agreement, the Distribution Center Sublease Agreements, [the Data Processing Agreement,] the Transfer Documents and any other agreement that by its express terms provides that it shall be an Ancillary Agreement for purposes of this Agreement.
Approvals or Notifications shall mean any consents, waivers, approvals, Permits or authorizations to be obtained from, notices, registrations or reports to be submitted to, or other filings to be made with, any Third Party, including any Governmental Authority.
Arbitration Request shall have the meaning set forth in Section 7.4(a).
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Assets shall mean, with respect to any Person, the assets, properties, claims and rights (including goodwill) of such Person, wherever located (including in the possession of vendors or other Third Parties or elsewhere), of every kind, character and description, whether real, personal or mixed, tangible, intangible or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of such Person, including rights and benefits pursuant to any Contract, Permit, concession, franchise, instrument, undertaking, commitment, understanding or other arrangement.
Benefit Plan shall have the meaning set forth in the Employee Matters Agreement.
Bound Member shall have the meaning set forth in Section 2.5(b).
Brand IP Agreement shall mean the Master Ownership and License Agreement Regarding Trademarks and Certain Related Intellectual Property to be entered into by and between Kellanova and WKKC or the members of their respective Groups in connection with the Internal Reorganization, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
Canadian WKKC Group Member shall mean any member of the WKKC Group organized under the Laws of Canada.
Captive Insurer shall mean any insurer that is an Affiliate of either Kellanova or WKKC prior to the Effective Time.
Cash Transfer shall have the meaning set forth in Section 2.12(a).
CEO Negotiation Request shall have the meaning set forth in Section 7.3.
Chosen Courts shall have the meaning set forth in Section 7.5.
Claim Costs shall have the meaning set forth in Section 5.1(a)(ii).
Code shall mean the Internal Revenue Code of 1986, as amended.
Contract shall mean any contract, lease, license, commitment, loan or credit agreement, indenture or other agreement, in each case, which is legally binding, and in each case other than a Permit or a Benefit Plan.
Contribution shall have the meaning set forth in the Recitals.
Corporate Liabilities shall mean any and all Liabilities of Kellanova to the extent relating to, arising out of or resulting from (a) claims made by or on behalf of holders of any of Kellanovas securities, in their capacities as such, (b) any form, report, statement, certifications or other document (including all exhibits, amendments and supplements thereto) (other than a Disclosure Document) filed by Kellanova with the SEC on or prior to the Distribution, including the financial statements included therein, (c) the maintenance of Kellanovas books and records, Kellanovas corporate compliance and other corporate-level actions and oversight of Kellanova and (d)(i) indemnification obligations to any current or former director or officer of Kellanova in their capacity as such in respect of occurrences prior to the Distribution or (ii) any claims for breach of fiduciary duties brought against any current or former directors or officers of Kellanova, in their
3
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
capacities as such in respect of occurrences prior to the Distribution, in each case, relating to any acts, omissions or events on or prior to the Distribution. For purposes of clarification of the foregoing, the Parties agree that no Liability relating to, arising out of or resulting from any obligations of any Person to perform the executory portion of any Contract existing as of the Distribution shall be deemed to be a Corporate Liability. Notwithstanding anything to the contrary herein, Corporate Liabilities shall not include any Liabilities that are related or attributable to or arising in connection with Taxes or Tax Returns.
COVID-19 shall mean SARS-CoV-2 or COVID-19, and any evolutions, variants, mutations or worsening thereof or related or associated epidemics, pandemics or disease outbreaks (including any subsequent waves).
[Data Processing Agreement shall mean the Data Processing Agreement to be entered into by and between Kellanova and WKKC or the members of their respective Groups in connection with the Internal Reorganization, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.]
Delayed Asset shall have the meaning set forth in Section 2.4(c).
Delayed Liability shall have the meaning set forth in Section 2.4(c).
Designated Party shall have the meaning set forth in Section 2.5(b).
Disclosure Document shall mean any registration statement (including the Form 10) filed with the SEC by or on behalf of any Party or any member of its Group, and also includes any information statement (including the Information Statement), prospectus, offering memorandum, offering circular, periodic report or similar disclosure document, whether or not filed with the SEC or any other Governmental Authority, in each case that describes the Contribution, the Internal Reorganization or the Distribution or the WKKC Group or primarily relates to the transactions contemplated hereby.
Dispute shall have the meaning set forth in Section 7.1(b).
Distribution shall have the meaning set forth in the Recitals.
Distribution Agent shall mean the trust company or bank duly appointed by Kellanova to act as distribution agent, transfer agent and registrar for the WKKC Shares in connection with the Distribution.
Distribution Center Sublease Agreements shall mean the Distribution Center Sublease Agreements for each distribution center listed on Schedule 1.1, to be entered into by and between or among the relevant members of the Kellanova Group, on the one hand, and the relevant members of the WKKC Group, on the other hand, in each case, in the form set forth on Exhibit C.
Distribution Date shall mean the date of the consummation of the Distribution, which shall be determined by the Kellanova Board in its sole and absolute discretion.
Effective Time shall mean 12:01 a.m., New York City time, on the Distribution Date.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
e-mail shall have the meaning set forth in Section 10.5.
Emergency Petition shall have the meaning set forth in Section 7.5.
Employee Matters Agreement shall mean the Employee Matters Agreement to be entered into by and between Kellanova and WKKC or the members of their respective Groups in connection with the Internal Reorganization, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
Environmental Law shall mean any Law relating to public or worker health or safety (regarding exposure to Hazardous Materials), pollution or protection of the environment, including such Laws relating to the use, handling, transportation, treatment, storage, disposal, Release or discharge of, or exposure to, Hazardous Materials.
Environmental Liabilities shall mean all Liabilities relating to, arising out of or resulting from any Hazardous Materials, Environmental Law or Contract relating to environmental, health or safety matters (including all removal, remediation or cleanup costs, investigatory costs, response costs, natural resources damages, property damages, personal injury damages, costs of compliance with any product take back requirements or with any settlement, judgment or other determination of Liability and indemnity, contribution or similar obligations) and all costs and expenses, interest, fines, penalties or other monetary sanctions in connection therewith.
Exchange Act shall mean the U.S. Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.
Final Cash Balance shall have the meaning set forth in Section 2.9(g).
Force Majeure shall mean, with respect to a Party, an event beyond the reasonable control of such Party (or any Person acting on its behalf), which event (a) does not arise or result from the fault or negligence of such Party (or any Person acting on its behalf) and (b) by its nature would not reasonably have been foreseen by such Party (or such Person), or, if it would reasonably have been foreseen, was unavoidable, and includes acts of God, acts of civil or military authority, acts of terrorism, cyberattacks, embargoes, epidemics, pandemics (including COVID-19 and Pandemic Measures), war, riots, insurrections, fires, explosions, earthquakes, floods, unusually severe weather conditions, organized labor, adverse economic or job actions, unavailability of parts, or, in the case of computer systems, any significant and prolonged failure in electrical or air conditioning equipment. Notwithstanding the foregoing, the receipt by a Party of an unsolicited takeover offer or other acquisition proposal, even if unforeseen or unavoidable, and such Partys response thereto shall not be deemed an event of Force Majeure.
Form 10 shall mean the registration statement on Form 10 filed by WKKC with the SEC to effect the registration of WKKC Shares pursuant to the Exchange Act in connection with the Distribution, as such registration statement may be amended or supplemented from time to time prior to the Distribution.
Governmental Approvals shall mean any Approvals or Notifications to be made to, or obtained from, any Governmental Authority.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Governmental Authority shall mean any nation or government, any state, municipality or other political subdivision thereof, and any entity, body, agency, commission, department, board, bureau, court, tribunal or other instrumentality, whether federal, state, local, domestic, foreign or multinational, exercising executive, legislative, judicial, regulatory, administrative or other similar functions of, or pertaining to, a government and any executive official thereof.
Group shall mean either the WKKC Group or the Kellanova Group, as the context requires.
Hazardous Materials shall mean any and all materials, substances or wastes for which Liability or standards of conduct may be imposed under or pursuant to any Environmental Law, including petroleum, petroleum products and byproducts, asbestos and asbestos-containing materials and per- and polyfluoroalkyl substances.
Holding Person shall have the meaning set forth in Section 2.4(c).
HQ shall have the meaning set forth in the definition of HQ Lease Agreement.
HQ Lease Agreement shall mean the Lease Agreement for certain office space located at One Kellogg Square in Battle Creek, Michigan (such location, HQ) to be entered into by and between Kellanova and WKKC or the members of their respective Groups in connection with the Internal Reorganization, the Distribution or the other transactions contemplated by this Agreement, each as it may be amended from time to time.
Indemnification Response Period shall have the meaning set forth in Section 4.6(b).
Indemnifying Party shall have the meaning set forth in Section 4.4(a).
Indemnitee shall have the meaning set forth in Section 4.4(a).
Indemnity Payment shall have the meaning set forth in Section 4.4(a).
Information Statement shall mean the information statement to be made available to the holders of Kellanova Shares in connection with the Distribution, as such information statement may be amended or supplemented from time to time prior to the Distribution.
Information Technology shall mean all computer systems (including hardware, computers, servers, workstations, routers, hubs, switches, and data communication lines), network and telecommunications equipment, Internet-related information technology infrastructure, and other information technology equipment, Software, and all associated documentation.
Initial Notice shall have the meaning set forth in Section 7.1(b).
Insurance Proceeds shall mean those monies:
(a) received by an insured from an insurance carrier; or
(b) paid by an insurance carrier on behalf of the insured;
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
in any such case net of any applicable premium adjustments (including reserves and retrospectively rated premium adjustments) and net of any costs or expenses (including attorneys fees) incurred in the collection thereof; provided, that Insurance Proceeds shall not include amounts paid from a Captive Insurer unless actually received from a Third Party.
Internal Reorganization shall have the meaning set forth in the Recitals.
Internal Reorganization Step Plan shall have the meaning set forth in Section 2.1(a).
Inventory shall have the meaning set forth in Section 2.2(a)(viii).
JAMS Expedited Rules shall have the meaning set forth in Section 7.4(a).
Kellanova shall have the meaning set forth in the Preamble.
Kellanova Accounts shall have the meaning set forth in Section 2.9(a).
Kellanova Assets shall have the meaning set forth in Section 2.2(b).
Kellanova Board shall have the meaning set forth in the Recitals.
Kellanova Books and Records shall have the meaning set forth in Section 2.2(b)(iv).
Kellanova Business shall mean all businesses, operations and activities (whether or not such businesses, operations or activities are or have been terminated, divested or discontinued) conducted at any time prior to the Effective Time by either Party or any member of its Group, other than the WKKC Business.
Kellanova Group shall mean Kellanova and each Person that is a Subsidiary of Kellanova (other than WKKC and any other member of the WKKC Group).
Kellanova Indemnitees shall have the meaning set forth in Section 4.2.
Kellanova Liabilities shall have the meaning set forth in Section 2.3(b).
Kellanova Shares shall mean the shares of common stock, par value $0.25 per share, of Kellanova.
Law shall mean any national, supranational, federal, state, provincial, local or similar law (including common law), statute, code, order, ordinance, rule, regulation, treaty (including any income Tax treaty), license, Permit, decree, injunction, binding judicial or administrative interpretation or other requirement, in each case, enacted, promulgated, issued or entered by a Governmental Authority.
Liabilities shall mean all debts, guarantees, assurances, commitments, liabilities, responsibilities, Losses, remediations, deficiencies, damages, fines, penalties, settlements, sanctions, interest, costs, expenses and obligations of any nature or kind, whether accrued or fixed, absolute or contingent, matured or unmatured, accrued or not accrued, asserted or unasserted, liquidated or unliquidated, foreseen or unforeseen, known or unknown, reserved or unreserved, or
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
determined or determinable, including those arising under any Law, Action (including any Third-Party Claim) or order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority or arbitration tribunal, and those arising under any Contract or any fines, damages or equitable relief that is imposed, in each case, including all costs and expenses relating thereto.
Losses shall mean actual losses (including any diminution in value), costs, damages, penalties and expenses (including legal and accounting fees and expenses and costs of investigation and litigation), whether or not involving a Third-Party Claim.
Management Services Agreement shall mean the Management Services Agreement to be entered into by and between Kellanova and WKKC or the members of their respective Groups in connection with the Internal Reorganization, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
Manufacturing and Supply Agreement shall mean the Manufacturing and Supply Agreement to be entered into by and between Kellanova and WKKC or the members of their respective Groups in connection with the Internal Reorganization, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
Merchandise shall have the meaning set forth in Section 2.2(a)(viii).
Non-Brand IP Agreement shall mean the Master Ownership and License Agreement Regarding Patents, Trade Secrets and Certain Related Intellectual Property to be entered into by and between Kellanova and WKKC or the members of their respective Groups in connection with the Internal Reorganization, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
North America shall have the meaning ascribed to such term in the Brand IP Agreement.
NYSE shall mean the New York Stock Exchange.
Officer Negotiation Request shall have the meaning set forth in Section 7.2.
Pandemic Measures shall mean any quarantine, shelter in place, stay at home, workforce reduction, social distancing, shut down, closure, sequester, immunization requirement, safety or similar Law, directive, guidelines or recommendations promulgated by any Governmental Authority, including the Centers for Disease Control and Prevention and the World Health Organization, in each case, in connection with or in response to a pandemic, including COVID-19.
Party or Parties shall have the meaning set forth in the Preamble.
Penalty Rate shall have the meaning set forth in Section 5.2.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Permits shall mean permits, approvals, authorizations, consents, licenses or certificates issued by any Governmental Authority.
Person shall mean an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority.
Privileged Information shall mean any information, in written, oral, electronic or other tangible or intangible forms, including any communications by or to attorneys (including attorney-client privileged communications), memoranda and other materials prepared by attorneys or under their direction (including attorney work product), as to which a Party or any member of its Group would be entitled to assert or have asserted a privilege or other protection, including the attorney-client and attorney work product privileges.
Receiving Person shall have the meaning set forth in Section 2.4(c).
Record Date shall mean the close of business on the date to be determined by the Kellanova Board in its sole and absolute discretion as the record date for determining holders of Kellanova Shares entitled to receive WKKC Shares pursuant to the Distribution.
Record Holders shall mean the holders of record of Kellanova Shares as of the Record Date.
Release shall mean any release, spill, emission, discharge, leaking, pumping, pouring, dumping, injection, deposit, disposal, dispersal, leaching or migration of Hazardous Materials into the environment (including indoor or ambient air, surface water, groundwater and surface or subsurface strata).
Representatives shall mean, with respect to any Person, any of such Persons directors, officers, employees, agents, consultants, advisors, accountants, attorneys or other representatives.
[Restricted Business shall mean (a) with respect to any member of the Kellanova Group, the sale to non-Affiliates, or promotion or marketing of, in North America, RTEC or Hot Cereal (as defined in the Brand IP Agreement); and (b) with respect to any member of the WKKC Group, the sale to non-Affiliates, or promotion or marketing of, (i) in North America, Bars & Other Bites, Crackers, Salty Snacks, Carriers, Pastries and Animal & Grahams Snacks (each as defined in the Brand IP Agreement) and (ii) outside of North America (other than in the countries set forth on Schedule 1.2), Bars & Other Bites, Crackers, Salty Snacks, Carriers, Pastries, Animal & Grahams Snacks, RTEC, Hot Cereal, Muesli, Granola, Cereal Bites and noodles and pasta (each as defined in the Brand IP Agreement other than noodles and pasta, which shall be products generally recognized in the industry as noodles or pasta).]
Retained Books and Records shall have the meaning set forth in Section 2.2(a)(xv).
SEC shall mean the U.S. Securities and Exchange Commission.
Security Interest shall mean any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Settlement Response Period shall have the meaning set forth in Section 4.5(e).
Shared Contract shall mean any Contract that relates to both (a) the WKKC Business and (b) any Kellanova Business; provided, that none of the following shall be a Shared Contract: (i) the Contracts the benefits of which are provided under the Transition Services Agreement or that are used in the provision of general corporate and administrative services that are not unique to the WKKC Business and (ii) the Contracts set forth on Schedule 1.3.
Software shall mean any and all (a) computer programs, including any and all software implementation of architectures, applications, interfaces, algorithms, models and methodologies, whether in source code, object code, human readable form or other form, (b) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, (c) descriptions, flow charts and other work products used to design, plan, organize and develop any of the foregoing, (d) screens, user interfaces, report formats, firmware, development tools, templates, menus, buttons and icons and (e) documentation, including user manuals and other training documentation, relating to any of the foregoing.
Specified Ancillary Agreement shall have the meaning set forth in Section 10.18(b).
Straddle Period shall have the meaning set forth in Section 2.13.
Subsidiary shall mean, with respect to any Person, any corporation, limited liability company, joint venture or partnership of which such Person (a) beneficially owns, either directly or indirectly, more than fifty percent (50%) of (i) the total combined voting power of all classes of voting securities, (ii) the total combined equity interests or (iii) the capital or profit interests, in the case of a partnership, or (b) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body.
Tangible Information shall mean information that is contained in written, electronic or other tangible forms.
Tax shall have the meaning set forth in the Tax Matters Agreement.
Tax Matters Agreement shall mean the Tax Matters Agreement to be entered into by and between Kellanova and WKKC in connection with the Internal Reorganization, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
Tax Return shall have the meaning set forth in the Tax Matters Agreement.
Third Party shall mean any Person other than the Parties or any members of their respective Groups.
Third-Party Claim shall have the meaning set forth in Section 4.5(a).
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Transfer Documents shall have the meaning set forth in Section 2.1(b).
Transferred Entities shall mean the entities set forth on Schedule 1.4.
Transition AP&T shall mean those WKKC AP&T Liabilities that are held by any member of the Kellanova Group as of the Effective Time.
Transition Committee shall have the meaning set forth in Section 7.1(a).
Transition Payables shall mean those WKKC Accounts Payable that are held by a member of the Kellanova Group as of the Effective Time.
Transition Services Agreement shall mean the Transition Services Agreement to be entered into by and between Kellanova and WKKC or any members of their respective Groups in connection with the Internal Reorganization, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
Unreleased Liability shall have the meaning set forth in Section 2.5(b).
WKKC shall have the meaning set forth in the Preamble.
WKKC Accounts shall have the meaning set forth in Section 2.9(a).
WKKC Accounts Payable shall have the meaning set forth in Section 2.3(a)(ii).
WKKC Accounts Receivable shall have the meaning set forth in Section 2.2(a)(iii).
WKKC AP&T Liabilities shall have the meaning set forth in Section 2.3(a)(iii).
WKKC Assets shall have the meaning set forth in Section 2.2(a).
WKKC Books and Records shall mean (a) all minute books and corporate records of any member of the WKKC Group, (b) all books, records, files and papers that are required to be retained by any member of the WKKC Group pursuant to applicable Law and (c) any active marketing and promotional materials (i) for marketing or promotional campaigns conducted exclusively within North America and (ii) related exclusively to (A) Licensed Brands in WKKCs applicable Food and Beverage Categories (each as defined in the Brand IP Agreement) (as set forth on Schedule 1 to the Brand IP Agreement) or (B) the brands set forth on Schedule 1.5 (collectively, the Extended Requirements Brands) for Non-Food/Beverage Applications (as defined in the Brand IP Agreement); provided, that WKKC Books and Records shall not include material that Kellanova is not permitted by applicable Law or Contract to disclose or transfer to WKKC; provided, further, that WKKC Books and Records shall not include any employment and benefits related records, which shall be governed exclusively by the Employee Matters Agreement.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
WKKC Business shall collectively mean the business and operations conducted by Kellanova and its Subsidiaries in North America at any time prior to the Distribution relating to: (a) the development, production, packaging, distribution, marketing, licensing or sale of (i) RTEC and Hot Cereal using any brand set forth on Schedule 1.6(a)(i), (ii) Muesli and Granola using any brand set forth on Schedule 1.6(a)(ii), (iii) Cereal Bites using any brands set forth on Schedule 1.6(a)(iii), (iv) Cookies using any brand set forth on Schedule 1.6(a)(iv), and (v) All Other Food and Beverage using any brand set forth on Schedule 1.6(a)(v); and (b) the licensing of Extended Requirements Brands to Third Parties for use in North America in Non-Food/Beverage Applications, including pursuant to the arrangements set forth on Schedule 1.6(b). For purposes of this definition, RTEC, Hot Cereal, Muesli, Granola, Cereal Bites, Cookies, All Other Food and Beverage and Non-Food/Beverage Applications shall have the meanings set forth in the Brand IP Agreement.
WKKC Bylaws shall mean the Amended and Restated Bylaws of WKKC, substantially in the form of Exhibit B.
WKKC Cash Amount shall have the meaning set forth in Section 2.2(a)(ii).
WKKC Certificate of Incorporation shall mean the Amended and Restated Certificate of Incorporation of WKKC, substantially in the form of Exhibit A.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
WKKC Contracts shall mean the following Contracts and agreements to which either Party or any member of its Group is a party or by which it or any member of its Group or any of their respective Assets is bound, whether or not in writing:
(a) | all Contracts exclusively related to the WKKC Business as of the Effective Time, other than the Contracts set forth on Schedule 1.7; |
(b) | any Contract or agreement (i) entered into in the name of, or expressly on behalf of, any member of the WKKC Group other than the Transferred Entities or (ii) set forth on Schedule 1.8; |
(c) | guarantee, indemnity, representation, covenant, warranty or other Liability of either Party or any member of its Group in respect of any other WKKC Contract, any WKKC Liability or the WKKC Business; |
(d) | any Contract or agreement that is expressly contemplated by this Agreement or any of the Ancillary Agreements to be assigned to WKKC or any member of the WKKC Group; and |
(e) | any credit agreement, indenture, note or other financing agreement or instrument entered into by WKKC or any member of the WKKC Group in connection with the Internal Reorganization, including any WKKC Financing Arrangements; and |
(f) | any indemnification or other similar agreement with any WKKC Group Employee or consultants of the WKKC Group that are in effect as of the Effective Time. |
WKKC DC shall mean the distribution centers set forth on Schedule 1.9.
WKKC Debt shall have the meaning set forth in Section 2.12(a).
WKKC Designees shall mean any and all Persons designated by Kellanova that will be members of the WKKC Group as of immediately prior to the Effective Time.
WKKC Financing Arrangements shall have the meaning set forth in Section 2.12(a).
WKKC Group shall mean (a) prior to the Effective Time, WKKC and each Person that will be a Subsidiary of WKKC as of immediately after the Effective Time, including the Transferred Entities and the WKKC Designees even if, prior to the Effective Time, such Person is not a Subsidiary of WKKC, and (b) on and after the Effective Time, WKKC and each Person that is a Subsidiary of WKKC.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
WKKC Group Employee shall have the meaning set forth in the Employee Matters Agreement.
WKKC Indemnitees shall have the meaning set forth in Section 4.3.
WKKC Liabilities shall have the meaning set forth in Section 2.3(a).
WKKC Owned Real Property shall have the meaning set forth in Section 2.2(a)(iv).
WKKC Shares shall mean the shares of common stock, par value $0.01 per share, of WKKC.
ARTICLE II
THE INTERNAL REORGANIZATION
2.1 Transfer of Assets and Assumption of Liabilities.
(a) Subject to Section 2.4, on or prior to the Effective Time and prior to the Distribution, in accordance with the plan and structure set forth on Schedule 2.1(a) (the Internal Reorganization Step Plan):
(i) Transfer and Assignment of WKKC Assets. Kellanova shall, and shall cause the applicable members of its Group to, contribute, assign, transfer, convey and deliver to WKKC, or the applicable WKKC Designees, and WKKC or such WKKC Designees shall accept from Kellanova and the applicable members of the Kellanova Group, all of Kellanovas and such Kellanova Group members respective direct or indirect right, title and interest in and to all of the WKKC Assets (it being understood that if any WKKC Asset shall be held by a Transferred Entity or a wholly owned Subsidiary of a Transferred Entity, such WKKC Asset shall be deemed assigned, transferred, conveyed and delivered to WKKC as a result of the transfer of all of the equity interests in such Transferred Entity from Kellanova or the applicable members of the Kellanova Group to WKKC or the applicable WKKC Designee);
(ii) Acceptance and Assumption of WKKC Liabilities. WKKC and the applicable WKKC Designees shall accept, assume and agree faithfully to perform, discharge and fulfill all of the WKKC Liabilities in accordance with their respective terms (it being understood that if any WKKC Liabilities shall be Liabilities of a Transferred Entity, such WKKC Liabilities shall be deemed assumed by WKKC as a result of the transfer of all of the equity interests in such Transferred Entity from Kellanova or the applicable members of the Kellanova Group to WKKC or the applicable WKKC Designee). WKKC and such WKKC Designees shall be responsible for all WKKC Liabilities, regardless of when or where such WKKC Liabilities arose or arise, or whether the facts on which they are based occurred prior to or subsequent to the Effective Time, regardless of where or against whom such WKKC Liabilities are asserted or determined (including any WKKC Liabilities arising out of claims made by Kellanovas or WKKCs respective directors, officers, employees, agents, Subsidiaries or Affiliates against any member of the Kellanova Group or the WKKC Group) or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of Law, fraud or misrepresentation by any member of the Kellanova Group or the WKKC Group, or any of their respective directors, officers, employees, agents, Subsidiaries or Affiliates;
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Pursuant to 17 C.F.R. Section 200.83
(iii) Transfer and Assignment of Kellanova Assets. Kellanova and WKKC shall cause WKKC and the WKKC Designees to contribute, assign, transfer, convey and deliver to Kellanova or certain members of the Kellanova Group designated by Kellanova, and Kellanova or such other members of the Kellanova Group shall accept from WKKC and the WKKC Designees, all of WKKCs and such WKKC Designees respective direct or indirect right, title and interest in and to all Kellanova Assets held by WKKC or a WKKC Designee; and
(iv) Acceptance and Assumption of Kellanova Liabilities. Kellanova and certain members of the Kellanova Group designated by Kellanova shall accept, assume and agree faithfully to perform, discharge and fulfill all of the Kellanova Liabilities held by WKKC or any WKKC designee and Kellanova and the applicable members of the Kellanova Group shall be responsible for all Kellanova Liabilities in accordance with their respective terms, regardless of when or where such Kellanova Liabilities arose or arise, or whether the facts on which they are based occurred prior to or subsequent to the Effective Time, regardless of where or against whom such Kellanova Liabilities are asserted or determined (including any such Kellanova Liabilities arising out of claims made by Kellanovas or WKKCs respective directors, officers, employees, agents, Subsidiaries or Affiliates against any member of the Kellanova Group or the WKKC Group) or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of Law, fraud or misrepresentation by any member of the Kellanova Group or the WKKC Group, or any of their respective directors, officers, employees, agents, Subsidiaries or Affiliates.
(b) Transfer Documents. In furtherance of the contribution, assignment, transfer, conveyance and delivery of the Assets and the assumption of the Liabilities in accordance with Section 2.1(a), and without prejudice to any actions taken to implement, or documents entered into between or among any of the Parties or members of their respective Groups to implement, or in furtherance of, the Internal Reorganization in accordance with the Internal Reorganization Step Plan prior to the date hereof, (i) each Party shall execute and deliver, and shall cause the applicable members of its Group to execute and deliver, to the other Party, such bills of sale, quitclaim deeds, stock powers, certificates of title, assignments of Contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence the transfer, conveyance and assignment of all of such Partys and the applicable members of its Groups right, title and interest in and to such Assets to the other Party and the applicable members of its Group in accordance with Section 2.1(a), and (ii) each Party shall execute and deliver, and shall cause the applicable members of its Group to execute and deliver, to the other Party, such assumptions of Contracts and other instruments of assumption as and to the extent necessary to evidence the valid and effective assumption of the Liabilities by such Party and the applicable members of its Group in accordance with Section 2.1(a). All of the foregoing documents contemplated by this Section 2.1(b) (including any documents entered into between or among any of the Parties or members of their respective Groups to implement or in furtherance of the Internal Reorganization in accordance with the Internal Reorganization Step Plan prior to the date hereof) shall be referred to collectively herein as the Transfer Documents.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(c) Misallocations. Subject to Section 2.4, in the event that at any time or from time to time (whether prior to, at or after the Effective Time, one Party (or any member of such Partys Group) shall receive or otherwise possess any Asset that is allocated to the other Party (or any member of such Partys Group) pursuant to this Agreement or any Ancillary Agreement, such Party shall use reasonable best efforts to promptly transfer, or cause to be transferred, such Asset to the Party so entitled thereto (or to any member of such Partys Group), and such Party (or member of such Partys Group) so entitled thereto shall accept such Asset. Prior to any such transfer, the Person receiving or possessing such Asset shall hold such Asset in trust for such other Person. Subject to Section 2.4, in the event that at any time or from time to time (whether prior to, at or after the Effective Time), one Party hereto (or any member of such Partys Group) shall receive or otherwise assume or be liable for any Liability that is allocated to the other Party (or any member of such Partys Group) pursuant to this Agreement or any Ancillary Agreement, such Party shall use reasonable best efforts to promptly transfer, or cause to be transferred, such Liability to the Party responsible therefor (or to any member of such Partys Group), and such Party (or member of such Partys Group) responsible therefor shall accept, assume and agree to faithfully perform or discharge such Liability in accordance with this Agreement. Any transfer, conveyance, acceptance or assumption made pursuant to this Section 2.1(c) shall be treated by the Parties for all purposes of this Agreement as if it had occurred immediately prior to the Distribution (or such earlier effective date as provided in any Transfer Document), except as otherwise required by applicable Law or the Tax Matters Agreement.
(d) Waiver of Bulk-Sale and Bulk-Transfer Laws. To the extent permissible under applicable Law, WKKC hereby waives compliance by each and every member of the Kellanova Group with the requirements and provisions of any bulk-sale or bulk-transfer Laws of any jurisdiction that may otherwise be applicable with respect to the transfer or sale of any or all of the WKKC Assets to any member of the WKKC Group. To the extent permissible under applicable Law, Kellanova hereby waives compliance by each and every member of the WKKC Group with the requirements and provisions of any bulk-sale or bulk-transfer Laws of any jurisdiction that may otherwise be applicable with respect to the transfer or sale of any or all of the Kellanova Assets to any member of the Kellanova Group.
2.2 WKKC Assets; Kellanova Assets.
(a) WKKC Assets. For purposes of this Agreement, WKKC Assets shall mean:
(i) all interests in the capital stock of, or other equity interests in, the members of the WKKC Group (other than WKKC) as of the Effective Time;
(ii) an amount of cash and cash equivalents equal to ($[]) (the WKKC Cash Amount), which shall be inclusive of all currency held on hand at any WKKC Owned Real Property or any WKKC DC;
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(iii) [all accounts receivable for products of the WKKC Business invoiced by any member of the WKKC Group (other than a Canadian WKKC Group Member) on or after July 31, 2023, in each case, that are outstanding as of the Effective Time (collectively, the WKKC Accounts Receivable);]
(iv) the real property set forth on Schedule 2.2(a)(iv), together with all buildings, fixtures and improvements erected thereon (the WKKC Owned Real Property);
(v) (A) the WKKC Contracts and all rights, interests or claims arising thereunder and (B) subject to Section 2.8, the portion, and the rights related to such portion, of any Shared Contract relating to the WKKC Business as of the Effective Time;
(vi) all Permits (A) exclusively related to the WKKC Business or the WKKC Assets or associated with any WKKC Owned Real Property or (B) set forth on Schedule 2.2(a)(vi), in each case as of the Effective Time and all rights, interests or claims of either Party of any member of its Group thereunder as of the Effective Time;
(vii) any and all (i) raw materials, works-in-process, supplies, ingredients, inputs, parts, packaging, finished goods and products and other inventories (collectively, Inventory) exclusively related to, exclusively used or held for use in, the WKKC Business and (ii) merchandise relating to Extended Requirement Brands (collectively, Merchandise);
(viii) all tangible personal property and interests therein (other than Inventory and Merchandise, which are addressed in clause (vii) above, and Information Technology, which is addressed in clause (xiii) below), whether owned or leased, including machinery, tools, equipment, vehicles and furniture that are (A) as of the Effective Time, located at any WKKC Owned Real Property (other than HQ) or any WKKC DC, (B) set forth on Schedule 2.2(a)(viii) or (C) exclusively related to, exclusively used or exclusively held for use in, the WKKC Business;
(ix) [any and all benefits of any credits, prepaid expenses and deposits, rebates, deferred charges, prepaid items advance payments and security deposits, in each case exclusively used or held for use in, or exclusively arising out of, the operation or conduct of the WKKC Business prior to the Effective Time;]
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(x) any and all claims, causes of action, defenses and rights of offset or counterclaim (in each case, in any manner arising or existing, whether choate or inchoate, known or unknown, contingent or non-contingent) or settlement agreements, in each case, to the extent arising out of the WKKC Business, any WKKC Asset or WKKC Liability as of or prior to the Effective Time (including under the WKKC Contracts and all rights and claims under any and all warranties and indemnities extended by suppliers, vendors, contractors, manufacturers and licensors in favor of either Party or the members of its Group in relation to any WKKC Assets as of or prior to the Effective Time);
(xi) any and all goodwill, if any, generated by or associated with the WKKC Business as of the Effective Time;
(xii) the right to Insurance Proceeds from, and to assert claims under, Third Party occurrence-based insurance policies maintained by Kellanova or member of its Group in respect of any Loss that is a WKKC Liability, in each case as provided for, and subject to the limitations set forth in, Section 5.1 of this Agreement;
(xiii) all (A) all Information Technology owned by either Party or any member of its Group as of immediately prior to the Effective Time that is (1) exclusively used or exclusively held for use in the WKKC Business as of the Effective Time, (2) located at any WKKC DC or (3) set forth on Schedule 2.2(a)(xiii) and (B) all Third Party Software loaded thereon as of the Effective Time to the extent the applicable Contract has transferred to the WKKC Group pursuant to the terms of this Agreement or the WKKC Group otherwise independently has a license to such Software as of the Effective Time;
(xiv) all Assets of either Party or any of the members of its Group as of the Effective Time that are expressly provided by this Agreement or any Ancillary Agreement (or the Schedules hereto or thereto) as Assets to be transferred to WKKC or any other member of the WKKC Group;
(xv) any and all WKKC Books and Records in the possession of either Party as of immediately prior to the Effective Time; provided, that Kellanova shall be permitted to retain copies of, and continue to use, subject to Section 6.9, (A) any WKKC Books and Records that as of the Effective Time are used in or necessary for the operation or conduct of the Kellanova Business, (B) any WKKC Books and Records that Kellanova is required by Law to retain (and if copies are not provided to WKKC, then, to the extent permitted by Law, such copies will be made available to WKKC upon WKKCs reasonable request), (C) one (1) copy of any WKKC Books and Records to the extent required to demonstrate compliance with applicable Law or pursuant to internal compliance procedures or related to any Kellanova Assets or Kellanovas or its Affiliates obligations under this Agreement or any of the Ancillary Agreements and (D) back-up electronic records of such WKKC Books and Records maintained by Kellanova in the ordinary course of business (such material in clauses (A) through (D) of this proviso, the Retained Books and Records);
(xvi) the consumer and other data listed on Schedule 2.2(a)(xvi);
(xvii) the Assets listed or described on Schedule 2.2(a)(xvii); and
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(xviii) all Assets held by a member of the Kellanova Group that are determined by Kellanova, in good faith, to be exclusively related to or exclusively used or held for use in connection with the WKKC Business to the extent the category of such Asset is not addressed in subsections (i)-(xvii) of this Section 2.2(a);
Notwithstanding the foregoing, the WKKC Assets shall not in any event include any Asset referred to in Section 2.2(b). For the avoidance of doubt, the ownership and use of any Kellanova intellectual property rights included in the WKKC Assets shall be governed exclusively by the Brand IP Agreement or the Non-Brand IP Agreement, as applicable.
(b) Kellanova Assets. For the purposes of this Agreement, Kellanova Assets shall mean all Assets of either Party or the members of its Group as of the Effective Time, other than the WKKC Assets, it being understood that, notwithstanding anything herein to the contrary, the Kellanova Assets shall include:
(i) all Assets of either Party or any of the members of its Group as of the Effective Time that are expressly provided by this Agreement or any Ancillary Agreement (or the Schedules hereto or thereto) as Assets to be retained by Kellanova or any other member of the Kellanova Group;
(ii) all cash and cash equivalents of either Party or any of the members of its Group as of the Effective Time, other than the WKKC Cash Amount;
(iii) all accounts receivable of either Group, other than WKKC Accounts Receivable, including (A) accounts receivable for shipments of any products invoiced by any member of either Group prior to July 31, 2023 and outstanding as of the Effective Time and (B) all accounts receivable invoiced by any Canadian WKKC Group Member prior to the Effective Time and outstanding as of the Effective Time;
(iv) (A) all books and records of the Kellanova Business as conducted at any time prior to the Effective Time by either Party, other than the WKKC Books and Records, and (B) all Retained Books and Records (clauses (A) and (B), collectively, Kellanova Books and Records); provided, that Kellanova Books and Records shall not include any employment and benefits related records, which shall be governed exclusively by the Employee Matters Agreement; and
(v) any and all Assets set forth on Schedule 2.2(b)(v).
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2.3 WKKC Liabilities; Kellanova Liabilities.
(a) WKKC Liabilities. For the purposes of this Agreement, WKKC Liabilities shall mean the following Liabilities of either Party or any of the members of its Group:
(i) all Liabilities (other than accounts payable and advertising, consumer and trade promotion Liabilities), including all Environmental Liabilities, to the extent relating to, arising out of or resulting from (and only such portion relating to, arising out of or resulting from), (x) the WKKC Assets (including the ownership or operation thereof) or (y) the business, operations and activities of the WKKC Business as conducted at any time prior to the Effective Time by either Party or any of its current or former Subsidiaries);
(ii) all accounts payable to the extent exclusively related to the WKKC Business that are outstanding as of the Effective Time[, as determined by Kellanova in good faith] (collectively, the WKKC Accounts Payable);
(iii) all advertising, consumer and trade promotion Liabilities to the extent exclusively related to the WKKC Business that are outstanding as of the Effective Time[, as determined by Kellanova in good faith] (the WKKC AP&T Liabilities);
(iv) any and all Liabilities with respect to any and all credits, prepaid expenses, rebates, deferred charges and prepaid items of any Person (other than any member of the Kellanova Group or the WKKC Group), in each case, to the extent related to, resulting from or arising out of the WKKC Business as conducted at any time prior to the Effective Time by either Party or any of its current or former Subsidiaries;
(v) all Liabilities relating to, arising out of or in connection with or resulting from the WKKC Financing Arrangements;
(vi) all Liabilities of either Party or any of the members of its Group as of the Effective Time that are expressly provided by this Agreement or any Ancillary Agreement (or the Schedules hereto or thereto) as Liabilities to be assumed by WKKC or any other member of the WKKC Group, and all agreements, obligations and Liabilities of any member of the WKKC Group under this Agreement or any of the Ancillary Agreements;
(vii) the Liabilities listed or described on Schedule 2.3(a)(vii); and
(viii) all Liabilities arising out of claims made by any Third Party (including Kellanovas or WKKCs respective directors, officers, shareholders/stockholders, employees and agents) against any member of the Kellanova Group or the WKKC Group to the extent relating to, arising out of or resulting from (and only such portion relating to, arising out of or resulting from) (x) the business, operations and activities of the WKKC Business as conducted at any time prior to the Effective Time by either Party or any of its current or former Subsidiaries (including any terminated, divested or discontinued business, operations and activities of the WKKC Business), (y) any WKKC Asset or (z) the other business, operations, activities or Liabilities of WKKC referred to in clauses (i) through (vii) of this Section 2.3(a), including Liabilities to the extent relating to, arising out of or resulting from the claims set forth on Schedule 2.3(a)(viii); provided, that, notwithstanding the foregoing, the Parties agree that any Liabilities of any member of the Kellanova Group pursuant to the Ancillary Agreements shall not be WKKC Liabilities but instead shall be Kellanova Liabilities.
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(b) Kellanova Liabilities. For the purposes of this Agreement, Kellanova Liabilities shall mean all Liabilities of either Party or the members of its Group as of the Effective Time, other than the WKKC Liabilities, it being understood that, notwithstanding anything herein to the contrary, the Kellanova Liabilities shall include:
(i) all Liabilities arising out of claims made by any Third Party (including Kellanovas or WKKCs respective directors, officers, shareholders/stockholders, employees and agents) against any member of the Kellanova Group or the WKKC Group to the extent relating to, arising out of or resulting from (and only such portion relating to, arising out of or resulting from) the Kellanova Business or the Kellanova Assets;
(ii) all accounts payable other than WKKC Accounts Payable;
(iii) all advertising, consumer and trade promotion Liabilities other than the WKKC AP&T Liabilities;
(iv) the Corporate Liabilities; and
(v) the Liabilities listed or described on Schedule 2.3(b)(v).
2.4 Approvals and Notifications.
(a) Approvals and Notifications. To the extent that the transfer or assignment of any Asset, the assumption of any Liability, the Internal Reorganization or the Distribution requires any Approvals or Notifications, the Parties shall use their commercially reasonable efforts to obtain or make such Approvals or Notifications as soon as reasonably practicable; provided, however, that, except to the extent expressly provided in this Agreement or any of the Ancillary Agreements or as otherwise agreed in writing between Kellanova and WKKC, neither Kellanova nor WKKC shall be obligated to contribute capital or pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any Person in order to obtain or make such Approvals or Notifications.
(b) Delayed Transfers. If and to the extent that the valid, complete and perfected transfer or assignment to a Partys Group of any Asset or assumption by a Partys Group of any Liability in connection with the Internal Reorganization or the Distribution would be a violation of applicable Law or require any Approval or Notification that has not been obtained or made by the Effective Time then, unless the Parties shall otherwise mutually determine, the transfer or assignment to the applicable Group of
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such Assets or the assumption by the applicable Group of such Liabilities, as the case may be, shall be automatically deemed deferred and any such purported transfer, assignment or assumption shall be null and void until such time as all legal impediments are removed or such Approval or Notification has been obtained or made. Notwithstanding the foregoing, any such Assets or Liabilities shall continue to constitute Assets of the applicable Party to which such Assets were to be transferred or assigned, or Liabilities of the applicable Party by which such Liabilities were to be assumed, respectively, for all other purposes of this Agreement.
(c) Treatment of Delayed Assets and Delayed Liabilities. If any transfer or assignment of any Asset (or a portion thereof) or any assumption of any Liability (or a portion thereof) intended to be transferred, assigned or assumed hereunder, as the case may be, is not consummated on or prior to the Effective Time, whether as a result of the provisions of Section 2.4(b) or for any other reason (any such Asset (or a portion thereof), a Delayed Asset and any such Liability (or a portion thereof), a Delayed Liability), then, insofar as reasonably possible and subject to applicable Law, the Person retaining such Delayed Asset or such Delayed Liability (the Holding Person), as the case may be, shall thereafter hold such Delayed Asset or Delayed Liability, as the case may be, on behalf of the Person entitled to the benefits of such Delayed Asset or obligated to discharge such Delayed Liability, as applicable (the Receiving Person) (at the expense of the Receiving Person). In addition, the Holding Person shall, insofar as reasonably possible and to the extent permitted by applicable Law, treat such Delayed Asset or Delayed Liability in the ordinary course of business in accordance with past practice and take such other actions as may be reasonably requested by the Receiving Person in order to place such Receiving Person in a substantially similar position as if such Delayed Asset or Delayed Liability had been transferred, assigned or assumed as contemplated hereby and so that all the benefits and burdens relating to such Delayed Asset or Delayed Liability, as the case may be, including use, risk of loss, potential for gain, and dominion, control and command over such Delayed Asset or Delayed Liability, as the case may be, and all costs and expenses related thereto, shall inure from and after the Effective Time to the Receiving Persons Group. Except as otherwise required by applicable Law, each Party shall, and shall cause the members of its Group to, (i) treat for all Tax purposes (x) any Delayed Asset as an Asset owned by the Party entitled to such Delayed Asset, and (y) any Delayed Liability as a Liability of the Party intended to be responsible for such Delayed Liability, in each case not later than the Effective Time, and (ii) neither report nor take any Tax position (on a Tax Return or otherwise) inconsistent with such treatment.
(d) Transfer of Delayed Assets and Delayed Liabilities. If and when the Approvals or Notifications, the absence of which caused the deferral of transfer or assignment of any Delayed Asset or the deferral of assumption of any Delayed Liability pursuant to Section 2.4(b), are obtained or made, and, if and when any other legal impediments to the transfer or assignment of any Delayed Asset or the assumption of any Delayed Liability have been removed, the transfer or assignment of the applicable Delayed Asset or the assumption of the applicable Delayed Liability, as the case may be, shall be effected in accordance with the terms of this Agreement or the applicable Ancillary Agreement.
(e) Costs for Delayed Assets and Delayed Liabilities. Except as contemplated by Section 2.4(f) with respect to Transition Payables and Transition AP&T, no Holding Person shall be obligated, in connection with the foregoing, to expend any money unless the necessary funds are advanced (or otherwise made available) by the Receiving Person or another member of the Receiving Persons Group, other than reasonable out-of-pocket expenses, attorneys fees and
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recording or similar fees, all of which shall be promptly reimbursed by the Receiving Person or another member of the Receiving Persons Group; provided, however, that neither the Holding Person nor any member of the Holding Persons Group shall knowingly allow the loss or diminution of value of any Delayed Asset without first providing the Receiving Persons Group commercially reasonable notice of such potential loss or diminution in value and affording the Receiving Persons Group a commercially reasonable opportunity to take action to prevent such loss or diminution in value.
(f) Transition Payables and Transition AP&T Liabilities. Notwithstanding anything in this Agreement to the contrary, the Parties agree that the Transition Payables and the Transition AP&T Liabilities shall be treated as Delayed Liabilities for all purposes under this Agreement, and shall be retained by Kellanova or the applicable member of its Group following the Effective Time until such Transition Payables and Transition AP&T Liabilities are satisfied in full and no longer outstanding. For so long as any Transition Payables or Transition AP&T Liabilities remain outstanding, Kellanova or the applicable member of its Group, as the Holding Person, shall use commercially reasonable efforts to make all payments required to be made to Third Parties in respect of such Transition Payables and Transition AP&T Liabilities, as and when due. On each Wednesday occurring after the Distribution Date until such time as no Transition Payables remain outstanding, Kellanova shall send WKKC an invoice setting forth in reasonable detail the amounts paid in respect of such Transition Payables and Transition AP&T Liabilities during the preceding week. WKKC shall promptly, and in any event within five (5) Business Days of receipt of such invoice, reimburse Kellanova for any such invoiced amount; provided, that, for the avoidance of doubt, if Kellanova fails to include any amounts paid in respect of any Transition Payables or Transition AP&T Liabilities in any such weekly invoice, Kellanova shall have the right to invoice WKKC at a later date and receive reimbursement from WKKC in respect thereof in accordance with this Section 2.4(f). Upon payment of any Transition Payable or Transition AP&T Liability by Kellanova or the applicable member of its Group, such Transition Payable or Transition AP&T Liability shall no longer be considered a Delayed Liability, and any further Liability in respect thereof (including any claim by the payee of such Transition Payable or Transition AP&T Liability or WKKC for an adjustment to the amount of such Transition Payable or Transition AP&T Liability or with respect to the quality of the goods or services received from such payee) shall be the sole responsibility of WKKC.
2.5 Novation of Liabilities.
(a) Novation of Liabilities. Each Party, at the request of the other, shall use its commercially reasonable efforts to obtain, or to cause to be obtained, as soon as reasonably practicable, any consent, substitution, approval or amendment required to novate or assign all Kellanova Liabilities or WKKC Liabilities, as applicable, and obtain in writing the unconditional release of each member of the other Partys Group that is a party to any such arrangements, so that, in any such case, the members of the WKKC Group shall be solely responsible for such WKKC Liabilities and the members of the Kellanova Group shall be solely responsible for such Kellanova Liabilities; provided, however, that, except as otherwise expressly provided in this Agreement or any of the Ancillary Agreements, neither Kellanova nor WKKC shall be obligated to contribute any capital or pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any Third Party from whom any such consent, substitution, approval, amendment or release is requested.
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(b) Unreleased Liabilities. Subject to Section 2.4(f), if the Parties are unable to obtain, or to cause to be obtained, any such required consent, substitution, approval, amendment or release and a member of either Group (the Bound Member) continues to be bound by any such arrangement or responsible for any such Liabilities with respect to which such Bound Member would not be bound or responsible had such required consent, substitution, approval, amendment or release been obtained (each, an Unreleased Liability), the Party to whose Group such Liability is allocated under this Agreement (the Designated Party) shall, to the extent not prohibited by Law, as indemnitor, guarantor, agent or subcontractor for such Bound Member, as the case may be, (A) pay, perform and discharge fully all the obligations or other Liabilities of such member of the Bound Members Group that constitute Unreleased Liabilities from and after the Effective Time and (B) use its commercially reasonable efforts to effect such payment, performance or discharge prior to the time any demand for such payment, performance or discharge is permitted to be made by the obligee thereunder on any member of the Bound Members Group. If and when any such consent, substitution, approval, amendment or release shall be obtained or the Unreleased Liabilities shall otherwise become assignable or able to be novated, the Bound Member shall promptly assign, or cause to be assigned, and the Designated Party or the applicable member of its Group shall assume, such Unreleased Liabilities without exchange of further consideration.
2.6 Release of Guarantees. In furtherance of, and not in limitation of, the obligations set forth in Section 2.5:
(a) On or prior to the Effective Time or as soon as practicable thereafter, each of Kellanova and WKKC shall, at the request of the other Party and with the reasonable cooperation of such other Party and the applicable member(s) of such other Partys Group, use commercially reasonable efforts to (i) have any member(s) of the Kellanova Group removed as guarantor of or obligor for any WKKC Liability to the extent that such guarantee or obligation relates to WKKC Liabilities, including the removal of any Security Interest on or in any Kellanova Asset that may serve as collateral or security for any such WKKC Liability; and (ii) have any member(s) of the WKKC Group removed as guarantor of or obligor for any Kellanova Liability to the extent that such guarantee or obligation relates to Kellanova Liabilities, including the removal of any Security Interest on or in any WKKC Asset that may serve as collateral or security for any such Kellanova Liability.
(b) To the extent required to obtain a release from a guarantee of:
(i) any member of the Kellanova Group, WKKC shall (or shall cause a member of the WKKC Group to) execute a guarantee agreement in the form of the existing guarantee or such other form as is agreed to by the relevant parties to such guarantee agreement, which agreement shall include the removal of any Security Interest on or in any Kellanova Asset that may serve as collateral or security for any WKKC Liability, except to the extent that such existing guarantee contains representations, covenants or other terms or provisions either (A) with which WKKC (or any member of the WKKC Group) would be reasonably unable to comply or (B) which WKKC (or any member of the WKKC Group) would not reasonably be able to avoid breaching; and
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(ii) any member of the WKKC Group, Kellanova shall (or shall cause a member of the Kellanova Group to) execute a guarantee agreement in the form of the existing guarantee or such other form as is agreed to by the relevant parties to such guarantee agreement, which agreement shall include the removal of any Security Interest on or in any WKKC Asset that may serve as collateral or security for any Kellanova Liability, except to the extent that such existing guarantee contains representations, covenants or other terms or provisions either (A) with which Kellanova (or any member of the Kellanova Group) would be reasonably unable to comply or (B) which Kellanova (or any member of the Kellanova Group) would not reasonably be able to avoid breaching.
(c) If Kellanova or WKKC is unable to obtain, or to cause to be obtained, any such required removal or release as set forth in clauses (a) and (b) of this Section 2.6, (i) the Party or the relevant member of its Group that has assumed the Liability with respect to such guarantee shall indemnify, defend and hold harmless the guarantor or obligor against or from any Liability arising from or relating thereto in accordance with the provisions of Article IV and shall, as agent or subcontractor for such guarantor or obligor, pay, perform and discharge fully all the obligations or other Liabilities of such guarantor or obligor thereunder; and (ii) each of Kellanova and WKKC, on behalf of itself and the other members of their respective Groups, agrees not to renew or extend the term of, increase any obligations under, or transfer to a Third Party, any guarantee, Contract or other obligation for which the other Party or a member of its Group is or may be liable unless all obligations of such other Party and the members of such other Partys Group with respect thereto are thereupon terminated by documentation satisfactory in form and substance to such other Party.
(d) Notwithstanding anything herein to the contrary, the Parties acknowledge and agree that the foregoing obligations shall not apply to, and there shall be no obligation on either Party or any member of their respective Groups to seek releases or replacements of, any guarantees provided in respect of any distribution center leased by Kellanova or any of its Subsidiaries prior to the Effective Time, including any WKKC DC.
2.7 Termination of Agreements.
(a) Except as set forth in Section 2.7(b), in furtherance of the releases and other provisions of Section 4.1, WKKC and each member of the WKKC Group, on the one hand, and Kellanova and each member of the Kellanova Group, on the other hand, hereby terminate any and all agreements, arrangements, commitments or understandings, whether or not in writing, between or among WKKC or any member of the WKKC Group, on the one hand, and Kellanova or any member of the Kellanova Group, on the other hand, effective as of the Effective Time. No such terminated agreement, arrangement, commitment or understanding (including any provision thereof which purports to survive termination) shall be of any further force or effect after the Effective Time. Each Party shall, at the reasonable request of the other Party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing.
(b) The provisions of Section 2.7(a) shall not apply to any of the following agreements, arrangements, commitments or understandings (or to any of the provisions thereof): (i) this Agreement and the Ancillary Agreements (and each other agreement or instrument expressly contemplated by this Agreement or any Ancillary Agreement to be entered into by any of the Parties or any of the members of their respective Groups or to be continued from and after the Effective Time); (ii) any agreements, arrangements, commitments or understandings to which any Third Party is a party; (iii) any intercompany payables or receivables accrued as of the Effective
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Time that are reflected in the books and records of the Parties or otherwise documented in writing in accordance with past practices, which shall be settled in the manner contemplated by Section 2.7(c); (iv) any agreements, arrangements, commitments or understandings to which any non-wholly owned Subsidiary of Kellanova or WKKC, as the case may be, is a party (it being understood that directors qualifying shares or similar interests will be disregarded for purposes of determining whether a Subsidiary is wholly owned); and (v) the agreements set forth on Schedule 2.7(b).
(c) All of the intercompany payables and receivables between any member of the Kellanova Group, on the one hand, and any member of the WKKC Group, on the other hand, outstanding as of the Effective Time shall, at the Effective Time or as promptly as practicable after the Effective Time, be repaid, settled or otherwise eliminated by means of cash payments, a dividend, capital contribution, a combination of the foregoing, or otherwise as determined by Kellanova in its sole and absolute discretion.
2.8 Treatment of Shared Contracts.
(a) Subject to applicable Law and without limiting the generality of the obligations set forth in Section 2.1, unless the Parties otherwise agree in writing, the Parties shall, and shall cause the members of their respective Groups to, use their respective reasonable best efforts to work together to partially assign or divide the respective rights and obligations under and in respect of each Shared Contract, such that each Party or the member of its Group shall, as of the Effective Time, be entitled to the rights and benefits, and shall assume the related portion of any Liabilities, inuring to its respective businesses; provided, however, that (i) in no event shall any member of any Group be required to assign (or amend) any Shared Contract in its entirety or to assign a portion of any Shared Contract which is not assignable (or cannot be amended) by its terms (including any terms imposing consents or conditions on an assignment where such consents or conditions have not been obtained or fulfilled) and (ii) if any Shared Contract cannot be so partially assigned by its terms or otherwise, or cannot be amended or if such assignment or amendment would impair the benefit the parties thereto derive from such Shared Contract, then the Parties shall, and shall cause each of the members of their respective Groups to, take such other reasonable and permissible actions (including by providing prompt notice to the other Party with respect to any relevant claim of Liability or other relevant matters arising in connection with a Shared Contract so as to allow such other Party the ability to exercise any applicable rights under such Shared Contract) to cause a member of the WKKC Group or the Kellanova Group, as the case may be, to receive the rights and benefits of that portion of each Shared Contract that relates to the WKKC Business or the Kellanova Business, as the case may be (in each case, to the extent so related), as if such Shared Contract had been assigned to a member of the applicable Group (or amended to allow a member of the applicable Group to exercise applicable rights under such Shared Contract) pursuant to this Section 2.8, and to bear the burden of the corresponding Liabilities (including any Liabilities that may arise by reason of such arrangement), as if such Liabilities had been assumed by a member of the applicable Group pursuant to this Section 2.8.
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(b) Except as otherwise required by applicable Law, each of Kellanova and WKKC shall, and shall cause the members of its Group to, (i) treat for all Tax purposes the portion of each Shared Contract inuring to its respective businesses as an Asset owned by, or a Liability of, as applicable, such Party, or the members of its Group, as applicable, not later than the Effective Time, and (ii) neither report nor take any Tax position (on a Tax Return or otherwise) inconsistent with such treatment.
(c) Nothing in this Section 2.8 shall require any member of any Group to make any non-de minimis payment (except to the extent advanced, assumed or agreed in advance to be reimbursed by any member of the other Group), incur any non-de minimis obligation or grant any non-de minimis concession for the benefit of any member of any other Group in order to effect any transaction contemplated by this Section 2.8.
2.9 Bank Accounts; Cash Balances.
(a) Each Party shall, and shall cause the members of their respective Groups to, take all actions necessary such that, on or prior to the Effective Time, the Kellanova Group and the WKKC Group maintain separate bank accounts and separate cash management processes. Without limiting the foregoing, each Party agrees to take, or cause the members of its Group to take, at the Effective Time (or such earlier time as the Parties may agree), all actions necessary to amend all Contracts governing each bank and brokerage account owned by WKKC or any other member of the WKKC Group (collectively, the WKKC Accounts) and all Contracts governing each bank or brokerage account owned by Kellanova or any other member of the Kellanova Group (collectively, the Kellanova Accounts) so that each such WKKC Account and Kellanova Account, if currently linked (whether by automatic withdrawal, automatic deposit or any other authorization to transfer funds from or to) to any Kellanova Account or WKKC Account, respectively, is de-linked from such Kellanova Account or WKKC Account, respectively.
(b) It is intended that, following consummation of the actions contemplated by Section 2.9(a), there will be in place a cash management process pursuant to which the WKKC Accounts will be managed and funds collected will be transferred into one (1) or more accounts maintained by WKKC or a member of the WKKC Group.
(c) It is intended that, following consummation of the actions contemplated by Section 2.9(a), there will continue to be in place a cash management process pursuant to which the Kellanova Accounts will be managed and funds collected will be transferred into one (1) or more accounts maintained by Kellanova or a member of the Kellanova Group.
(d) With respect to any outstanding checks issued or payments initiated by Kellanova, WKKC, or any of the members of their respective Groups prior to the Effective Time, such outstanding checks and payments shall be honored following the Effective Time by the Person or Group owning the account on which the check is drawn or from which the payment was initiated, respectively, and such Person or Group owning such account shall not have any claim with respect to such check or payment from the members of the other Group.
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(e) As between Kellanova and WKKC (and the members of their respective Groups), all payments made, and reimbursements, credits, returns, or rebates received, after the Effective Time by either Party (or member of its Group) that relate to a business, Asset or Liability of the other Party (or member of its Group), shall be held by such Party in trust for the use and benefit of the Party (or member of its Group) entitled thereto and, promptly following receipt by such Party (or member of its Group) of any such payment or reimbursement, credit, return or rebate such Party shall pay over, or shall cause the applicable member of its Group to pay over to the other Party the amount of such payment or reimbursement without right of set-off.
(f) It is understood and agreed that, effective as of the Effective Time (and after giving effect to the Cash Transfer), WKKC and members of the WKKC Group shall have cash and cash equivalents in an aggregate amount equal to the WKKC Cash Amount. For purposes of determining the amount of cash and cash equivalents held by WKKC and members of the WKKC Group for purposes of the foregoing, cash and cash equivalents held in currency other than U.S. dollars will be translated into U.S. dollars based on the exchange rate selected by Kellanova.
(g) [Within fifteen (15) days after the Distribution Date, Kellanova shall deliver to WKKC a good faith calculation of the aggregate amount of cash and cash equivalents (net of any overdrafts) held by the WKKC Group as of the Effective Time (the Final Cash Balance). Kellanovas calculation of the Final Cash Balance shall be final, binding, conclusive and non-appealable on WKKC for all purposes of this Agreement and, for the avoidance of doubt, shall not be subject to further adjustment as a result of payments required to be made by one Party to the other after the Effective Time under this Agreement or under any Ancillary Agreement. If the Final Cash Balance exceeds the WKKC Cash Amount, then WKKC shall pay or cause to be paid an amount in cash equal to such difference to Kellanova by wire transfer of immediately available funds to an account or accounts designated in writing by Kellanova to WKKC within five (5) Business Days after the date of delivery of the Final Cash Balance by Kellanova. If the Final Cash Balance is less than the WKKC Cash Amount, then Kellanova shall pay or cause to be paid an amount in cash equal to the absolute value of such difference to WKKC by wire transfer of immediately available funds to an account or accounts designated in writing by WKKC to Kellanova within five (5) Business Days after the date of delivery of the Final Cash Balance by Kellanova. Any such payment shall be treated by the Parties for all purposes as an adjustment to the Cash Transfer that occurred immediately prior to the Distribution.]
2.10 Ancillary Agreements. Effective on or prior to the Effective Time, each of Kellanova and WKKC will, or will cause the applicable members of their Groups to, execute and deliver all Ancillary Agreements to which it is a party (other than the Distribution Center Sublease Agreements).
2.11 Disclaimer of Representations and Warranties. EACH OF KELLANOVA (ON BEHALF OF ITSELF AND EACH MEMBER OF THE KELLANOVA GROUP) AND WKKC (ON BEHALF OF ITSELF AND EACH MEMBER OF THE WKKC GROUP) UNDERSTANDS AND AGREES THAT, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN ANY ANCILLARY AGREEMENT, NO PARTY TO THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT CONTEMPLATED BY THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR OTHERWISE, IS REPRESENTING OR WARRANTING IN ANY WAY AS TO: (A) THE ASSETS, BUSINESSES OR LIABILITIES TRANSFERRED OR ASSUMED AS CONTEMPLATED HEREBY OR THEREBY, (B) ANY CONSENTS OR APPROVALS REQUIRED IN
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CONNECTION THEREWITH, (C) THE VALUE OR FREEDOM FROM ANY SECURITY INTERESTS OF, OR ANY OTHER MATTER CONCERNING, ANY ASSETS OF SUCH PARTY, (D) THE ABSENCE OF ANY DEFENSES OR RIGHT OF SETOFF OR FREEDOM FROM COUNTERCLAIM WITH RESPECT TO ANY CLAIM OR OTHER ASSET, INCLUDING ANY ACCOUNTS RECEIVABLE, OF ANY PARTY, OR (E) THE LEGAL SUFFICIENCY OF ANY ASSIGNMENT, DOCUMENT OR INSTRUMENT DELIVERED HEREUNDER TO CONVEY TITLE TO ANY ASSET OR THING OF VALUE UPON THE EXECUTION, DELIVERY AND FILING HEREOF OR THEREOF. EXCEPT AS MAY EXPRESSLY BE SET FORTH HEREIN OR IN ANY ANCILLARY AGREEMENT, ALL SUCH ASSETS ARE BEING TRANSFERRED ON AN AS IS, WHERE IS BASIS (AND, IN THE CASE OF ANY REAL PROPERTY, BY MEANS OF A QUITCLAIM OR SIMILAR FORM OF DEED OR CONVEYANCE) AND THE RESPECTIVE TRANSFEREES SHALL BEAR THE ECONOMIC AND LEGAL RISKS THAT (I) ANY CONVEYANCE WILL PROVE TO BE INSUFFICIENT TO VEST IN THE TRANSFEREE GOOD AND MARKETABLE TITLE, FREE AND CLEAR OF ANY SECURITY INTEREST, AND (II) ANY NECESSARY APPROVALS OR NOTIFICATIONS ARE NOT OBTAINED OR MADE OR THAT ANY REQUIREMENTS OF LAWS OR JUDGMENTS ARE NOT COMPLIED WITH.
2.12 WKKC Financing Arrangements.
(a) Prior to the Effective Time and pursuant to the Internal Reorganization Step Plan, (i) WKKC will enter into one (1) or more financing arrangements and agreements (the WKKC Financing Arrangements), pursuant to which it shall borrow prior to the Effective Time a principal amount of not less than [] dollars ($[]) (the WKKC Debt) and (ii) WKKC shall distribute, convey or otherwise transfer to Kellanova, in the manner determined by Kellanova, a portion (as determined by Kellanova in its sole discretion) of the proceeds of the WKKC Debt to Kellanova, as partial consideration for the transfer of WKKC Assets to WKKC in the Contribution pursuant to Section 2.1 (such distribution, conveyance or transfer, the Cash Transfer). Kellanova and WKKC agree to take all necessary actions to assure the full release and discharge of Kellanova and the other members of the Kellanova Group from all obligations pursuant to the WKKC Financing Arrangements as of no later than the Effective Time.
(b) Prior to the Effective Time, Kellanova and WKKC shall cooperate in the preparation of all materials as may be necessary or advisable to execute the WKKC Financing Arrangements.
2.13 Financial Information Certifications. Kellanovas disclosure controls and procedures and internal control over financial reporting (as each is contemplated by the Exchange Act) are currently applicable to WKKC as its Subsidiary. In order to enable the principal executive officer and principal financial officer of WKKC to make the certifications required of them under Section 302 of the Sarbanes-Oxley Act of 2002 following the Distribution in respect of any quarterly or annual fiscal period of WKKC that begins on or prior to the Distribution Date in respect of which financial statements are not included in the Form 10 (a Straddle Period), Kellanova, within a reasonable period of time following a written request from WKKC, shall provide WKKC with one (1) or more certifications with respect to such disclosure controls and procedures and the effectiveness thereof and whether there were any changes in the internal controls over financial reporting that have materially
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affected or are reasonably likely to materially affect the internal control over financial reporting, which certification(s) shall (a) be with respect to the applicable Straddle Period (it being understood that no certification need be provided with respect to any period or portion of any period after the Distribution Date) and (b) be in substantially the same form as those that had been provided by officers or employees of Kellanova in similar certifications delivered prior to the Distribution Date, with such changes thereto as Kellanova may reasonably determine. Such certification(s) shall be provided by Kellanova (and not by any officer or employee in their individual capacity).
ARTICLE III
THE DISTRIBUTION
3.1 Sole and Absolute Discretion; Cooperation.
(a) Kellanova shall, in its sole and absolute discretion, determine the terms of the Distribution, including the form, structure and terms of any transaction(s) or offering(s) to effect the Distribution and the timing and conditions to the consummation of the Distribution. In addition, Kellanova may, at any time and from time to time until the consummation of the Distribution, modify or change the terms of the Distribution, including by accelerating or delaying the timing of the consummation of all or part of the Distribution. Nothing shall in any way limit Kellanovas right to terminate this Agreement or the Distribution as set forth in Article IX or alter the consequences of any such termination from those specified in Article IX.
(b) WKKC shall cooperate with Kellanova to accomplish the Distribution and shall, at Kellanovas direction, promptly take any and all actions, necessary or desirable to effect the Distribution, including in respect of the registration under the Exchange Act of WKKC Shares on the Form 10. Kellanova shall select any investment bank or manager in connection with the Distribution, as well as any financial printer, solicitation or exchange agent and financial, legal, accounting and other advisors for Kellanova. WKKC and Kellanova, as the case may be, will provide to the Distribution Agent any information required in order to complete the Distribution.
3.2 Actions Prior to the Distribution. Prior to the Effective Time and subject to the terms and conditions set forth herein, the Parties shall take, or cause to be taken, the following actions in connection with the Distribution:
(a) Notice to NYSE. Kellanova shall, to the extent possible, give the NYSE not less than ten (10) days advance notice of the Record Date in compliance with Rule 10b-17 under the Exchange Act.
(b) WKKC Certificate of Incorporation and WKKC Bylaws. On or prior to the Distribution Date, Kellanova and WKKC shall take all necessary actions so that, as of the Effective Time, the WKKC Certificate of Incorporation and the WKKC Bylaws, each in substantially the form filed as an exhibit to the Form 10, shall become the certificate of incorporation and bylaws of WKKC, respectively.
(c) WKKC Directors and Officers. On or prior to the Distribution Date, Kellanova and WKKC shall take all necessary actions so that as of the Effective Time: (i) the directors and executive officers of WKKC shall be those set forth in the Information Statement made available to the Record Holders prior to the Distribution Date, unless otherwise agreed by the Parties; (ii) each individual referred to in clause (i) [(other than those set forth on Schedule 3.2(c))] shall have resigned from his or her position, if any, as a member of the Kellanova Board or as an executive officer of Kellanova; and (iii) WKKC shall have such other officers as WKKC shall appoint.
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(d) NYSE Listing. WKKC shall prepare and file, and shall use its reasonable best efforts to have approved, an application for the listing of the WKKC Shares to be distributed in the Distribution on the NYSE, subject to official notice of distribution.
(e) Securities Law Matters. WKKC shall file any amendments or supplements to the Form 10 as may be necessary or advisable in order to cause the Form 10 to become and remain effective as required by the SEC or federal, state or other applicable securities Laws. Kellanova and WKKC shall cooperate in preparing, filing with the SEC and causing to become effective registration statements, including on Form S-8, or amendments thereof that are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or advisable in connection with the transactions contemplated by this Agreement and the Ancillary Agreements. Kellanova and WKKC will prepare, and WKKC will, to the extent required under applicable Law, file with the SEC, any such documentation and any requisite no-action letters that Kellanova determines are necessary or desirable to effectuate the Distribution, and Kellanova and WKKC shall each use its reasonable best efforts to obtain all necessary approvals from the SEC with respect thereto as soon as practicable. Kellanova and WKKC shall take all such action as may be necessary or appropriate under the securities or blue sky Laws of the United States (and any comparable Laws under any foreign jurisdiction) in connection with the Distribution.
(f) Availability of Information Statement. Kellanova shall, as soon as is reasonably practicable after the Form 10 is declared effective under the Exchange Act and the Kellanova Board has approved the Distribution, cause a Notice of Internet Availability of the Information Statement or the Information Statement to be mailed to the Record Holders.
(g) The Distribution Agent. Kellanova shall enter into a distribution agent agreement with the Distribution Agent or otherwise provide instructions to the Distribution Agent regarding the Distribution.
(h) Stock-Based Employee Benefit Plans. Kellanova and WKKC shall take all actions as may be necessary to approve the grants of adjusted equity awards by Kellanova (in respect of Kellanova Shares) and WKKC (in respect of WKKC Shares) in connection with the Distribution in order to satisfy the requirements of Rule 16b-3 under the Exchange Act.
3.3 Conditions to the Distribution.
(a) The consummation of the Distribution will be subject to the satisfaction, or waiver by Kellanova in its sole and absolute discretion, of the following conditions:
(i) The Kellanova Board shall have approved the Distribution, which approval may be given or withheld at its absolute and sole discretion;
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(ii) The SEC shall have declared effective the Form 10; no stop order suspending the effectiveness of the Form 10 shall be in effect; and no proceedings for such purposes shall have been instituted or threatened by the SEC;
(iii) A Notice of Internet Availability of the Information Statement or the Information Statement shall have been mailed to the Record Holders;
(iv) The WKKC Shares to be distributed to the Kellanova stockholders in the Distribution shall have been accepted for listing on NYSE or another national securities exchange approved by the Kellanova Board, subject to official notice of distribution;
(v) The transfer of the WKKC Assets (other than any Delayed Asset) and WKKC Liabilities (other than any Delayed Liability) contemplated to be transferred from Kellanova to WKKC on or prior to the Distribution shall have occurred as contemplated by Section 2.1, and the transfer of the Kellanova Assets (other than any Delayed Asset) and Kellanova Liabilities (other than any Delayed Liability) contemplated to be transferred from WKKC to Kellanova on or prior to the Distribution Date shall have occurred as contemplated by Section 2.1, in each case pursuant to the Internal Reorganization Step Plan;
(vi) Kellanova shall have received a private letter ruling from the U.S. Internal Revenue Service, in form and substance satisfactory to the Kellanova Board in its sole and absolute discretion, to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (A) the Contribution and Distribution will qualify for non-recognition of gain or loss to Kellanova and WKKC pursuant to Sections 368 and 355 of the Code and (B) the Distribution will qualify for non-recognition of gain or loss to Kellanovas stockholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares, and such private letter ruling shall remain in effect as of the Distribution Date;
(vii) Kellanova shall have received an opinion from Kellanovas outside tax counsel, in form and substance satisfactory to the Kellanova Board in its sole and absolute discretion, that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (A) the Contribution and Distribution will qualify for non-recognition of gain or loss to Kellanova and WKKC pursuant to Sections 368 and 355 of the Code and (B) the Distribution will qualify for non-recognition of gain or loss to Kellanovas stockholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares;
(viii) Kellanova shall have obtained one or more opinions from an independent nationally recognized valuation advisory firm, in form and substance satisfactory to the Kellanova Board in its sole and absolute discretion, to the effect that (A) WKKC has adequate surplus to declare the Cash Transfer, (B) following the Distribution, Kellanova, on the one hand, and WKKC, on the other hand, will be solvent and adequately capitalized, and (C) Kellanova has adequate surplus to declare the applicable dividend to the Record Holders;
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(ix) The actions and filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities Laws or blue sky Laws and the rules and regulations thereunder shall have been taken or made, and, where applicable, have become effective or been accepted by the applicable Governmental Authority;
(x) Each of the Ancillary Agreements shall have been duly executed and delivered by the applicable parties thereto;
(xi) No order, injunction or decree that would prevent the consummation of all or any portion of the Distribution shall be threatened, pending or issued (and still in effect) by any Governmental Authority of competent jurisdiction, no other legal restraint or prohibition preventing the consummation of all or any portion of the Distribution shall be in effect, and no other event shall have occurred or failed to occur that prevents the consummation of all or any portion of the Distribution;
(xii) WKKC shall have consummated the WKKC Financing Arrangements in accordance with Section 2.12(a), Kellanova shall have received the proceeds from the Cash Transfer, and Kellanova shall be satisfied in its sole and absolute discretion that, as of the Effective Time, it shall have no Liability whatsoever under the WKKC Financing Arrangements; and
(xiii) No other events or developments shall exist or shall have occurred that, in the judgment of the Kellanova Board, in its sole and absolute discretion, makes it inadvisable to effect the Internal Reorganization, the Distribution or the transactions contemplated by this Agreement or any Ancillary Agreement.
(b) The foregoing conditions are for the sole benefit of Kellanova and shall not give rise to or create any duty on the part of Kellanova or the Kellanova Board to waive or not waive any such condition or in any way limit Kellanovas right to terminate this Agreement as set forth in Article IX or alter the consequences of any such termination from those specified in Article IX. Any determination made by the Kellanova Board prior to the Distribution concerning the satisfaction or waiver of any or all of the conditions set forth in Section 3.3(a) shall be conclusive and binding on the Parties.
3.4 The Distribution.
(a) Subject to Section 3.3, on or prior to the Effective Time, WKKC will deliver to the Distribution Agent, for the benefit of the Record Holders, book-entry transfer authorizations for such number of the outstanding WKKC Shares as is necessary to effect the Distribution, and shall cause the transfer agent for the Kellanova Shares to instruct the Distribution Agent to distribute at the Effective Time the appropriate number of WKKC Shares to each such holder or designated transferee or transferees of such holder by way of direct registration in book-entry form. WKKC will not issue paper stock certificates in respect of the WKKC Shares. The Distribution shall be effective at the Effective Time.
(b) Subject to Section 3.3 and Section 3.4(c), each Record Holder will be entitled to receive in the Distribution [] WKKC Share[s] for every [] Kellanova Share[s] held by such Record Holder on the Record Date, rounded down to the nearest whole number.
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(c) No fractional shares will be distributed or credited to book-entry accounts in connection with the Distribution, and any such fractional share interests to which a Record Holder would otherwise be entitled shall not entitle such Record Holder to vote or to any other rights as a stockholder of WKKC. In lieu of any such fractional shares, each Record Holder who, but for the provisions of this Section 3.4(c), would be entitled to receive a fractional share interest of a WKKC Share pursuant to the Distribution, shall be paid cash, without any interest thereon, as hereinafter provided. As soon as practicable after the Effective Time, Kellanova shall direct the Distribution Agent to determine the number of whole and fractional WKKC Shares allocable to each Record Holder, to aggregate all such fractional shares into whole shares, and to sell the whole shares obtained thereby in the open market at prevailing market prices on behalf of each Record Holder who otherwise would be entitled to receive fractional share interests (with the Distribution Agent, in its sole and absolute discretion, determining when, how and through which broker-dealer and at what price to make such sales), and to cause to be distributed to each such Record Holder, in lieu of any fractional share, such Record Holders or owners ratable share of the total proceeds of such sale, after deducting any Taxes required to be withheld and applicable transfer Taxes, and after deducting the costs and expenses of such sale and distribution, including brokerage fees and commissions. None of Kellanova, WKKC or the Distribution Agent will be required to guarantee any minimum sale price for the fractional WKKC Shares sold in accordance with this Section 3.4(c). Neither Kellanova nor WKKC will be required to pay any interest on the proceeds from the sale of fractional shares. Neither the Distribution Agent nor the broker-dealers through which the aggregated fractional shares are sold shall be Affiliates of Kellanova or WKKC. Solely for purposes of computing fractional share interests pursuant to this Section 3.4(c) and Section 3.4(d), the beneficial owner of Kellanova Shares held of record in the name of a nominee in any nominee account shall be treated as the Record Holder with respect to such shares.
(d) Any WKKC Shares or cash in lieu of fractional shares with respect to WKKC Shares that remain unclaimed by any Record Holder one hundred and eighty (180) days after the Distribution Date shall be delivered to WKKC, and WKKC or its transfer agent on its behalf shall hold such WKKC Shares and cash for the account of such Record Holder, and the Parties agree that all obligations to provide such WKKC Shares and cash, if any, in lieu of fractional share interests shall be obligations of WKKC, subject in each case to applicable escheat or other abandoned property Laws, and Kellanova shall have no Liability with respect thereto.
(e) Until the WKKC Shares are duly transferred in accordance with this Section 3.4 and applicable Law, from and after the Effective Time, WKKC will regard the Persons entitled to receive such WKKC Shares as record holders of WKKC Shares in accordance with the terms of the Distribution without requiring any action on the part of such Persons. WKKC agrees that, subject to any transfers of such shares, from and after the Effective Time (i) each such holder will be entitled to receive all dividends, if any, payable on, and exercise voting rights and all other rights and privileges with respect to, the WKKC Shares then held by such holder, and (ii) each such holder will be entitled, without any action on the part of such holder, to receive evidence of ownership of the WKKC Shares then held by such holder.
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ARTICLE IV
MUTUAL RELEASES; INDEMNIFICATION
4.1 Release of Pre-Distribution Claims.
(a) WKKC Release of Kellanova. Except as provided in Section 4.1(c) and Section 4.1(d), effective as of the Effective Time, WKKC does hereby, for itself and each other member of the WKKC Group, and their respective successors and assigns, and, to the extent permitted by Law, all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, members, agents or employees of any member of the WKKC Group (in each case, in their respective capacities as such), remise, release and forever discharge (i) Kellanova and the members of the Kellanova Group and their respective successors and assigns, (ii) all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, members, agents or employees of any member of the Kellanova Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, and (iii) all Persons who at any time prior to the Effective Time are or have been stockholders, directors, officers, members, agents or employees of a Transferred Entity and who are not, as of immediately following the Effective Time, directors, officers or employees of WKKC or a member of the WKKC Group, in each case from: (A) all WKKC Liabilities (including such Liabilities arising under the Comprehensive Environmental Response, Compensation and Liability Act), (B) all Liabilities arising from or in connection with the transactions and all other activities to implement the Internal Reorganization and the Distribution and (C) all Liabilities (including such Liabilities arising under the Comprehensive Environmental Response, Compensation and Liability Act) arising from or in connection with actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), in each case to the extent relating to, arising out of or resulting from the WKKC Business, the WKKC Assets or the WKKC Liabilities. Notwithstanding anything to the foregoing, WKKC shall not be deemed to have released any claim, defense, fact or circumstance, which WKKC determines after the Effective Time is necessary or desirable to defend against any Action brought by any director, officer, employee, contractor, or agent or to prosecute any claim or Action against any director officer, employee, contractor or agent relating to the work such individual performed for the WKKC Group prior to the Effective Time.
(b) Kellanova Release of WKKC. Except as provided in Section 4.1(c) and Section 4.1(d), effective as of the Effective Time, Kellanova does hereby, for itself and each other member of the Kellanova Group, and their respective successors and assigns, and, to the extent permitted by Law, all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, members, agents or employees of any member of the Kellanova Group (in each case, in their respective capacities as such), remise, release and forever discharge (i) WKKC and the members of the WKKC Group and their respective successors and assigns, (ii) all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, members, agents or employees of any member of the WKKC Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, and (iii) all Persons who at any time prior to the Effective Time are or have been stockholders, directors, officers, members, agents or employees of a member of the Kellanova Group and who are not, as of immediately following the Effective Time, directors, officers or employees of Kellanova or a member of the Kellanova Group from (A) all Kellanova Liabilities (including such Liabilities arising under the Comprehensive Environmental Response, Compensation and Liability Act), (B) all Liabilities arising from or in connection with the transactions and all other activities to implement the Internal Reorganization and the Distribution and (C) all Liabilities (including such Liabilities arising under the Comprehensive Environmental Response, Compensation and Liability
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Act) arising from or in connection with actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), in each case to the extent relating to, arising out of or resulting from the Kellanova Business, the Kellanova Assets or the Kellanova Liabilities. Notwithstanding anything to the foregoing, Kellanova shall not be deemed to have released any claim, defense, fact or circumstance, which Kellanova determines after the Effective Time is necessary or desirable to defend against any Action brought by any director, officer, employee, contractor, or agent or to prosecute any claim or Action against any director officer, employee, contractor or agent relating to the work such individual performed for the Kellanova Group prior to the Effective Time.
(c) Obligations Not Affected. Nothing contained in Section 4.1(a) or 4.1(b) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement or any agreements, arrangements, commitments or understandings that are specified in Section 2.7(b) as not to terminate as of the Effective Time, in each case in accordance with its terms. Nothing contained in Section 4.1(a) or 4.1(b) shall release any Person from:
(i) any Liability provided in or resulting from any agreement among any members of the Kellanova Group or any members of the WKKC Group that is specified in Section 2.7(b) as not to terminate as of the Effective Time, or any other Liability specified in Section 2.7(b) as not to terminate as of the Effective Time;
(ii) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to the Group of which such Person is a member in accordance with, or any other Liability of any member of any Group under, this Agreement or any Ancillary Agreement;
(iii) any Liability for the sale, lease, construction or receipt of goods, property or services purchased, obtained or used in the ordinary course of business by a member of one Group from a member of the other Group prior to the Effective Time;
(iv) any Liability that the Parties may have with respect to indemnification or contribution or other obligation pursuant to this Agreement, any Ancillary Agreement or otherwise for claims brought against the Parties by Third Parties, which Liability shall be governed by the provisions of this Article IV and Article V and, if applicable, the appropriate provisions of the Ancillary Agreements; or
(v) any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 4.1.
In addition, nothing contained in Section 4.1(a) shall release any member of the Kellanova Group from honoring its existing obligations to indemnify any director, officer or employee of WKKC who was a director, officer or employee of any member of the Kellanova Group on or prior to the Effective Time, to the extent such director, officer or employee becomes a named defendant in any Action with respect to which such director, officer or employee was entitled to such indemnification pursuant to such existing obligations; it being understood that, if any portion of the underlying obligation giving rise to such Action is a WKKC Liability, WKKC shall indemnify
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Kellanova for such portion of such Liability (including Kellanovas costs to indemnify the director, officer or employee) in accordance with the provisions set forth in this Article IV. Nothing contained in Section 4.1(b) shall release any member of the WKKC Group from honoring its existing obligations to indemnify any director, officer or employee of Kellanova who was a director, officer or employee of any member of the WKKC Group on or prior to the Effective Time, to the extent such director, officer or employee becomes a named defendant in any Action with respect to which such director, officer or employee was entitled to such indemnification pursuant to such existing obligations; it being understood that, if any portion of the underlying obligation giving rise to such Action is a Kellanova Liability, Kellanova shall indemnify WKKC for such portion of such Liability (including Kellanovas costs to indemnify the director, officer or employee) in accordance with the provisions set forth in this Article IV.
(d) No Claims. WKKC shall not make, and shall not permit any other member of the WKKC Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Kellanova or any other member of the Kellanova Group, or any other Person released pursuant to Section 4.1(a), with respect to any Liabilities released pursuant to Section 4.1(a). Kellanova shall not make, and shall not permit any other member of the Kellanova Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against WKKC or any other member of the WKKC Group, or any other Person released pursuant to Section 4.1(b), with respect to any Liabilities released pursuant to Section 4.1(b).
(e) Execution of Further Releases. At any time at or after the Effective Time, at the request of either Party, the other Party shall cause each member of its respective Group to execute and deliver releases reflecting the provisions of this Section 4.1.
4.2 Indemnification by WKKC. Except as otherwise specifically set forth in this Agreement or in any Ancillary Agreement, to the fullest extent permitted by Law, WKKC shall, and shall cause the other members of the WKKC Group to, indemnify, defend and hold harmless Kellanova, each member of the Kellanova Group and each of their respective past, present and future directors, officers, employees and agents, in each case in their respective capacities as such, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the Kellanova Indemnitees), from and against any and all Liabilities of the Kellanova Indemnitees to the extent relating to, arising out of or resulting from, directly or indirectly, any of the following items (without duplication):
(a) any WKKC Liability;
(b) any failure of WKKC, any other member of the WKKC Group or any other Person to pay, perform or otherwise promptly discharge any WKKC Liabilities in accordance with their terms, whether prior to, on or after the Effective Time;
(c) any breach by WKKC or any other member of the WKKC Group of this Agreement or any of the Ancillary Agreements;
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(d) except to the extent it relates to a Kellanova Liability, any guarantee, indemnification or contribution obligation, surety bond or other credit support agreement, arrangement, commitment or understanding for the benefit of any member of the WKKC Group by any member of the Kellanova Group that survives following the Distribution; and
(e) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the Form 10, the Information Statement (as amended or supplemented if WKKC shall have furnished any amendments or supplements thereto) or any other Disclosure Document, other than the matters described in clause (e) of Section 4.3.
4.3 Indemnification by Kellanova. Except as otherwise specifically set forth in this Agreement or in any Ancillary Agreement, to the fullest extent permitted by Law, Kellanova shall, and shall cause the other members of the Kellanova Group to, indemnify, defend and hold harmless WKKC, each member of the WKKC Group and each of their respective past, present and future directors, officers, employees or agents, in each case in their respective capacities as such, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the WKKC Indemnitees), from and against any and all Liabilities of the WKKC Indemnitees to the extent relating to, arising out of or resulting from, directly or indirectly, any of the following items (without duplication):
(a) any Kellanova Liability;
(b) any failure of Kellanova, any other member of the Kellanova Group or any other Person to pay, perform or otherwise promptly discharge any Kellanova Liabilities in accordance with their terms, whether prior to, on or after the Effective Time;
(c) any breach by Kellanova or any other member of the Kellanova Group of this Agreement or any of the Ancillary Agreements;
(d) except to the extent it relates to a WKKC Liability, any guarantee, indemnification or contribution obligation, surety bond or other credit support agreement, arrangement, commitment or understanding for the benefit of any member of the Kellanova Group by any member of the WKKC Group that survives following the Distribution; and
(e) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to statements made explicitly in Kellanovas name in the Form 10, the Information Statement (as amended or supplemented if WKKC shall have furnished any amendments or supplements thereto) or any other Disclosure Document; it being agreed that the statements set forth on Schedule 4.3(e) shall be the only statements made explicitly in Kellanovas name in the Form 10, the Information Statement or any other Disclosure Document, and all other information contained in the Form 10, the Information Statement or any other Disclosure Document shall be deemed to be information supplied by WKKC.
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4.4 Indemnification Obligations Net of Insurance Proceeds and Other Amounts.
(a) The Parties intend that any Liability subject to indemnification, contribution or reimbursement pursuant to this Article IV or Article V will be net of Insurance Proceeds or other amounts actually recovered (net of any out-of-pocket costs or expenses incurred in the collection thereof) from any Person by or on behalf of the Indemnitee in respect of any indemnifiable Liability. Accordingly, the amount which either Party (an Indemnifying Party) is required to pay to any Person entitled to indemnification or contribution hereunder (an Indemnitee) will be reduced by any Insurance Proceeds or other amounts actually recovered (net of any out-of-pocket costs or expenses incurred in the collection thereof) from any Person by or on behalf of the Indemnitee in respect of the related Liability. If an Indemnitee receives a payment (an Indemnity Payment) required by this Agreement from an Indemnifying Party in respect of any Liability and subsequently receives Insurance Proceeds or any other amounts in respect of such Liability, then within ten (10) calendar days of receipt of such Insurance Proceeds, the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payment received over the amount of the Indemnity Payment that would have been due if the Insurance Proceeds or such other amounts (net of any out-of-pocket costs or expenses incurred in the collection thereof) had been received, realized or recovered before the Indemnity Payment was made.
(b) The Parties agree that an insurer that would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of any provision contained in this Agreement or any Ancillary Agreement, have any subrogation rights with respect thereto, it being understood that no insurer or any other Third Party shall be entitled to a windfall (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification and contribution provisions hereof. Each Party shall, and shall cause the members of its Group to, use commercially reasonable efforts (taking into account the probability of success on the merits and the cost of expending such efforts, including attorneys fees and expenses) to collect or recover any Insurance Proceeds that may be collectible or recoverable respecting the Liabilities for which indemnification or contribution may be available under this Article IV. Notwithstanding the foregoing, an Indemnifying Party may not delay making any indemnification payment required under the terms of this Agreement, or otherwise satisfying any indemnification obligation, pending the outcome of any Action to collect or recover Insurance Proceeds, and an Indemnitee need not attempt to collect any Insurance Proceeds prior to making a claim for indemnification or contribution or receiving any Indemnity Payment otherwise owed to it under this Agreement or any Ancillary Agreement.
(c) Any Indemnity Payment otherwise owed under this Agreement will be reduced by the Tax Benefits Actually Realized (as defined in the Tax Matters Agreement) by the Indemnitee and its Affiliates in accordance with, and subject to, the principles set forth or referred to in Section 2.5 of the Tax Matters Agreement, and shall be increased in accordance with, and subject to, the principles set forth or referred to in Section 2.5 of the Tax Matters Agreement.
4.5 Procedures for Indemnification of Third-Party Claims.
(a) Notice of Claims. If, at or following the Effective Time, an Indemnitee shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) who is not a member of the Kellanova Group or the WKKC Group of any claim or of the commencement by any such Person of any Action (a Third-Party Claim) with respect to which an Indemnifying Party may be obligated to provide indemnification to such Indemnitee pursuant
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to Section 4.2 or 4.3, or any other Section of this Agreement or any Ancillary Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof as soon as practicable, but in any event within fourteen (14) days (or sooner if the nature of the Third-Party Claim so requires) after becoming aware of such Third-Party Claim. Any such notice shall describe the Third-Party Claim in reasonable detail, including the facts and circumstances giving rise to such claim for indemnification, and include copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third-Party Claim. Such notice shall also clearly state that, if the Indemnifying Party desires to assume defense of such Third-Party Claim pursuant to Section 4.5(b), the Indemnifying Party must so elect within thirty (30) days after receipt of such notice. Notwithstanding the foregoing, the failure of an Indemnitee to provide timely notice in accordance with this Section 4.5(a) shall not relieve an Indemnifying Party of its indemnification obligations under this Agreement, except to the extent to which the Indemnifying Party is actually prejudiced by the Indemnitees failure to provide notice in accordance with this Section 4.5(a).
(b) Control of Defense. An Indemnifying Party may elect to defend (and seek to settle or compromise), at its own expense and with its own counsel, any Third-Party Claim; provided that, prior to the Indemnifying Party assuming and controlling the defense of such Third-Party Claim, it shall first acknowledge to the Indemnitee in writing that, assuming the facts presented to the Indemnifying Party by the Indemnitee are true, the Indemnifying Party shall indemnify the Indemnitee for any such damages to the extent resulting from, or arising out of, such Third-Party Claim. Notwithstanding the foregoing, if the Indemnifying Party assumes such defense and, in the course of defending such Third-Party Claim, (i) the Indemnifying Party discovers that the facts presented at the time the Indemnifying Party acknowledged its indemnification obligation in respect of such Third-Party Claim were not true in any or all material respects and (ii) such untruth provides a reasonable basis for asserting that the Indemnifying Party does not have an indemnification obligation in respect of such Third-Party Claim, then (A) the Indemnifying Party shall not be bound by such acknowledgment, (B) the Indemnifying Party shall promptly thereafter provide the Indemnitee written notice of its assertion that it does not have an indemnification obligation in respect of such Third-Party Claim and (C) the Indemnitee shall have the right to assume the defense of such Third-Party Claim. Within thirty (30) days after the receipt of a notice from an Indemnitee in accordance with Section 4.5(a) (or sooner, if the nature of the Third-Party Claim so requires), the Indemnifying Party shall provide written notice to the Indemnitee indicating whether the Indemnifying Party shall assume responsibility for defending the Third-Party Claim. If an Indemnifying Party elects not to assume responsibility for defending any Third-Party Claim, then the Indemnitee that is the subject of such Third-Party Claim shall be entitled to continue to conduct and control the defense of such Third-Party Claim. If an Indemnifying Party fails to notify an Indemnitee of its election to assume defense of such Third-Party Claim within such thirty (30) day period after receipt of (1) a written notice from such Indemnitee in accordance with Section 4.5(a) and (2) a second written notice from such Indemnitee at least two (2) Business Days prior to the end of such thirty (30) day period, then the Indemnitee that is the subject of such Third-Party Claim shall be entitled to continue to conduct and control the defense of such Third-Party Claim.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(c) Allocation of Defense Costs. If an Indemnifying Party has elected to assume the defense of a Third-Party Claim, then such Indemnifying Party shall be solely liable for all fees and expenses (including attorneys fees) incurred by it in connection with the defense of such Third-Party Claim and shall not be entitled to seek any indemnification or reimbursement from the Indemnitee for any such fees or expenses (including attorneys fees) incurred by the Indemnifying Party during the course of the defense of such Third-Party Claim by such Indemnifying Party, regardless of any subsequent decision by the Indemnifying Party to reject or otherwise abandon its assumption of such defense; provided, that the Indemnifying Party shall not be liable for any fees and expenses (including attorneys fees) incurred by it in connection with the defense of such Third-Party Claim if its assumption of the defense of such Third-Party Claim was induced by material mistruths by the Indemnitee. If an Indemnifying Party elects not to assume responsibility for defending any Third-Party Claim or fails to notify an Indemnitee of its election within thirty (30) days after receipt of a notice from an Indemnitee as provided in Section 4.5(a), and the Indemnitee conducts and controls the defense of such Third-Party Claim and the Indemnifying Party has an indemnification obligation with respect to such Third-Party Claim, then the Indemnifying Party shall be liable for all reasonable and documented fees and expenses (including attorneys fees) incurred by the Indemnitee in connection with the defense of such Third-Party Claim.
(d) Right to Monitor and Participate. An Indemnitee that does not conduct and control the defense of any Third-Party Claim, or an Indemnifying Party that does not elect to defend any Third-Party Claim as contemplated hereby, nevertheless shall have the right to employ separate counsel (including local counsel as necessary) of its own choosing to monitor and participate in (but not control) the defense of any Third-Party Claim for which it is a potential Indemnitee or Indemnifying Party, but the fees and expenses of such counsel shall be at the expense of such Indemnitee or Indemnifying Party, as the case may be, and the provisions of Section 4.5(c) shall not apply to such fees and expenses. Notwithstanding the foregoing, but subject to Section 6.7 and Section 6.8, such Party shall cooperate with the Party entitled to conduct and control the defense of such Third-Party Claim in such defense and make available to the controlling Party, at the non-controlling Partys expense, all witnesses, information and materials in such Partys possession or under such Partys control relating thereto as are reasonably required by the controlling Party. In addition to the foregoing, if any outside legal counsel to the Indemnitee reasonably determines in good faith that such Indemnitee and the Indemnifying Party have actual or potential differing defenses or conflicts of interest between them that make joint representation inappropriate, then the Indemnitee shall have the right to employ one firm of separate counsel (including local counsel as necessary) and to participate in (but not control) the defense, compromise, or settlement thereof, and in such case the Indemnifying Party shall bear the reasonable and documented fees and expenses of such counsel for all Indemnitees.
(e) No Settlement. Neither Party may settle or compromise any Third-Party Claim for which either Party is seeking to be indemnified hereunder without the prior written consent of the other Party, which consent may not be unreasonably withheld, conditioned or delayed, unless such settlement or compromise is solely for monetary damages that are fully payable by the settling or compromising Party, does not involve any admission, finding or determination of wrongdoing or violation of Law by the other Party and provides for a full, unconditional and irrevocable release of the other Party from all Liability in connection with the Third-Party Claim. The Parties hereby agree that if a Party delivers to the other Party (i) a written notice containing a proposal to settle or compromise a Third-Party Claim for which either Party is seeking to be indemnified hereunder (which notice clearly states that the Party receiving such notice must respond to the notice within ten (10) Business Days or within any such shorter time period that may be required by applicable Law or court order (the Settlement Response Period)) and (ii) a second written notice at least two (2) Business Days prior to the end of the Settlement Response Period, and the Party receiving such proposal does not respond in any manner to the Party presenting such proposal within the Settlement Response Period, then the Party receiving such proposal shall be deemed to have consented to the terms of such proposal.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(f) Tax Matters Agreement Governs. The above provisions of this Section 4.5 and the provisions of Section 4.6 do not apply to Taxes (it being understood and agreed that Taxes and Tax matters, including the control of Tax-related proceedings, shall be governed by the Tax Matters Agreement). In the case of any conflict between this Agreement and the Tax Matters Agreement in relation to any matters addressed by the Tax Matters Agreement, the Tax Matters Agreement shall prevail.
4.6 Additional Matters.
(a) Timing of Payments. Indemnification or contribution payments in respect of any Liabilities for which an Indemnitee is entitled to indemnification or contribution under this Article IV shall be paid reasonably promptly (but in any event within thirty (30) days of the final determination of the amount that the Indemnitee is entitled to indemnification or contribution under this Article IV) by the Indemnifying Party to the Indemnitee as such Liabilities are incurred upon demand by the Indemnitee, including reasonably satisfactory documentation setting forth the basis for the amount of such indemnification or contribution payment, including documentation with respect to calculations made and consideration of any Insurance Proceeds that actually reduce the amount of such Liabilities. The indemnity and contribution provisions contained in this Article IV shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Indemnitee and (ii) the knowledge by the Indemnitee of Liabilities for which it might be entitled to indemnification hereunder.
(b) Notice of Direct Claims. Any claim for indemnification or contribution under this Agreement or any Ancillary Agreement that does not result from a Third-Party Claim shall be asserted by written notice given by the Indemnitee to the applicable Indemnifying Party promptly following the Indemnitee becoming aware of such claim (which notice clearly states that the Indemnifying Party must respond to the notice within thirty (30) days (the Indemnification Response Period)) (provided that the failure of an Indemnitee to provide prompt notice in accordance with this Section 4.6(b) shall not relieve an Indemnifying Party of its indemnification obligations under this Agreement, except to the extent to which the Indemnifying Party is actually prejudiced by the Indemnitees failure to provide prompt notice in accordance with this Section 4.6(b)). If the Indemnitee provides a second written notice at least two (2) Business Days prior to the end of the Indemnification Response Period and such Indemnifying Party does not respond within the Indemnification Response Period, such specified claim shall be conclusively deemed a Liability of the Indemnifying Party under this Section 4.6(b) or, in the case of any written notice in which the amount of the claim (or any portion thereof) is estimated, on such later date when the amount of the claim (or such portion thereof) becomes finally determined. If such Indemnifying Party does not respond within the Indemnification Response Period or rejects such claim in whole or in part, such Indemnitee shall, subject to the provisions of Article VII, be free to pursue such remedies as may be available to such party as contemplated by this Agreement and the Ancillary Agreements, as applicable, without prejudice to its continuing rights to pursue indemnification or contribution hereunder.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(c) Pursuit of Claims Against Third Parties. If (i) a Party incurs any Liability arising out of this Agreement or any Ancillary Agreement; (ii) an adequate legal or equitable remedy is not available for any reason against the other Party to satisfy the Liability incurred by the incurring Party; and (iii) a legal or equitable remedy may be available to the other Party against a Third Party for such Liability, then the other Party shall use its commercially reasonable efforts to cooperate with the incurring Party, at the incurring Partys expense, to permit the incurring Party to obtain the benefits of such legal or equitable remedy against the Third Party.
(d) Subrogation. In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third-Party Claim against any claimant or plaintiff asserting such Third-Party Claim or against any other Person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.
(e) Substitution. In the event of an Action in which the Indemnifying Party is not a named defendant, if either the Indemnitee or Indemnifying Party shall so request, the Parties shall endeavor to substitute the Indemnifying Party for the named defendant. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in Section 4.5 and this Section 4.6, and the Indemnifying Party shall fully indemnify the named defendant against all reasonable costs of defending the Action (including court costs, sanctions imposed by a court, attorneys fees, experts fees and all other external expenses), the costs of any judgment or settlement and the cost of any interest or penalties relating to any judgment or settlement.
4.7 Right of Contribution.
(a) Contribution. If any right of indemnification contained in Section 4.2 or Section 4.3 is held unenforceable or is unavailable for any reason (other than pursuant to the terms hereof), or is insufficient to hold harmless an Indemnitee in respect of any Liability for which such Indemnitee is entitled to indemnification hereunder, then the Indemnifying Party shall contribute to the amounts paid or payable by the Indemnitees as a result of such Liability (or Actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the members of its Group, on the one hand, and the Indemnitees entitled to contribution, on the other hand, as well as any other relevant equitable considerations.
(b) Allocation of Relative Fault. Solely for purposes of determining relative fault pursuant to this Section 4.7: (i) any fault associated with the business conducted with the Delayed Assets or Delayed Liabilities of WKKC (except for the gross negligence or intentional misconduct of a member of the Kellanova Group) or with the ownership, operation or activities of the WKKC Business prior to the Effective Time shall be deemed to be the fault of WKKC and the other members of the WKKC Group, and no such fault shall be deemed to be the fault of Kellanova or any other member of the Kellanova Group; and (ii) any fault associated with the business conducted with Delayed Assets or Delayed Liabilities of Kellanova (except for the gross negligence or intentional misconduct of a member of the WKKC Group) or with the ownership, operation or activities of the Kellanova Business prior to the Effective Time, shall be deemed to be the fault of Kellanova and the other members of the Kellanova Group, and no such fault shall be deemed to be the fault of WKKC or any other member of the WKKC Group.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
4.8 Covenant Not to Sue. Each Party hereby covenants and agrees that none of it, the members of such Partys Group or any Person claiming through it shall bring suit or otherwise assert any claim against any Indemnitee, or assert a defense against any claim asserted by any Indemnitee, before any court, arbitrator, mediator or administrative agency anywhere in the world, alleging that: (a) the assumption or retention of any WKKC Liabilities by WKKC or a member of the WKKC Group on the terms and conditions set forth in this Agreement and the Ancillary Agreements is unlawful, a breach of fiduciary or other duty, void, unenforceable, unconscionable, inequitable or otherwise improper for any reason; (b) the assumption or retention of any Kellanova Liabilities by Kellanova or a member of the Kellanova Group on the terms and conditions set forth in this Agreement and the Ancillary Agreements is unlawful, a breach of fiduciary or other duty, void, unenforceable, unconscionable, inequitable or otherwise improper for any reason or (c) the provisions of this Article IV are unlawful, a breach of fiduciary or other duty, void, unenforceable, unconscionable, inequitable or otherwise improper for any reason.
4.9 Remedies Cumulative. The remedies provided in this Article IV shall be cumulative and, subject to the provisions of Article VIII, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party.
4.10 Survival of Indemnities. The rights and obligations of each of Kellanova and WKKC and their respective Indemnitees under this Article IV shall survive (a) the sale or other transfer by either Party or any member of its Group of any assets or businesses or the assignment by it of any Liabilities; or (b) any merger, consolidation, business combination, sale of all or substantially all of its Assets, restructuring, recapitalization, reorganization or similar transaction involving either Party or any of the members of its Group.
ARTICLE V
CERTAIN OTHER MATTERS
5.1 Insurance Matters.
(a) After the Effective Time, with respect to any WKKC Liabilities incurred by any member of the WKKC Group arising from or relating to facts, circumstances, events or matters that occurred prior to the Effective Time with respect to which Kellanova or a member of its Group maintains Third Party occurrence-based insurance coverage, Kellanova will provide WKKC with access to, and WKKC may make occurrence-based claims under, such applicable Third Party occurrence-based insurance policies in place immediately prior to the Effective Time (to the extent coverage remains available), but solely to the extent that such policies provided coverage for members of the WKKC Group or the WKKC Business for occurrence-based claims prior to the Effective Time; provided, that WKKC shall access and make occurrence-based claims under such insurance policies in good faith and in a manner consistent with past practice; provided, further, that such access to, and the right to make occurrence-based claims under, such insurance policies shall be subject to the terms, conditions and exclusions of such insurance policies, including any limits on coverage or scope, any deductibles, self-insured retentions and other fees and expenses, and shall be subject to the following additional conditions:
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Pursuant to 17 C.F.R. Section 200.83
(i) WKKC shall notify Kellanova as promptly as practicable of any claim made by WKKC pursuant to this Section 5.1(a);
(ii) WKKC and the members of the WKKC Group shall indemnify, hold harmless and reimburse Kellanova and the members of the Kellanova Group for any deductibles, self-insured retention, fees, indemnity payments, settlements, judgments, legal fees, allocated claims expenses and claim handling fees, and other expenses (Claim Costs) incurred by Kellanova or any member of the Kellanova Group to the extent resulting from any access to, or any claims made by WKKC or any members of the WKKC Group under, any insurance provided pursuant to this Section 5.1(a), whether such claims are made by WKKC, its employees or any Third Parties; provided, that WKKC and the members of the WKKC Group shall only be required to indemnify Kellanova and the members of the Kellanova Group to the extent such Claim Costs exceeds payments received by Kellanova or another member of the Kellanova Group from a Captive Insurer or any other Person in respect of any claims made by WKKC or any member of the WKKC Group under any insurance provided pursuant to this Section 5.1(a); and
(iii) WKKC shall exclusively bear (and neither Kellanova nor any member of the Kellanova Group shall have any obligation to repay or reimburse WKKC or any member of the WKKC Group for) and shall be liable for all excluded, uninsured, uncovered, unavailable or uncollectible amounts (including where any insurer declines, denies, delays or obstructs any claim payment) of all such claims made by it or any member of its Group under the policies as provided for in this Section 5.1(a).
(b) Notwithstanding the foregoing, WKKC shall promptly remit to Kellanova any Insurance Proceeds received pursuant to Section 5.1(a) to the extent such Insurance Proceeds cover Losses that were remedied prior to the Effective Time or that were suffered by Kellanova or its Subsidiaries prior to the Effective Time.
(c) Except as expressly provided in Section 5.1(a), and subject to the limitation in Section 5.1(b), from and after the Effective Time, WKKC, each member of the WKKC Group and each of their respective employees (including former or inactive employees) shall cease be insured by, shall have no access or availability to or under, shall not be entitled to make claims on or under and shall not be entitled to claim benefits from or seek coverage under, and shall not have any rights to or under, any of Kellanovas or any member of the Kellanova Groups insurance policies or any of their respective self-insured programs (including any assets or insurance policies or programs of any Captive Insurer) in place immediately prior to the Effective Time. In no event shall Kellanova, any other member of the Kellanova Group or any Kellanova Indemnitee have Liability or obligation whatsoever to any member of the WKKC Group in the event that any (i) insurance policy or insurance policy related Contract shall be terminated or otherwise cease to be in effect for any reason, shall be unavailable or inadequate to cover any Liability of any member of the WKKC Group for any reason whatsoever or shall be cancelled, not renewed or not extended beyond the current expiration date or (ii) any insurer declines, denies, delays or obstructs any claim payment.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(d) At the Effective Time, WKKC shall have in effect all insurance programs required to comply with WKKCs contractual obligations and such other policies required by Law or as reasonably necessary or appropriate for companies operating a business similar to that of WKKC.
(e) Neither WKKC nor any member of the WKKC Group, in connection with making a claim under any insurance policy of Kellanova or any member of the Kellanova Group pursuant to this Section 5.1, shall take any action that would be reasonably likely to (i) have a material and adverse impact on the then-current relationship between Kellanova or any member of the Kellanova Group, on the one hand, and the applicable insurance company, on the other hand; (ii) result in the applicable insurance company terminating or materially reducing coverage, or materially increasing the amount of any premium owed by Kellanova or any member of the Kellanova Group under the applicable insurance policy; or (iii) otherwise compromise, jeopardize or interfere in any material respect with the rights of Kellanova or any member of the Kellanova Group under the applicable insurance policy; provided, that WKKCs, any member of the WKKC Groups, any of their respective employees or any Third Partys making of a claim pursuant to Section 5.1(a) shall not be deemed to be an action that triggers the foregoing clauses (i), (ii) or (iii).
(f) Any payments, costs, adjustments or reimbursements to be paid by WKKC pursuant to this Section 5.1 shall be billed quarterly and payable within thirty (30) days from receipt of an invoice from Kellanova. Kellanova shall retain the exclusive right to control its insurance policies and programs, including the right to exhaust, settle, release, commute, buyback or otherwise resolve disputes with respect to any of its insurance policies and programs and to amend, modify or waive any rights under any such insurance policies and programs, notwithstanding whether any such policies or programs apply to any WKKC Liabilities or claims WKKC has made or could make in the future, and no member of the WKKC Group shall erode, exhaust, settle, release, commute, buyback or otherwise resolve disputes with Kellanovas insurers with respect to any of Kellanovas insurance policies and programs, or amend, modify or waive any rights under any such insurance policies and programs. WKKC shall cooperate with Kellanova and share such information as is reasonably necessary in order to permit Kellanova to manage and conduct its insurance matters as Kellanova deems appropriate. Each Party and any member of its applicable Group has the sole right to settle or otherwise resolve Third Party claims made against it or any member of its applicable Group covered under an applicable insurance policy.
(g) This Agreement shall not be considered as an attempted assignment of any policy of insurance or as a contract of insurance and shall not be construed to waive any right or remedy of any member of the Kellanova Group in respect of any insurance policy or any other contract or policy of insurance.
(h) WKKC does hereby, for itself and each other member of the WKKC Group, agree that no member of the Kellanova Group shall have any Liability whatsoever as a result of the insurance policies and practices of Kellanova and the members of the Kellanova Group as in effect at any time, including as a result of the level or scope of any such insurance, the creditworthiness of any insurance carrier, the terms and conditions of any policy, or the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim or otherwise.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(i) For the avoidance of doubt, this Section 5.1 shall not be deemed to apply or relate to any Benefit Plan.
5.2 Late Payments. Except as expressly provided to the contrary in this Agreement or in any Ancillary Agreement, any amount not paid when due pursuant to this Agreement or any Ancillary Agreement (and any amounts billed or otherwise invoiced or demanded and properly payable that are not paid within thirty (30) days of a notice of non-payment) shall accrue interest from the fifth day following the due date to and including the date of payment, at the three-month Secured Overnight Financing Rate (SOFR) plus two percent (2.0%); provided that the party to whom a payment is due pursuant to this Agreement or any Ancillary Agreement may, if such payment is not timely made, issue a notice of non-payment notifying the other party that the Penalty Rate shall apply if payment in full is not made by the fifteenth (15th) day following the date of delivery of such notice of non-payment. For purposes hereof, the Penalty Rate shall mean the three-month Secured Overnight Financing Rate (SOFR) plus eight percent (8.0%).
5.3 Treatment of Payments for Tax Purposes. For all applicable Tax purposes, the Parties agree to treat any payment required by this Agreement as set forth in Section 5.4 of the Tax Matters Agreement.
5.4 Inducement. WKKC acknowledges and agrees that Kellanovas willingness to cause, effect and consummate the Internal Reorganization and the Distribution has been conditioned upon and induced by WKKCs covenants and agreements in this Agreement and the Ancillary Agreements, including WKKCs assumption of the WKKC Liabilities pursuant to the Internal Reorganization and the provisions of this Agreement and WKKCs covenants and agreements contained in Article IV.
5.5 Post-Effective Time Conduct. The Parties acknowledge that, after the Effective Time, each Party shall be independent of the other Party, with responsibility for its own actions and inactions and its own Liabilities relating to, arising out of or resulting from the conduct of its business, operations and activities following the Effective Time, except as may otherwise be provided in any Ancillary Agreement, and each Party shall (except as otherwise provided in Article IV) use commercially reasonable efforts to prevent such Liabilities from being inappropriately borne by the other Party.
5.6 Distribution Center Sublease Agreements. On the date that is the second (2nd) anniversary of the Distribution Date (or such other date as mutually agreed in writing by the Parties), Kellanova and WKKC shall, or shall cause the applicable members of their respective Groups to, execute and deliver the Distribution Center Sublease Agreements in substantially the form attached hereto as Exhibit C.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
ARTICLE VI
EXCHANGE OF INFORMATION; CONFIDENTIALITY; OTHER COVENANTS
6.1 Agreement for Exchange of Information.
(a) Subject to Section 6.9 and any other applicable confidentiality obligations, each of Kellanova and WKKC, on behalf of itself and each member of its Group, agrees to use commercially reasonable efforts to provide or make available, or cause to be provided or made available, to the other Party and the members of such other Partys Group, at any time before, on or after the Effective Time, as soon as reasonably practicable after written request therefor, any information (or a copy thereof) in the possession or under the control of such Party or its Group which the requesting Party requests to the extent that (i) such information relates to the WKKC Business, or any WKKC Asset or WKKC Liability, if WKKC is the requesting Party, or to the Kellanova Business, or any Kellanova Asset or Kellanova Liability, if Kellanova is the requesting Party; (ii) such information is required by the requesting Party or its Group to comply with its obligations under this Agreement or any Ancillary Agreement; or (iii) such information is required by the requesting Party or its Group to comply with any Laws or regulations or stock exchange rules or obligations imposed by any Governmental Authority, including the obligation to verify the accuracy of internal controls over information technology reporting of financial data and related processes employed in connection with verifying compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (it being understood that in the case of such verification, the obligations set forth in this sentence shall apply to access to the facilities, systems, infrastructure and personnel of the applicable Party or its Group); provided, however, that in the event that the Party to whom the request has been made determines that any such provision of information could be detrimental to the Party providing the information or its Group, violate any Law or agreement, or waive any privilege available under applicable Law, including any attorney-client privilege, then the Parties shall use commercially reasonable efforts to permit compliance with such obligations to the extent and in a manner that avoids any such harm or consequence. The Party providing information pursuant to this Section 6.1 shall only be obligated to provide such information in the form, condition and format in which it then exists, and in no event shall such Party be required to perform any improvement, modification, conversion, updating or reformatting of any such information, and nothing in this Section 6.1 shall expand the obligations of either Party under Section 6.4. Each Party shall cause its and its Subsidiaries employees to, and shall use commercially reasonable efforts to cause its Representatives employees to, when on the property of any Party or its Subsidiaries, or when given access to any facilities, systems, infrastructure or personnel of the other Party or any members of its Group, conform to the policies and procedures of such Party and its Group concerning health, safety, conduct and security that are made known or provided to the accessing Party from time to time.
(b) Without limiting the generality of the foregoing, until the end of the WKKC fiscal year during which the Distribution Date occurs (and for a reasonable period of time afterwards as required for each Party to prepare consolidated financial statements or complete a financial statement audit for the fiscal year during which the Distribution Date occurs), each Party shall use its commercially reasonable efforts to cooperate with the other Partys information requests to enable (i) the other Party to meet its timetable for dissemination of its earnings releases, financial statements and managements assessment of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting in accordance with Items 307 and 308, respectively, of Regulation S-K promulgated under the Exchange Act; and (ii) the other Partys accountants to timely complete their review of the quarterly financial statements and audit of the annual financial statements, including, to the extent applicable to such Party, its auditors audit of its internal control over financial reporting and managements assessment thereof in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the SECs and Public Company Accounting Oversight Boards rules and auditing standards thereunder and any other applicable Laws.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
6.2 Ownership of Information. The provision of any information pursuant to Section 6.1 or Section 6.7 shall not affect the ownership of such information (which shall be determined solely in accordance with the terms of this Agreement and the Ancillary Agreements) or constitute a grant of rights in or to any such information.
6.3 Compensation for Providing Information. The Party requesting information pursuant to Section 6.1 agrees to reimburse the other Party for the reasonable out-of-pocket costs, if any, of creating, gathering, copying, transporting and otherwise complying with the request with respect to such information (including any reasonable out-of-pocket costs and expenses incurred in any review of information for purposes of protecting the Privileged Information of the providing Party or in connection with the restoration of backup media for purposes of providing the requested information).
6.4 Record Retention. To facilitate the possible exchange of information pursuant to this Article VI and other provisions of this Agreement after the Effective Time, the Parties agree to use their commercially reasonable efforts, which shall be no less rigorous than those used for retention of such Partys own information, to retain all information in their respective possession or control, or in the possession or control of any member of their respective Group, at the Effective Time in accordance with the record retention policies of Kellanova as in effect at the Effective Time (copies of which shall be provided to WKKC prior to the Effective Time) or such other policies as may be mutually agreed by Kellanova and WKKC. Notwithstanding the foregoing, the Tax Matters Agreement will exclusively govern the retention of Tax-related records and the exchange of Tax-related information, and the Employee Matters Agreement will exclusively govern the maintenance and retention of employment and benefits related records.
6.5 Limitations of Liability. Neither Party nor any member of its Group shall have any Liability to the other Party or any member of its Group in the event that any information exchanged or provided pursuant to this Agreement is found to be inaccurate in the absence of gross negligence, bad faith, fraud or willful misconduct by the Party providing such information. Neither Party nor any member of its Group shall have any Liability to any other Party or any member of its Group if any information is destroyed after commercially reasonable efforts by such Party to comply with the provisions of Section 6.4.
6.6 Other Agreements Providing for Exchange of Information.
(a) The rights and obligations granted under this Article VI are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange, retention or confidential treatment of information set forth in any Ancillary Agreement.
(b) Any Party or any member of its Group that receives, pursuant to a request for information in accordance with this Article VI, Tangible Information that is not relevant to its request shall, at the request of the providing Party, (i) return it to the providing Party or, at the providing Partys request, destroy such Tangible Information; and (ii) deliver to the providing Party written confirmation that such Tangible Information was returned or destroyed, as the case may be, which confirmation shall be signed by an authorized representative of the requesting Party.
49
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
6.7 Production of Witnesses; Records; Cooperation.
(a) After the Effective Time, except in the case of a Dispute between Kellanova and WKKC, or any members of their respective Groups, each Party shall use its commercially reasonable efforts to make available to the other Party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available without undue burden, to the extent that any such Person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with any Action in which the requesting Party (or member of its Group) may from time to time be involved, regardless of whether such Action is a matter with respect to which indemnification may be sought hereunder. The requesting Party shall bear all costs and expenses in connection therewith.
(b) If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third-Party Claim, the other Party shall make available to such Indemnifying Party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available without undue burden, to the extent that any such Person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be, and shall otherwise cooperate in such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be.
(c) Without limiting the foregoing, the Parties shall cooperate and consult to the extent reasonably necessary with respect to any Actions other than those between Kellanova and WKKC, or any members of their respective Groups.
(d) The obligation of the Parties to provide witnesses pursuant to this Section 6.7 is intended to be interpreted in a manner so as to facilitate cooperation and shall include the obligation to provide as witnesses directors, officers, employees, other personnel and agents without regard to whether such Person or the employer of such Person could assert a possible business conflict (subject to the exception set forth in the first sentence of Section 6.7(a)).
6.8 Privileged Matters.
(a) The Parties recognize that legal and other professional services that have been and will be provided prior to the Effective Time have been and will be rendered for the collective benefit of each of the members of the Kellanova Group and the WKKC Group, and that each of the members of the Kellanova Group and the WKKC Group should be deemed to be the client with respect to such services for the purposes of asserting all privileges which may be asserted under applicable Law in connection therewith. The Parties recognize that legal and other professional services will be provided following the Effective Time, which services will be rendered, unless agreed otherwise, solely for the benefit of the Kellanova Group or the WKKC Group, as the case may be. In furtherance of the foregoing, each Party shall authorize the delivery to or retention by the other Party of materials existing as of the Effective Time that are necessary for such other Party to perform or receive such services.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(b) The Parties agree as follows:
(i) Kellanova shall be entitled, in perpetuity, to control the assertion or waiver of all privileges and immunities in connection with any Privileged Information that relates solely to the Kellanova Business and not to the WKKC Business, whether or not the Privileged Information is in the possession or under the control of any member of the Kellanova Group or any member of the WKKC Group. Kellanova shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges and immunities in connection with any Privileged Information that relates solely to any Kellanova Liabilities resulting from any Actions that are now pending or may be asserted in the future, whether or not the Privileged Information is in the possession or under the control of any member of the Kellanova Group or any member of the WKKC Group;
(ii) WKKC shall be entitled, in perpetuity, to control the assertion or waiver of all privileges and immunities in connection with any Privileged Information that relates solely to the WKKC Business and not to the Kellanova Business, whether or not the Privileged Information is in the possession or under the control of any member of the WKKC Group or any member of the Kellanova Group. WKKC shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges and immunities in connection with any Privileged Information that relates solely to any WKKC Liabilities resulting from any Actions that are now pending or may be asserted in the future, whether or not the Privileged Information is in the possession or under the control of any member of the WKKC Group or any member of the Kellanova Group; and
(iii) If the Parties do not agree as to whether certain information is Privileged Information, then such information shall be treated as Privileged Information, and the Party that believes that such information is Privileged Information shall be entitled to control the assertion or waiver of all privileges and immunities in connection with any such information unless the Parties otherwise agree. The Parties shall use the procedures set forth in Article VII to resolve any disputes as to whether any information relates solely to the Kellanova Business, solely to the WKKC Business, or to both the Kellanova Business and the WKKC Business.
(c) Subject to the remaining provisions of this Section 6.8, the Parties agree that they shall have a shared privilege or immunity with respect to all privileges and immunities not allocated pursuant to Section 6.8(b) and all privileges and immunities relating to any Actions or other matters that involve both Parties (or one (1) or more members of their respective Groups) and in respect of which both Parties have Liabilities under this Agreement, and that no such shared privilege or immunity may be waived by either Party without the consent of the other Party.
(d) If any Dispute arises between the Parties or any members of their respective Groups regarding whether a privilege or immunity should be waived to protect or advance the interests of either Party or any member of their respective Groups, each Party agrees that it shall (i) negotiate with the other Party in good faith; (ii) endeavor to minimize any prejudice to the rights of the other Party; and (iii) not unreasonably withhold, condition or delay consent to any request for waiver by the other Party. Further, each Party specifically agrees that it shall not withhold its consent to the waiver of a privilege or immunity for any purpose except in good faith to protect its own legitimate interests.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(e) In the event of any Dispute between Kellanova and WKKC, or any members of their respective Groups, either Party may waive a privilege in information relating to the Dispute in which the other Party or member of such other Partys Group has a shared privilege, without obtaining consent pursuant to Section 6.8(c); provided that the Parties intend such waiver of a shared privilege to be effective only as to the use of information with respect to the Action between the Parties or the applicable members of their respective Groups, and is not intended to operate as a waiver of the shared privilege with respect to any Third Party.
(f) Upon receipt by either Party, or by any member of its respective Group, of any subpoena, discovery or other request that may reasonably be expected to result in the production or disclosure of Privileged Information subject to a shared privilege or immunity or as to which another Party has the sole right hereunder to assert a privilege or immunity, or if either Party obtains knowledge that any of its, or any member of its respective Groups, current or former directors, officers, agents or employees have received any subpoena, discovery or other requests that may reasonably be expected to result in the production or disclosure of such Privileged Information, such Party shall (unless prohibited by Law) promptly notify the other Party of the existence of the request (which notice shall be delivered to such other Party no later than five (5) business days following the receipt of any such subpoena, discovery or other request) and shall provide the other Party a reasonable opportunity to review the Privileged Information and to assert any rights it or they may have under this Section 6.8 or otherwise, to prevent the production or disclosure of such Privileged Information.
(g) Any furnishing of, or access or transfer of, any information pursuant to this Agreement is made in reliance on the agreement of Kellanova and WKKC set forth in this Section 6.8 and in Section 6.9 to maintain the confidentiality of Privileged Information and to assert and maintain all applicable privileges and immunities. The Parties agree that their respective rights to any access to information, witnesses and other Persons, the furnishing of notices and documents and other cooperative efforts between the Parties contemplated by this Agreement, and the transfer of Privileged Information between the Parties and members of their respective Groups as needed pursuant to this Agreement, shall not be deemed a waiver of any privilege that has been or may be asserted under this Agreement or otherwise.
(h) In connection with any matter contemplated by Section 6.7 or this Section 6.8, the Parties agree to, and to cause the applicable members of their Group to, use commercially reasonable efforts to maintain their respective separate and joint privileges and immunities, including by executing joint defense or common interest agreements where necessary or useful for this purpose.
52
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
6.9 Confidentiality.
(a) Confidentiality. Subject to Section 6.10, and without prejudice to any longer period that may be provided for in any of the Ancillary Agreements, from and after the Effective Time until the seven (7)-year anniversary of the Effective Time, each of Kellanova and WKKC, on behalf of itself and each member of its respective Group, agrees to hold, and to cause its respective Representatives to hold, in strict confidence, with at least the same degree of care that applies to Kellanovas confidential and proprietary information pursuant to policies in effect as of the Effective Time, all confidential and proprietary information concerning the other Party or any member of the other Partys Group or their respective businesses that is either in its possession (including confidential and proprietary information in its possession prior to the date hereof) or furnished by any such other Party or any member of such Partys Group or their respective Representatives at any time pursuant to this Agreement, any Ancillary Agreement or otherwise, and shall not use any such confidential and proprietary information other than for such purposes as shall be expressly permitted hereunder or thereunder, except, in each case, to the extent that such confidential and proprietary information has been (i) in the public domain or generally available to the public, other than as a result of a disclosure by such Party or any member of such Partys Group or any of their respective Representatives in violation of this Agreement, (ii) later lawfully acquired from other sources by such Party (or any member of such Partys Group) which sources are not themselves known by such Party (or any member of such Partys Group) to be bound by a confidentiality obligation or other contractual, legal or fiduciary obligation of confidentiality with respect to such confidential and proprietary information, or (iii) independently developed or generated without reference to or use of any proprietary or confidential information of the other Party or any member of such Partys Group. Notwithstanding the foregoing seven (7)-year period, Kellanovas and WKKCs obligations with respect to confidential and proprietary information that constitutes Trade Secrets shall survive and continue for so long as such confidential and proprietary information retains its status as a Trade Secret. If any confidential and proprietary information of one Party or any member of its Group is disclosed to the other Party or any member of such other Partys Group in connection with providing services to such first Party or any member of such first Partys Group under this Agreement or any Ancillary Agreement, then such disclosed confidential and proprietary information shall be used only as required to perform such services.
(b) No Release; Return or Destruction. Each Party agrees not to release or disclose, or permit to be released or disclosed, any information addressed in Section 6.9(a) to any other Person, except its Representatives who need to know such information in their capacities as such (who shall be advised of their obligations hereunder with respect to such information), and except in compliance with Section 6.10. Without limiting the foregoing, when any such information is no longer needed for the purposes contemplated by this Agreement or any Ancillary Agreement, and is no longer subject to any legal hold or other document preservation obligation, each Party will promptly after request of the other Party either return to the other Party all such information in a tangible form (including all copies thereof and all notes, extracts or summaries based thereon) or notify the other Party in writing that it has destroyed such information (and such copies thereof and such notes, extracts or summaries based thereon); provided, that the Parties may retain electronic back-up versions of such information maintained on routine computer system backup tapes, disks or other backup storage devices; provided further, that any such information so retained shall remain subject to the confidentiality provisions of this Agreement or any Ancillary Agreement.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(c) Third Party Information; Privacy or Data Protection Laws. Each Party acknowledges that it and members of its Group may presently have and, following the Effective Time, may gain access to or possession of confidential or proprietary information of, or legally-protected personal information relating to, Third Parties (i) that was received under privacy policies or notices or confidentiality or non-disclosure agreements entered into between such Third Parties, on the one hand, and the other Party or members of such other Partys Group, on the other hand, prior to the Effective Time; or (ii) that, as between the two Parties, was originally collected by the other Party or members of such other Partys Group and that may be subject to and protected by privacy policies or notices, as well as applicable data privacy Laws or other applicable Laws. Each Party agrees that it shall hold, protect and use, and shall cause the members of its Group and its and their respective Representatives to hold, protect and use, in strict confidence the confidential and proprietary information of, or legally-protected personal information relating to, Third Parties in accordance with the obligations outlined in the applicable privacy policies or notices and applicable data privacy Laws or other applicable Laws and the terms of any agreements that were either entered into before the Effective Time or affirmative commitments or representations that were made before the Effective Time by, between or among the other Party or members of the other Partys Group, on the one hand, and such Third Parties, on the other hand[, including as set forth in the Data Processing Agreement].
6.10 Protective Arrangements. In the event that a Party or any member of its Group either determines on the advice of its counsel that it is required to disclose any information of the other Party pursuant to applicable Law or receives any request or demand under lawful process or from any Governmental Authority to disclose or provide information of the other Party (or any member of the other Partys Group) that is subject to the confidentiality provisions hereof, such Party shall notify the other Party (to the extent legally permitted) as promptly as practicable under the circumstances prior to disclosing or providing such information and shall cooperate, at the expense of the other Party, in seeking any appropriate protective order requested by the other Party. In the event that such other Party fails to receive such appropriate protective order in a timely manner and the Party receiving the request or demand reasonably determines that its failure to disclose or provide such information shall actually prejudice the Party receiving the request or demand, then the Party that received such request or demand may thereafter disclose or provide information to the extent required by such Law (as so advised by its counsel) or by lawful process or such Governmental Authority, and the disclosing Party shall promptly provide the other Party with a copy of the information so disclosed, in the same form and format so disclosed, together with a list of all Persons to whom such information was disclosed, in each case to the extent legally permitted.
6.11 [Restrictive Covenants.
(a) Non-Competition. Each Party covenants and agrees that, from the Effective Time until the second anniversary of the Effective Time, neither Party will, and will cause each other member of its respective Group not to, directly or indirectly, own, invest in, operate, manage, control, participate or engage in any Restricted Business (in each case, as applicable) without the prior written consent of the other Party; provided, that nothing in this Section 6.11(a) will prohibit (i) the ownership by Kellanova or WKKC, as the case may be, or any member of its respective Group, of debt, equity or any other class of securities of any Person that owns, invests in, operates, manages, controls, participates or engages directly or indirectly in a Restricted Business (as applicable), provided ownership of such securities (either directly, indirectly or upon conversion) is less than 5% of such class of securities of such Person, (ii) acquiring (whether by means of acquisition, asset purchase, merger, consolidation, similar business combination or otherwise) a Person engaged in a Restricted Business together with other lines of business if no more than 20%
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
of such Persons revenues were derived from a Restricted Business (measured by the most current annual financial statements published or prepared by the acquired Person in the ordinary course of business, (iii) continuing to hold any debt, equity or other class of securities of any Person that were held by the applicable Party or a member of its Group as of the Effective Time or (iv) exercising its rights or performing or complying with its obligations under this Agreement or any Ancillary Agreement.
(b) Remedies; Enforcement. Each Party acknowledges and agrees that (i) injury to the other Party from any breach of the obligations of such Party set forth in this Section 6.11 would be irreparable and impossible to measure and (ii) the remedies at Law for any breach or threatened breach of this Section 6.11, including monetary damages, would therefore be inadequate compensation for any loss and the other Party shall have the right to specific performance and injunctive or other equitable relief in accordance with Section 10.13, in addition to any and all other rights and remedies at Law or in equity, and all such rights and remedies shall be cumulative. Each Party understands and acknowledges that the restrictive covenants and other agreements contained in this Section 6.11 are an essential part of this Agreement and the transactions contemplated hereby. It is the intent of the Parties that the provisions of this Section 6.11 shall be enforced to the fullest extent permissible under applicable Law applied in each jurisdiction in which enforcement is sought. If any particular provision or portion of this Section 6.11 shall be adjudicated to be invalid or unenforceable, such provision or portion thereof shall be deemed amended to the minimum extent necessary to render such provision or portion valid and enforceable, such amendment to apply only with respect to the operation of such provision or portion thereof in the particular jurisdiction in which such adjudication is made.]
ARTICLE VII
DISPUTE RESOLUTION
7.1 Transition Committee.
(a) Prior to the Effective Time, the Parties shall establish a transition committee (the Transition Committee) that shall consist of an equal number of members from Kellanova and WKKC. The Transition Committee shall be responsible for monitoring and managing all matters related to any of the transactions contemplated by this Agreement or any Ancillary Agreements. The Transition Committee shall have the authority to (a) establish one or more subcommittees from time to time as it deems appropriate or as may be described in any Ancillary Agreements, with each such subcommittee comprised of one or more members of the Transition Committee or one or more employees of either Party or any member of its respective Group, and each such subcommittee having such scope of responsibility as may be determined by the Transition Committee from time to time; (b) delegate to any such subcommittee any of the powers of the Transition Committee; and (c) combine, modify the scope of responsibility of, and disband any such subcommittee; and (d) modify or reverse any such delegations. The Transition Committee shall establish general procedures for managing the responsibilities delegated to it under this Section 7.1(a), and may modify such procedures from time to time. All decisions by the Transition Committee or any subcommittee thereof shall be effective only if mutually agreed by both Parties. The Parties shall use the procedures set forth in Article VII to resolve any matters as to which the Transition Committee is not able to reach a decision. Unless otherwise agreed by the Parties, the Transition Committee shall be dissolved on the date that is two years and six months after the Effective Time.
55
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(b) Subject to Section 7.5, either Party seeking resolution of any dispute, controversy or claim arising out of or relating to this Agreement or any Ancillary Agreement (including regarding whether any Assets are WKKC Assets or Kellanova Assets, any Liabilities are WKKC Liabilities or Kellanova Liabilities or the validity, interpretation, breach or termination of this Agreement or any Ancillary Agreement) (a Dispute), shall provide written notice thereof to the Transition Committee (the Initial Notice). Following the delivery of the Initial Notice, the Transition Committee shall attempt to resolve the Dispute through the procedures it is empowered to adopt in accordance with Section 7.1(a). If the Transition Committee is unable for any reason to resolve a Dispute within ten (10) days after the delivery of the Initial Notice, the Parties shall enter into good-faith negotiations in accordance with Section 7.2 and Section 7.3.
7.2 Good-Faith Officer Negotiation. If a Dispute is not resolved pursuant to Section 7.1, either Party may provide written notice thereof to the other Party (the Officer Negotiation Request). Within ten (10) days of the delivery of the Officer Negotiation Request, the Parties shall attempt to resolve the Dispute through good faith negotiation. All such negotiations shall be conducted by executives who hold, at a minimum, the title of Vice President and who have authority to settle the Dispute. All such negotiations shall be confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. If the Parties are unable for any reason to resolve a Dispute within ten (10) days of receipt of the Officer Negotiation Request, and such ten (10) day period is not extended by mutual written consent of the Parties, the Chief Executive Officers of the Parties shall enter into good faith negotiations in accordance with Section 7.3.
7.3 CEO Negotiation. If any Dispute is not resolved pursuant to Section 7.2, either Party may provide written notice of such Dispute to the Chief Executive Officer of the other Party (a CEO Negotiation Request). As soon as reasonably practicable following receipt of a CEO Negotiation Request, the Chief Executive Officers of the Parties shall begin conducting good faith negotiations with respect to such Dispute. All such negotiations shall be confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. If the Chief Executive Officers of the Parties are unable for any reason to resolve a Dispute within ten (10) days of receipt of a CEO Negotiation Request, and such ten (10) day period is not extended by mutual written consent of the Parties, the Dispute shall be submitted to arbitration in accordance with Section 7.4.
7.4 Arbitration.
(a) In the event that a Dispute has not been resolved within ten (10) days of the receipt of a CEO Negotiation Request in accordance with Section 7.3, or within such longer period as the Parties may agree to in writing, then such Dispute shall, upon the written request of a Party (the Arbitration Request), be submitted to be finally resolved by binding arbitration. The JAMS Comprehensive Arbitration Rules and Procedures with Expedited Procedures (JAMS Expedited Rules) in effect at the time of the arbitration shall govern the arbitration, except as they may be modified herein or by mutual written agreement of the Parties. The arbitration shall be held in (i) Chicago, Illinois or (ii) such other place as the Parties may mutually agree in writing. Unless otherwise agreed by the Parties in writing, any Dispute to be decided pursuant to this Section 7.4 will be decided by a panel of three (3) arbitrators. The arbitrators shall be empowered to fully and finally determine the arbitrability of any claim (including whether a Dispute is within the scope of the Parties agreement to arbitrate).
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(b) The panel of three (3) arbitrators will be chosen as follows: (i) within fifteen (15) days from the date of the receipt of the Arbitration Request, each Party will name an arbitrator; and (ii) the two (2) Party-appointed arbitrators will thereafter, within thirty (30) days from the date on which the second (2nd) of the two (2) arbitrators was named, name a third (3rd), independent arbitrator who will act as chairperson of the arbitral tribunal. In the event that either Party fails to name an arbitrator within fifteen (15) days from the date of receipt of the Arbitration Request, then upon written application by either Party, that arbitrator shall be appointed pursuant to the JAMS Expedited Rules. In the event that the two (2) Party-appointed arbitrators fail to appoint the third (3rd), then the third (3rd) independent arbitrator will be appointed pursuant to the JAMS Expedited Rules. If the arbitration will be before a sole independent arbitrator, then the sole independent arbitrator will be appointed by agreement of the Parties within fifteen (15) days from the date of receipt of the Arbitration Request. If the Parties cannot agree to a sole independent arbitrator during such fifteen (15)-day period, then upon written application by either Party, the sole independent arbitrator will be appointed pursuant to the JAMS Expedited Rules.
(c) The arbitrators will have the right to award, on an interim basis, or include in the final award, any relief that it deems proper in the circumstances, including money damages (with interest on unpaid amounts from the due date), injunctive relief (including specific performance) and attorneys fees and costs; provided that the arbitrators will not award any relief not specifically requested by the Parties and, in any event, will not award any indirect, punitive, exemplary, enhanced, treble, remote, speculative or similar damages in excess of compensatory damages of the other arising in connection with the transactions contemplated hereby (other than any such Liability with respect to a Third-Party Claim). Upon selection of the arbitrators following any grant of preliminary relief by an emergency arbitrator pursuant to Section 7.5, the arbitrators may affirm or disaffirm that relief, and the Parties will seek modification or rescission of the interim relief as necessary to accord with that decision. The award of the arbitrators shall be final and binding on the Parties, and may be entered or enforced in any court of competent jurisdiction, including, without limitation any state or federal court within the state of [] (which the parties hereby agree have jurisdiction over them to enforce any such award). The initiation of an Officer Negotiation Request, CEO Negotiation Request, or arbitration pursuant to this Article VII will toll the applicable statute of limitations for the duration of any such proceedings (not to exceed thirty (30) days, unless the Parties agree otherwise). Notwithstanding applicable state Law, the arbitration and this agreement to arbitrate shall be governed by the Federal Arbitration Act, 9 U.S.C. § 1, et seq.
(d) The Parties agree that any arbitration hereunder shall be kept confidential, and that the existence of the proceeding and all of its elements (including any pleadings, briefs or other documents or evidence submitted or exchanged, any testimony or other oral submissions, and any awards) shall be deemed confidential, and shall not be disclosed beyond the arbitrators and JAMS, the Parties, their counsel, and any Person necessary to the conduct of the proceeding, except as and to the extent required by Law and to defend or pursue any legal right. In the event any Party makes application to any court in connection with this Article VII (including any proceedings to enforce a final award), that Party shall take all steps reasonably within its power to cause such application, and any exhibits (including copies of any award or decisions of the arbitrators) to be filed under seal, shall oppose any challenge by any Third Party to such sealing, and shall give the other Party immediate notice of such challenge.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(e) Notwithstanding the foregoing provisions of this Article VII, either Party may initiate arbitration before the expiration of the periods specified in Section 7.1(b), Section 7.2 and Section 7.3 if such Party has submitted an Initial Notice, Officer Negotiation Request or a CEO Negotiation Request and the other Party has failed to comply with Section 7.1(b), Section 7.2 or Section 7.3 in good faith with respect to such negotiation
7.5 Emergency Relief. Notwithstanding the foregoing provisions of this Article VII, a Party may seek preliminary provisional or injunctive judicial relief in accordance with Section 10.2 with respect to a Dispute without first complying with the procedures set forth in Section 7.1, Section 7.2, Section 7.3 and Section 7.4 if such action is reasonably necessary to avoid irreparable damage (such action, an Emergency Petition). Each Party hereto irrevocably agrees that any Emergency Petition sought hereunder shall be brought and determined exclusively in the [] (the Chosen Courts). Each of the Parties hereto hereby irrevocably submits with regard to any such Emergency Petition for itself and in respect of its property, generally and unconditionally, to the personal jurisdiction of the Chosen Courts and agrees that it will not bring any Emergency Petition in any court other than the Chosen Courts. Each of the Parties hereto hereby irrevocably waives, and agrees not to assert, by way of motion, as a defense, counterclaim or otherwise, in any Dispute with respect to this Agreement, (i) any claim that it is not personally subject to the jurisdiction of the Chosen Courts, (ii) any claim that it or its property is exempt or immune from jurisdiction of any such court or from any legal process commenced in such courts (whether through service of notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise) and (iii) to the fullest extent permitted by applicable Law, any claim that (A) the Dispute in such court is brought in an inconvenient forum, (B) the venue of such Dispute is improper or (C) this Agreement, or the subject matter hereof, may not be enforced in or by such courts. To the fullest extent permitted by applicable Law, each Party hereto hereby consents to the service of process in accordance with Section 10.5; provided that (I) nothing herein shall affect the right of any Party to serve legal process in any other manner permitted by Law and (II) each such Partys consent to jurisdiction and service contained in this Section 7.5 is solely for the purpose referred to in this Section 7.5 and shall not be deemed to be a general submission to said courts or in the State of Delaware other than for such purpose. EACH PARTY HERETO IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY DISPUTE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
7.6 Conduct During Dispute Resolution Process. Unless otherwise agreed in writing, the Parties shall, and shall cause the respective members of their Groups to, continue to honor all commitments under this Agreement and each Ancillary Agreement to the extent required by such agreements during the course of dispute resolution pursuant to the provisions of this Article VII, unless such commitments are the specific subject of the Dispute at issue.
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ARTICLE VIII
FURTHER ASSURANCES
8.1 Further Assurances.
(a) In addition to the actions specifically provided for elsewhere in this Agreement, but subject to the express limitations of this Agreement and the Ancillary Agreements, each of the Parties shall use its reasonable best efforts, prior to, on and after the Effective Time, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements.
(b) Without limiting the foregoing, prior to, on and after the Effective Time, each Party hereto shall cooperate with the other Party, and without any further consideration, but at the expense of the requesting Party, to execute and deliver, or use its reasonable best efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all Approvals or Notifications of, any Governmental Authority or any other Person under any Permit, license, agreement, indenture or other instrument (including any consents or Governmental Approvals), and to take all such other actions as such Party may reasonably be requested to take by the other Party from time to time, consistent with the terms of this Agreement and the Ancillary Agreements, in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the transfers of the WKKC Assets and the Kellanova Assets and the assignment and assumption of the WKKC Liabilities and the Kellanova Liabilities and the other transactions contemplated hereby and thereby. Without limiting the foregoing, each Party will, at the reasonable request, cost and expense of the requesting Party, take such other actions as may be reasonably necessary to vest in such other Party good and marketable title to the Assets allocated to such Party under this Agreement or any of the Ancillary Agreements, free and clear of any Security Interest, if and to the extent it is practicable to do so.
(c) On or prior to the Effective Time, Kellanova and WKKC in their respective capacities as direct and indirect stockholders of the members of their Groups, shall each ratify any actions which are reasonably necessary or desirable to be taken by Kellanova, WKKC or any of the members of their respective Groups, as the case may be, to effectuate the transactions contemplated by this Agreement and the Ancillary Agreements.
ARTICLE IX
TERMINATION
9.1 Termination. This Agreement and all Ancillary Agreements may be terminated, and the Distribution may be abandoned at any time prior to the Effective Time by Kellanova, in its sole and absolute discretion, without the approval or consent of any other Person, including WKKC. After the Effective Time, this Agreement may not be terminated except by an agreement in writing signed by a duly authorized officer of each of the Parties.
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9.2 Effect of Termination. In the event of any termination of this Agreement prior to the Effective Time, no Party (nor any of its directors, officers or employees) shall have any Liability or further obligation to the other Party by reason of this Agreement.
ARTICLE X
MISCELLANEOUS
10.1 Counterparts; Entire Agreement; Corporate Power.
(a) This Agreement and each Ancillary Agreement may be executed in one (1) or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one (1) or more counterparts have been signed by each of the Parties and delivered to the other Party.
(b) This Agreement, the Ancillary Agreements and the Exhibits, Schedules and appendices hereto and thereto contain the entire agreement between the Parties with respect to the subject matter hereof, supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter, and there are no agreements or understandings between the Parties other than those set forth or referred to herein or therein. This Agreement and the Ancillary Agreements together govern the arrangements in connection with the Internal Reorganization and the Distribution and would not have been entered into independently.
(c) Kellanova represents on behalf of itself and each other member of the Kellanova Group, and WKKC represents on behalf of itself and each other member of the WKKC Group, as follows:
(i) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform this Agreement and each Ancillary Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby; and
(ii) this Agreement and each Ancillary Agreement to which it is a party has been duly executed and delivered by it and constitutes a valid and binding agreement of it enforceable in accordance with the terms thereof.
(d) Each Party acknowledges that it and each other Party may execute this Agreement or the Ancillary Agreements by stamp or mechanical signature, and that delivery of an executed counterpart of a signature page to this Agreement or any Ancillary Agreement (whether executed by manual, stamp or mechanical signature) by e-mail in portable document format (PDF) shall be effective as delivery of such executed counterpart of this Agreement or any Ancillary Agreement. Each Party expressly adopts and confirms each such stamp or mechanical signature (regardless of whether delivered in person, by mail, by courier, by e-mail in portable document format (PDF)) made in its respective name as if it were a manual signature delivered in person, agrees that it will not assert that any such signature or delivery is not adequate to bind such Party to the same extent as if it were signed manually and delivered in person and agrees that, at the reasonable request of the other Party at any time, it will as promptly as reasonably practicable cause this Agreement or such Ancillary Agreement to be manually executed (any such execution to be as of the date of the initial date thereof) and delivered in person, by mail or by courier.
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10.2 Governing Law. This Agreement and, unless expressly provided therein, each Ancillary Agreement (and any claims or Disputes arising out of or related hereto or thereto or to the transactions contemplated hereby and thereby or to the inducement of any party to enter herein and therein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the Laws of the State of Delaware irrespective of the choice of Laws principles of the State of Delaware including all matters of validity, construction, effect, enforceability, performance and remedies.
10.3 Assignability. Except as set forth in any Ancillary Agreement, this Agreement and each Ancillary Agreement shall be binding upon and inure to the benefit of the Parties and the parties thereto, respectively, and their respective successors and permitted assigns; provided, however, that neither Party nor any such party thereto may assign its rights or delegate its obligations under this Agreement or any Ancillary Agreement without the express prior written consent of the other Party hereto or other parties thereto, as applicable.
10.4 Third Party Beneficiaries. Except for the indemnification rights under this Agreement and each Ancillary Agreement of any Kellanova Indemnitee or WKKC Indemnitee in their respective capacities as such, (a) the provisions of this Agreement and each Ancillary Agreement are solely for the benefit of the Parties and are not intended to confer upon any Person except the Parties any rights or remedies hereunder, and (b) there are no Third Party beneficiaries of this Agreement or any Ancillary Agreement and neither this Agreement nor any Ancillary Agreement shall provide any Third Party with any remedy, claim, Liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement or any Ancillary Agreement.
10.5 Notices. All notices and other communications to be given to any Party shall be sufficiently given for all purposes hereunder if in writing and delivered by hand, courier or overnight delivery service, or five (5) days after being mailed by certified or registered mail, return receipt requested, with appropriate postage prepaid, or when delivered via email (such email shall be deemed delivered on the date of dispatch by the sender thereof to the extent no bounce back or similar message indicating non-delivery is received with respect thereto) and shall be directed to the address set forth below (or at such other address or email address as such Party shall designate by like notice):
If to Kellanova, to:
Kellanova
[]
Attention: []
E-mail: []
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If to WKKC, to:
WK Kellogg Co
One Kellogg Square
Battle Creek, Michigan 49017
Attention: []
E-mail: []
10.6 Severability. If any provision of this Agreement or any Ancillary Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or thereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties.
10.7 Force Majeure. No Party shall be deemed in default of this Agreement or, unless otherwise expressly provided therein, any Ancillary Agreement for any delay or failure to fulfill any obligation (other than a payment obligation) hereunder or thereunder so long as and to the extent to which any delay or failure in the fulfillment of such obligation is prevented, frustrated, hindered or delayed as a consequence of circumstances of Force Majeure. In the event of any such excused delay, the time for performance of such obligations (other than a payment obligation) shall be extended for a period equal to the time lost by reason of the delay. A Party claiming the benefit of this provision shall, as soon as reasonably practicable after the occurrence of any such event, (a) provide written notice to the other Party of the nature and extent of any such Force Majeure condition; and (b) use commercially reasonable efforts to remove any such causes and resume performance under this Agreement and the Ancillary Agreements, as applicable, as soon as reasonably practicable.
10.8 No Set-Off. Except as expressly set forth in any Ancillary Agreement or as otherwise mutually agreed to in writing by the Parties, neither Party nor any member of such Partys Group shall have any right of set-off or other similar rights with respect to (a) any amounts received pursuant to this Agreement or any Ancillary Agreement; or (b) any other amounts claimed to be owed to the other Party or any member of its Group arising out of this Agreement or any Ancillary Agreement.
10.9 Expenses. Except as otherwise expressly set forth in this Agreement or any Ancillary Agreement or set forth on Schedule 10.9, or as otherwise agreed to in writing by the Parties, all fees, costs and expenses incurred in connection with the preparation, execution, delivery and implementation of this Agreement, including the Internal Reorganization and the Distribution, and any Ancillary Agreement, the Internal Reorganization, the Form 10, the Information Statement, the Internal Reorganization Step Plan and the consummation of the transactions contemplated hereby and thereby will be borne, to the extent incurred prior to the Effective Time, by Kellanova, and to the extent incurred following the Effective Time, by the Party or its applicable Subsidiary incurring such fees, costs or expenses. The Parties agree that certain specified costs and expenses shall be allocated between the Parties as set forth on Schedule 10.9.
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10.10 Headings. The article, section and paragraph headings contained in this Agreement and in the Ancillary Agreements are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement or any Ancillary Agreement.
10.11 Survival of Covenants. Except as expressly set forth in this Agreement or any Ancillary Agreement, the covenants, representations and warranties contained in this Agreement and each Ancillary Agreement, and Liability for the breach of any obligations contained herein, shall survive the Internal Reorganization and the Distribution and shall remain in full force and effect.
10.12 Waivers of Default. Waiver by a Party of any default by the other Party of any provision of this Agreement or any Ancillary Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the other Party. No failure or delay by a Party in exercising any right, power or privilege under this Agreement or any Ancillary Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof prejudice any other or further exercise thereof or the exercise of any other right, power or privilege.
10.13 Specific Performance. Subject to the provisions of Article VII, in the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement or any Ancillary Agreement, the Party or Parties who are, or are to be, thereby aggrieved shall have the right to specific performance and injunctive or other equitable relief in respect of its or their rights under this Agreement or such Ancillary Agreement, in addition to any and all other rights and remedies at Law or in equity, and all such rights and remedies shall be cumulative. The Parties agree that the remedies at Law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any Action for specific performance that a remedy at Law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived by each of the Parties.
10.14 Amendments. No provisions of this Agreement or any Ancillary Agreement shall be deemed waived, amended, supplemented or modified by a Party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the Party against whom it is sought to enforce such waiver, amendment, supplement or modification.
10.15 Interpretation. In this Agreement and any Ancillary Agreement, (a) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other genders as the context requires; (b) the terms hereof, herein, and herewith and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement (or the applicable Ancillary Agreement) as a whole (including all of the Schedules,
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Exhibits and Appendices hereto and thereto) and not to any particular provision of this Agreement (or such Ancillary Agreement); (c) Article, Section, Schedule, Exhibit and Appendix references are to the Articles, Sections, Schedules, Exhibits and Appendices to this Agreement (or the applicable Ancillary Agreement) unless otherwise specified; (d) unless otherwise stated, all references to any agreement (including this Agreement and each Ancillary Agreement) shall be deemed to include the exhibits, schedules and annexes (including all Schedules, Exhibits and Appendices) to such agreement; (e) the word including and words of similar import when used in this Agreement (or the applicable Ancillary Agreement) shall mean including, without limitation, unless otherwise specified; (f) the word or shall not be exclusive; (g) the word extent in the phrase to the extent shall mean the degree to which a subject or other thing extends, and such phrase shall not mean simply if; (h) unless otherwise specified in a particular case, the word days refers to calendar days; (i) references to Business Day shall mean any day other than a Saturday, a Sunday or a day on which banking institutions are generally authorized or required by Law to close in the United States, New York, Michigan or Illinois; (j) references herein to this Agreement or any other agreement contemplated herein shall be deemed to refer to this Agreement or such other agreement as of the date on which it is executed and as it may be amended, modified or supplemented thereafter, unless otherwise specified; and (k) unless expressly stated to the contrary in this Agreement or in any Ancillary Agreement, all references to the date hereof, the date of this Agreement, hereby and hereupon and words of similar import shall all be references to [], 2023.
10.16 Limitations of Liability. Notwithstanding anything in this Agreement to the contrary, neither WKKC or any member of the WKKC Group, on the one hand, nor Kellanova or any member of the Kellanova Group, on the other hand, shall be liable under this Agreement to the other for any indirect, incidental, punitive, exemplary, remote, speculative or similar damages in excess of compensatory damages of the other arising in connection with the transactions contemplated hereby (other than any such Liability with respect to a Third-Party Claim).
10.17 Performance. Kellanova will cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement or in any Ancillary Agreement to be performed by any member of the Kellanova Group. WKKC will cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement or in any Ancillary Agreement to be performed by any member of the WKKC Group. Each Party (including its permitted successors and assigns) further agrees that it will (a) give timely notice of the terms, conditions and continuing obligations contained in this Agreement and any applicable Ancillary Agreement to all of the other members of its Group and (b) cause all of the other members of its Group not to take any action or fail to take any such action inconsistent with such Partys obligations under this Agreement, any Ancillary Agreement or the transactions contemplated hereby or thereby.
10.18 Mutual Drafting; Precedence.
(a) This Agreement and the Ancillary Agreements shall be deemed to be the joint work product of the Parties and any rule of construction that a document shall be interpreted or construed against a drafter of such document shall not be applicable.
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(b) In the event of any conflict or inconsistency between, on the one hand, the terms of this Agreement and, on the other hand, the terms of the Ancillary Agreements (other than the [Data Processing Agreement or the] Transfer Documents) (each, a Specified Ancillary Agreement), the terms of the applicable Specified Ancillary Agreement shall control with respect to the subject matter addressed by such Specified Ancillary Agreement to the extent of such conflict or inconsistency. In the event of any conflict or inconsistency between the terms of this Agreement and the terms of the [Data Processing Agreement or the] Transfer Agreements, the terms of this Agreement shall control to the extent of such conflict or inconsistency.
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IN WITNESS WHEREOF, the Parties have caused this Separation and Distribution Agreement to be executed by their duly authorized representatives as of the date first written above.
KELLOGG COMPANY | ||
By: |
| |
Name: | ||
Title: | ||
WK KELLOGG CO | ||
By: |
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Name: | ||
Title: |
[Signature Page to Separation and Distribution Agreement]
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
WK KELLOGG CO
ARTICLE ONE
The name of the corporation is WK Kellogg Co (the Corporation).
ARTICLE TWO
The address of the Corporations registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.
ARTICLE THREE
The nature and purpose of the business of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (DGCL).
ARTICLE FOUR
Section 1. Authorized Shares. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 1,050,000,000 shares, consisting of two classes as follows:
1. 50,000,000 shares of Preferred Stock, par value $0.0001 per share (the Preferred Stock); and
2. 1,000,000,000 shares of Common Stock, par value $0.0001 per share (the Common Stock).
The Preferred Stock and the Common Stock shall have the designations, rights, powers and preferences and the qualifications, restrictions and limitations thereof, if any, set forth below.
Section 2. Preferred Stock. The Board of Directors of the Corporation (the Board of Directors) is authorized, subject to limitations prescribed by law, to provide, by resolution or resolutions, for the issuance of shares of Preferred Stock in one or more series, and with respect to each series, to establish the number of shares to be included in each such series, and to fix the voting powers (if any), designations, powers, preferences, and relative, participating, optional or other special rights, if any, of the shares of each such series, and any qualifications, limitations or restrictions thereof. The powers (including voting powers), preferences, and relative, participating, optional and
Confidential Treatment Requested by WK Kellogg Co
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other special rights of each series of Preferred Stock and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. Subject to the rights of the holders of any series of Preferred Stock, the number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the approval of the Board of Directors and by the affirmative vote of the holders of a majority in voting power of the outstanding shares of capital stock of the Corporation entitled to vote generally in an election of directors, without the separate vote of the holders of the Preferred Stock as a class, irrespective of the provisions of Section 242(b)(2) of the DGCL.
Section 3. Common Stock.
(a) Except as otherwise provided by the DGCL or this certificate of incorporation (as it may be amended and/or restated from time to time, the Restated Certificate) and subject to the rights of holders of any series of Preferred Stock then outstanding, all of the voting power of the stockholders of the Corporation shall be vested in the holders of the Common Stock and the holders of Preferred Stock shall not be entitled to vote on any matter except as required by law or provided in this Restated Certificate (including any certificate of designation relating to any series of Preferred Stock). Each share of Common Stock shall entitle the holder thereof to one vote for each share held by such holder on all matters voted upon by the stockholders of the Corporation; provided, however, that, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Restated Certificate (including any certificate of designation relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Restated Certificate (including any certificate of designation relating to any series of Preferred Stock) or pursuant to the DGCL.
(b) Except as otherwise required by law or expressly provided in this Restated Certificate, each share of Common Stock shall have the same powers, rights and privileges and shall rank equally, share ratably and be identical in all respects as to all matters.
(c) Subject to the rights of the holders of any series of Preferred Stock then outstanding and to the other provisions of applicable law and this Restated Certificate, holders of Common Stock shall be entitled to receive equally, on a per share basis, such dividends and other distributions in cash, securities or other property of the Corporation if, as and when declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor.
(d) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the Corporations debts and any other payments required by law and subject to the right, if any, of the holders of any outstanding series of Preferred Stock or any class or series of stock having a preference over or the right to participate with the Common
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Stock as to distributions upon dissolution or liquidation or winding up of the Corporation , the remaining assets of the Corporation shall be distributed to the holders of shares of Common Stock equally on a per share basis. Subject to the rights of the holders of any series of Preferred Stock then outstanding and to the other provisions of this Restated Certificate (including any certificate of designation relating to any series of Preferred Stock), a merger or consolidation of the Corporation with or into any other corporation or other entity, or a sale or conveyance of all or any part of the assets of the Corporation shall not be deemed to be a voluntary or involuntary liquidation or dissolution or winding up of the Corporation within the meaning of this Paragraph (d).
ARTICLE FIVE
Section 1. Board of Directors. Except as otherwise provided in this Restated Certificate or the DGCL, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
Section 2. Number of Directors. Subject to any rights of the holders of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances or otherwise, the number of directors which shall constitute the whole Board of Directors shall not be less than six (6) or more than fifteen (15), shall be seven (7) and, thereafter, shall be fixed from time to time exclusively by resolution of the Board of Directors.
Section 3. Classes of Directors. From the effective date of when the shares of Common Stock are first publicly traded (the Effective Date) until the third annual meeting of stockholders following the Effective Date (the Sunset Date), and subject to the succeeding provisions of this Section (3) and Section (5) of this Article FIVE, the directors shall be divided into three classes designated Class I, Class II and Class III. Each class shall consist, as nearly as possible, of an equal number of directors. The Board of Directors is authorized to assign members of the Board already in office to their respective class. The initial Class I Directors shall serve for a term expiring at the first annual meeting of stockholders following the Effective Date; the initial Class II Directors shall serve for a term expiring at the second annual meeting of stockholders following the Effective Date; and the initial Class III Directors shall serve for a term expiring at the third annual meeting of stockholders following the Effective Date. Directors elected at the first annual meeting following the Effective Date will serve a two year term expiring at the third annual meeting of stockholders following the Effective Date. Directors elected at the second annual meeting following the Effective Date will serve a one year term expiring at the third annual meeting of stockholders following the Effective Date. Commencing with the third annual meeting of stockholders following the Effective Date, the classification of the Board of Directors shall terminate, and each director shall be elected to serve a term of one year, with each directors term to expire at the annual meeting of stockholders next following the directors election. If the number of directors is changed prior to the Sunset Date, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director.
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Section 4. Election and Term of Office. Elections of directors need not be by written ballot unless the Bylaws of the Corporation (as amended and/or restated, the Bylaws) shall so provide.
Section 5. Newly-Created Directorships and Vacancies. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, disqualification, removal from office or any other cause may be filled only by resolution of a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and may not be filled by any other person or persons. A director elected or appointed to fill a vacancy shall serve for the unexpired term of his or her predecessor in office and until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. Until the Sunset Date, a director elected or appointed to fill a position resulting from an increase in the number of directors shall hold office until the next election of the class for which such director shall have been elected or appointed and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal.
Section 6. Removal and Resignation of Directors. Subject to the rights of the holders of any series of Preferred Stock then outstanding and notwithstanding any other provision of this Restated Certificate, directors may be removed only for cause upon the affirmative vote of stockholders representing a majority of the voting power of the then outstanding shares of capital stock of the Corporation then entitled to vote thereon. Any director may resign at any time upon notice in writing or by electronic transmission to the Corporation.
Section 7. Rights of Holders of Preferred Stock. Notwithstanding the provisions of this ARTICLE FIVE, whenever the holders of one or more series of Preferred Stock shall have the right, voting separately or together by series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorship shall be subject to the rights of such series of Preferred Stock. During any period when the holders of any series of Preferred Stock, voting separately as a series or together with one or more series, have the right to elect additional directors, then upon commencement and for the duration of the period during which such right continues: (i) the then otherwise total authorized number of directors of the Corporation shall automatically be increased by such specified number of directors, and the holders of such Preferred Stock shall be entitled to elect the additional directors so provided for or fixed pursuant to said provisions, and (ii) each such additional director shall serve until such directors successor shall have been duly elected and qualified, or until such directors right to hold such office terminates pursuant to said provisions, whichever occurs earlier, subject to his or her earlier death, resignation, disqualification or removal. Except as otherwise provided by the Board of Directors in the resolution or resolutions establishing such series, whenever the holders of any series of Preferred Stock having such right to elect additional directors are divested of such right pursuant to the provisions of such stock, the terms of office of all such additional directors elected by the holders of such stock, or elected to fill any vacancies resulting from the death, resignation, disqualification or removal of such additional directors, shall forthwith terminate (in which case each such director thereupon shall cease to be qualified as, and shall cease to be, a director) and the total authorized number of directors of the Corporation shall automatically be reduced accordingly.
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Section 8. Advance Notice. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws.
ARTICLE SIX
Section 1. Limitation of Liability.
(a) Except to the extent that the DGCL, as the same exists or hereafter may be amended, prohibits the elimination or limitation of liability of directors or officers for breaches of fiduciary duty, no person who is or was a director or officer of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director or officer, notwithstanding any provision of law imposing such liability.
(b) No amendment to or repeal of this provision or by changes in law, or the adoption of any other provision of this Restated Certificate inconsistent with the foregoing paragraph, unless otherwise required by law, shall apply to or have any effect on the liability or alleged liability of any director or officer of the Corporation for or with respect to any acts or omissions of such director or officer occurring prior to such amendment, repeal or adoption of such inconsistent provision, provided, however, that if the DGCL is amended to permit further elimination or limitation of the personal liability of directors or officers, then the liability of a director or officer of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL as so amended.
ARTICLE SEVEN
Section 1. Action by Written Consent. Any action required or permitted to be taken by the Corporations stockholders may be taken only at a duly called annual or special meeting of the Corporations stockholders and the power of stockholders to act by consent without a meeting is specifically denied; provided, however, that any action required or permitted to be taken by the holders of Preferred Stock, voting separately as a series or separately as a class with one or more other such series, may be taken without a meeting, without prior notice and without a vote, to the extent expressly so provided in the resolutions creating such series of Preferred Stock.
Section 2. Special Meetings of Stockholders. Subject to the rights of the holders of any series of Preferred Stock then outstanding and to the requirements of applicable law, special meetings of stockholders of the Corporation may be called only (i) by or at the direction of the Chair of the Board of Directors or by the Board of Directors pursuant to a written resolution adopted by the affirmative vote of the majority of the total number of directors that the Corporation would have if there were no vacancies and (ii) by the Chair of the Board of Directors at the written request of one or more stockholders that collectively own at least 20% of the outstanding shares of capital stock of the Corporation in the manner provided for in the Bylaws. Any business transacted at any special meeting of stockholders shall be limited to the purpose or purposes stated in the notice of the meeting.
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Section 3. Amendments to the Bylaws. Subject to the rights of holders of any series of Preferred Stock then outstanding, in furtherance and not in limitation of the powers conferred by law, the Bylaws may be amended, altered or repealed and new bylaws made by, (i) the Board of Directors or (ii) by the stockholders by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote thereon, voting together as a single class, which vote shall be in addition to any vote of the holders of any class or series of capital stock of the Corporation required herein (including any certificate of designation relating any series of Preferred Stock).
Section 4. Amendments to this Restated Certificate. Subject to the rights of holders of any series of Preferred Stock then outstanding, and in addition to any other vote required by law or this Restated Certificate, no provision of ARTICLE FIVE, ARTICLE SIX, ARTICLE SEVEN, ARTICLE EIGHT, OR ARTICLE NINE of this Restated Certificate may be altered, amended or repealed in any respect, nor may any provision of this Restated Certificate or the Bylaws inconsistent therewith be adopted, unless such alteration, amendment, repeal or adoption is approved by the affirmative vote of the holders of a majority of the voting power of all outstanding shares of capital stock of the Corporation entitled to vote thereon, voting together as a single class.
ARTICLE EIGHT
Section 1. Exclusive Forum.
(a) Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty by, or other wrongdoing by, any current or former director, officer, or stockholder of the Corporation to the Corporation or the Corporations stockholders, or a claim of aiding and abetting any such breach of fiduciary duty, (iii) any action asserting a claim against the Corporation or any director, officer, or stockholder of the Corporation arising pursuant to any provision of the DGCL, the Restated Certificate or the Bylaws of the Corporation (as either may be amended, restated, modified, supplemented or waived from time to time), (iv) any action to interpret, apply, enforce or determine the validity of the Restated Certificate or the Bylaws of the Corporation (as either may be amended), (v) any action asserting a claim against the corporation or any director, officer, or stockholder of the Corporation governed by the internal affairs doctrine or (vi) any action asserting an internal corporate claim as that term is defined in Section 115 of the DGCL. For the avoidance of doubt, this Section 1(a) of ARTICLE NINE shall not apply to any action or proceeding asserting a claim under the Securities Act of 1933, as amended (the Securities Act) or the Exchange Act.
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(b) Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act against the Corporation or any director, officer, employee or agent of the Corporation.
Section 2. Notice. Any Person purchasing or otherwise acquiring or holding any interest in shares of capital stock of the Corporation (including, without limitation, shares of Common Stock) shall be deemed to have notice of and to have consented to the provisions of this ARTICLE NINE.
ARTICLE NINE
If any provision or provisions of this Restated Certificate shall be held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Restated Certificate (including, without limitation, each portion of any paragraph of this Restated Certificate containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not, to the fullest extent permitted by applicable law, in any way be affected or impaired thereby.
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Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
WK KELLOGG CO
A Delaware corporation
(Adopted as of [], 2023)
ARTICLE I
OFFICES
Section 1. Offices. WK Kellogg Co (the Corporation) may have an office or offices other than its registered office at such place or places, either within or outside the State of Delaware, as the Board of Directors of the Corporation (the Board of Directors) may from time to time determine or the business of the Corporation may require. The registered office of the Corporation in the State of Delaware shall be as stated in the Corporations certificate of incorporation (as amended and/or restated, the Certificate of Incorporation).
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. The Board of Directors may designate a place, if any, either within or outside the State of Delaware, as the place of meeting for any annual meeting or for any special meeting of stockholders.
Section 2. Annual Meeting. An annual meeting of the stockholders shall be held at such date and time as is specified by resolution of the Board of Directors. At the annual meeting, stockholders shall elect directors to succeed those whose terms expire at such annual meeting and transact such other business as properly may be brought before the annual meeting pursuant to Section 12 of this ARTICLE II of these Bylaws (these Bylaws). The Board of Directors may postpone, reschedule or cancel any annual meeting of stockholders previously scheduled by the Board of Directors.
Section 3. Special Meetings.
(a) Special meetings of the stockholders may be held on such date, at such time, and at such place (if any) either within or without the State of Delaware and may be called only (i) by such number of Directors constituting not less than two-thirds of the Board of Directors , (ii) by the Chair of the Board of Directors, (iii) by the Chair of the Board of Directors at the written request of one or more stockholders that collectively own at least 20% of the outstanding shares of capital stock of the Corporation (the Requisite Percentage) entitled to vote on the matter for which such meeting is to be called (any such meeting called pursuant to clause (iii), a Stockholder Requested Special Meeting) or (iv) pursuant to clauses (ii) and (iii), above, in the event of the Chairs absence or incapacity, by a Vice Chair, or in the Chair and Vice Chairs absence or incapacity, by the Chair of the Nominating and Governance Committee. Special meetings of stockholders shall be held at such place and time and on such date as shall be determined by the Board of Directors and stated in the Corporations notice of the meeting; provided, that the Board of Directors may in its sole discretion determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication.
Confidential Treatment Requested by WK Kellogg Co
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(b) A Stockholder Requested Special Meeting shall be called by the Chair if the stockholder(s) requesting such meeting provide the information required by this Section 3(b) regarding such stockholder(s) and the proposed special meeting and otherwise comply with this Section 3. In order for a Stockholder Requested Special Meeting to be required to be called by the Chair, one or more valid written requests for a special meeting (individually or collectively, a Special Meeting Request) signed and dated by stockholders of record entitled to vote on the matter or matters proposed to be brought before the proposed special meeting that collectively own the Requisite Percentage (or their duly authorized agents), must be delivered to and received by the Secretary at the principal executive offices of the Corporation (the date of such receipt, the Request Receipt Date) and must be accompanied by:
(i) with respect to any nomination of director(s) to the Board of Directors, the same information described in Section 12(b)(iii); with respect to any other business proposed to be presented at any Stockholder Requested Special Meeting, the same information described in Section 12(a)(iii); and
(ii) (A) as to each stockholder of record signing such request (or if such stockholder of record is a nominee or custodian) or beneficial owner on whose behalf such request is signed, an affidavit by each such person (x) stating the number of shares of capital stock of the Corporation owned by such stockholder as of the date such request was signed and (y) agreeing to (1) continue to own such shares of capital stock of the Corporation through the date of the Stockholder Requested Special Meeting and (2) update and supplement such affidavit as of the record date for the Stockholder Requested Special Meeting (such update and supplement shall be delivered to the Secretary at the principal executive offices of the Corporation not later than five business days after the record date for such Stockholder Requested Special Meeting) and as of the date that is no more than 10 business days prior to the date of the Stockholder Requested Special Meeting (such update and supplement shall be delivered to the Secretary at the principal executive offices of the Corporation not later than five business days prior to the date of such Stockholder Requested Special Meeting); provided, however, that, in the event of any decrease in the ownership by such person at any time before the Stockholder Requested Special Meeting, such persons Special Meeting Request shall be deemed to have been revoked with respect to such shares of capital stock of the Corporation comprising such reduction and shall not be counted towards the calculation of the Requisite
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Percentage; and provided further, that, if as a result of such reduction, the Requisite Percentage is not met, then such Special Meeting Request shall not be valid and the Stockholder Requested Special Meeting shall not be required to be called or shall be cancelled by the Board of Directors if already called, and (B) as to any stockholder or beneficial owner who has solicited other stockholders to request the special meeting, the information described in Section 12(a)(iii) as to each such stockholder or beneficial owner.
(c) One or more written requests for a special meeting delivered to the Secretary shall constitute a valid Special Meeting Request only if each such written request satisfies the requirements of this Section 3 and has been dated and delivered to the Secretary at the principal executive offices of the Corporation within 60 days of the earliest dated of such requests. If the stockholder of record signing the Special Meeting Request is a nominee or custodian on behalf of a beneficial owner, such Special Meeting Request shall not be valid unless documentary evidence is supplied to the Secretary at the time of delivery of such Special Meeting Request of such signatorys authority to execute the Special Meeting Request on behalf of such beneficial owner. The determination of the validity of a Special Meeting Request shall be made by the Board of Directors, which determination shall be conclusive and binding on the Corporation and its stockholders. Notwithstanding anything to the contrary herein, a Special Meeting Request shall not be valid and a Stockholder Requested Special Meeting shall not be required to be called or may be cancelled by the Board of Directors if already called, as applicable, if: (i) at any time prior to the Stockholder Requested Special Meeting, the Special Meeting Request does not comply with these Bylaws, including this Section 3, (ii) such Special Meeting Request relates to an item of business that is not a matter on which stockholders are authorized to act under, or that involves a violation of, applicable law, (iii) the Request Receipt Date occurs during the period commencing 120 days prior to the first anniversary of the date of the preceding years annual meeting of stockholders and ending on the date of the next annual meeting of stockholders, (iv) the purpose(s) specified in the Special Meeting Request relates to an item of business that is the same or substantially similar (as determined by the Board of Directors, which determination shall be conclusive and binding on the Corporation and its stockholders, a Similar Item) to an item of business that was presented at any meeting of stockholders held within the 120 days prior to the Request Receipt Date, or (v) a Similar Item is included in the Corporations notice as an item of business to be brought before a stockholder meeting that has been called or that is called for a date within 120 days of the Request Receipt Date. For the avoidance of doubt, the nomination, election, or removal of directors will be deemed to be a Similar Item with respect to all items of business involving the nomination, election, or removal of directors and/or changing the size of the Board of Directors and filling of vacancies and/or newly created directorships resulting from any increase in the authorized number of directors. Except as otherwise provided by law, in the case of a Stockholder Requested Special Meeting, the Chair of the Board of Directors shall have the power and duty (A) to determine whether any business proposed to be brought
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before the meeting was proposed in accordance with the procedures set forth in this Section 3 and (B) if any proposed business was not proposed in compliance with this Section 3 or the stated business to be brought before the special meeting is not a proper subject for stockholder action under applicable law, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted.
(d) A Stockholder Requested Special Meeting shall be called for a date not more than 120 days after the Request Receipt Date with respect to the last Special Meeting Request related to such Stockholder Requested Special Meeting (or, in the case of any litigation related to the validity of the requests for a Stockholder Requested Special Meeting, 120 days after the final, non-appealable resolution of such litigation).
(e) Business transacted at any Stockholder Requested Special Meeting shall be limited to (i) the purpose(s) stated in the valid Special Meeting Request(s) related to such meeting and (ii) any additional matters that the Board of Directors determines to include in the Corporations notice of the meeting. If none of the requesting stockholders (or their duly authorized agents) appear at the Stockholder Requested Special Meeting to present the matters that were specified in the Stockholder Meeting Request(s), the Corporation need not present such matters for a vote at such meeting, notwithstanding that proxies in respect of such matter may have been received by the Corporation.
(f) Notwithstanding the provisions of Section 6, if a quorum is not present at any Stockholder Requested Special Meeting, the Chair, the Board of Directors and the Corporation, shall have no obligation to postpone or adjourn such Stockholder Requested Special Meeting, and further, may cancel such Stockholder Requested Special Meeting; and each of the same shall be deemed to have fulfilled their respective obligations under this Section 3 with respect to such Stockholder Requested Special Meeting.
(g) At any time prior to the Stockholder Requested Special Meeting, a Special Meeting Request may be withdrawn by a requesting stockholder in a writing that is signed and dated by such requesting stockholder, or their duly authorized agent, and delivered to the Secretary of the Corporation prior to the Stockholder Requested Special Meeting. If as a result of such withdrawal, the Requisite Percentage for a Special Meeting Request is not met, then such Special Meeting Request shall not be valid and the Stockholder Requested Special Meeting shall not be required to be called or shall be cancelled by the Board of Directors if already called.
Section 4. Notice of Meetings. Whenever stockholders are required or permitted to take action at a meeting, notice of the meeting shall be given that shall state the place, if any, date, and time of the meeting of the stockholders, the means of remote communications, if any, by which stockholders and proxyholders not physically present may be deemed to be present in person and vote at such meeting, the record date for
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determining the stockholders entitled to vote at the meeting, if such date is different from the record date for determining stockholders entitled to notice of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the General Corporation Law of the State of Delaware (the DGCL)) or the Certificate of Incorporation.
(a) Form of Notice. All such notices shall be delivered in writing or in any other manner permitted by the DGCL. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, addressed to the stockholder at his, her or its address as the same appears on the records of the Corporation. If delivered by courier service, notice shall be deemed given at the earlier of when the notice is received or left at such stockholders address as the same appears on the records of the Corporation. If given by electronic mail, notice shall be deemed given when directed to such stockholders electronic mail address unless the stockholder has notified the Corporation in writing or by electronic transmission of an objection to receiving notice by electronic mail or such notice is prohibited by the DGCL. Notice to stockholders may also be given by other forms of electronic transmission consented to by the stockholder. If given by facsimile telecommunication, such notice shall be deemed given when directed to a number at which the stockholder has consented to receive notice by facsimile. If given by a posting on an electronic network together with separate notice to the stockholder of such specific posting, such notice shall be deemed given upon the later of (x) such posting and (y) the giving of such separate notice. If notice is given by any other form of electronic transmission, such notice shall be deemed given when directed to the stockholder. An affidavit of the secretary or an assistant secretary of the Corporation, the transfer agent of the Corporation or any other agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
(b) Waiver of Notice. Whenever notice is required to be given under any provisions of the DGCL, the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the stockholder entitled to notice, or a waiver by electronic transmission given by the stockholder entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders of the Corporation need be specified in any waiver of notice of such meeting. Attendance of a stockholder of the Corporation at a meeting of such stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened and does not further participate in the meeting.
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(c) Notice by Electronic Transmission. Notwithstanding Section 4(a) of this ARTICLE II, a notice may not be given by electronic transmission from and after the time: (i) the Corporation is unable to deliver by electronic transmission two (2) consecutive notices given by the Corporation; and (ii) such inability becomes known to the secretary or an assistant secretary of the Corporation or to the transfer agent or other person responsible for the giving of notice. However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. For purposes of these Bylaws, except as otherwise limited by applicable law, the term electronic transmission means any form of communication not directly involving the physical transmission of paper, including the use of, or participation in, one or more electronic networks or databases (including one or more distributed electronic networks or databases), that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such recipient through an automated process. A notice by electronic mail must include a prominent legend that the communication is an important notice regarding the Corporation. A notice by electronic mail will include any files attached thereto and any information hyperlinked to a website if such electronic mail includes the contact information of an officer or agent of the corporation who is available to assist with accessing such files or information.
Section 5. List of Stockholders. The Corporation shall prepare, no later than the tenth day before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, provided, however, if the record date for determining the stockholders entitled to vote is less than ten (10) days before the meeting date, the list shall reflect the stockholders entitled to vote as of the 10th day before the meeting date, arranged in alphabetical order and showing the address of each such stockholder and the number of shares registered in the name of each such stockholder. Nothing contained in this section shall require the Corporation to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of ten (10) days ending on the day before the meeting date: (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the Corporation. In the event the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. Except as otherwise provided by law, the list shall be the only evidence as to who are the stockholders entitled to examine the list of stockholders required by this Section 5 or to vote in person or by proxy at any meeting of stockholders.
Section 6. Quorum. The holders of a majority in voting power of the outstanding capital stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders, except as otherwise provided by law, by the Certificate of Incorporation or these Bylaws. If a quorum is not present, the chair of the meeting or the holders of a majority of the voting power present in person or represented by proxy at the meeting and entitled to vote on the matter may
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adjourn the meeting to another time and/or place from time to time until a quorum shall be present in person or represented by proxy. When a specified item of business requires a vote by a class or series (if the Corporation shall then have outstanding shares of more than one class or series) voting as a separate class or series, the holders of a majority in voting power of the outstanding stock of such class or series shall constitute a quorum (as to such class or series) for the transaction of such item of business. A quorum once established at a meeting shall not be broken by the withdrawal of enough votes to leave less than a quorum.
Section 7. Adjourned Meetings. Any meeting of stockholders may be adjourned from time to time to reconvene at any other time, and to any other place, if any, at which a meeting of stockholders may be held under these Bylaws by the chair of the meeting for any reason by or at the direction of the Board of Directors, or by a majority of the stockholders present or represented at the meeting and entitled to vote on the matter whether or not a quorum is present. Notice need not be given of any such adjournment if the date, time and place, if any, thereof, and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting are (a) announced at the meeting at which adjournment is taken, (b) displayed, during the time scheduled for the meeting, on the same electronic network used to enable stockholders and proxyholders to participate in the meeting by means of remote communication or (c) set forth in the notice of meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting, the corporation may transact any business that might have been transacted at the original meeting.
Section 8. Vote Required. Subject to the rights of the holders of any series of preferred stock then outstanding, when a quorum has been established, all matters shall be determined by the affirmative vote of the majority of voting power of capital stock present in person or represented by proxy at the meeting and entitled to vote on the subject matter, unless by express provisions of the DGCL or other an applicable law, the rules of any stock exchange upon which the Corporations securities are listed, any regulation applicable to the Corporation or its securities, the Certificate of Incorporation or these Bylaws a minimum or different vote is required, in which case such minimum or different vote shall be the required vote for such matter.
Section 9. Election of Directors. Except as otherwise provided by these Bylaws, each director shall be elected by the vote of the majority of the votes cast with respect to that directors election at any meeting for the election of directors at which a quorum is present, provided that if, as of the tenth (10th) day preceding the date the Corporation first mails its notice of meeting for such meeting to the stockholders of the Corporation, the number of nominees exceeds the number of directors to be elected (a Contested Election), the directors shall be elected by the vote of a plurality of the votes cast. For purposes of this Section 9 of ARTICLE II these Bylaws, a majority of votes cast shall mean that the number of votes cast for a directors election exceeds the number of votes cast against that directors election (with abstentions and broker non-votes not
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counted as a vote cast either for or against that directors election). In order for any incumbent director to become a nominee of the Board of Directors for further service on the Board of Directors, such person must submit an irrevocable resignation, contingent on (i) that person not receiving a majority of the votes cast in an election that is not a Contested Election, and (ii) acceptance of that resignation by the Board of Directors in accordance with the policies and procedures adopted by the Board of Directors for such purpose. In the event an incumbent director fails to receive a majority of the votes cast in an election that is not a Contested Election, the nominating and governance committee, or such other committee designated by the Board of Directors pursuant to these Bylaws, shall make a recommendation to the Board of Directors as to whether to accept or reject the resignation of such incumbent director, or whether other action should be taken. The Board of Directors shall act on the resignation, taking into account the committees recommendation, and publicly disclose (by a press release and filing an appropriate disclosure with the Securities and Exchange Commission) its decision regarding the resignation and, if such resignation is rejected, the rationale behind the decision within ninety (90) days following certification of the election results. The committee in making its recommendation and the Board of Directors in making its decision each may consider any factors and other information that they consider appropriate and relevant. If the Board of Directors accepts a directors resignation pursuant to this Section 9, or if a nominee for director is not elected and the nominee is not an incumbent director, then the Board of Directors may fill the resulting vacancy pursuant to Section 5 of ARTICLE FIVE of the Certificate of Incorporation.
Section 10. Voting Rights. Subject to the rights of the holders of any series of preferred stock then outstanding, except as otherwise provided by the DGCL or the Certificate of Incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote in person or by proxy for each share of capital stock held by such stockholder which has voting power upon the matter in question. Voting at meetings of stockholders need not be by written ballot.
Section 11. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent to corporate action without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally.
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Section 12. Advance Notice of Stockholder Business and Director Nominations.
(a) Business at Annual Meetings of Stockholders.
(i) Only such business (other than nominations of persons for election to the Board of Directors, which must be made in compliance with and are governed exclusively by Section 12(b) of this ARTICLE II) shall be conducted at an annual meeting of the stockholders as shall have been brought before the meeting (A) as specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or any duly authorized committee thereof, (B) by or at the direction of the Board of Directors or any duly authorized committee thereof, or (C) by any stockholder of the Corporation who (1) was a stockholder of record at the time of giving of notice provided for in Section 12(a)(iii) of this ARTICLE II, on the record date for determination of stockholders of the Corporation entitled to vote at the meeting, and at the time of the annual meeting, (2) at the time of the meeting, is entitled to vote at the meeting and (3) complies with the notice procedures set forth in Section 12(a)(iii) of this ARTICLE II. For the avoidance of doubt, the foregoing clause (C) of this Section 12(a)(i) of ARTICLE II shall be the exclusive means for a stockholder to propose such business (other than business included in the Corporations proxy materials pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the Exchange Act) before an annual meeting of stockholders.
(ii) For any business (other than nominations of persons for election to the Board of Directors, which must be made in compliance with and are governed exclusively by Section 12(b) of this ARTICLE II) to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in proper written form as described in Section 12(a)(iii) of this ARTICLE II to the Secretary; any such proposed business must be a proper matter for stockholder action and the stockholder and the Stockholder Associated Person (as defined in Section 12(e) of this ARTICLE II) must have acted in accordance with the representations set forth in the Solicitation Statement (as defined in Section 12(a)(iii) of this ARTICLE II) required by these Bylaws. To be timely, a stockholders notice for such business must be delivered by hand and received by the Secretary at the principal executive offices of the Corporation in proper written form not less than ninety (90) days and not more than one hundred twenty (120) days prior to the first anniversary of the preceding years annual meeting of stockholders (which date shall, for purposes of the Corporations first annual meeting of stockholders after its shares of Common Stock are first publicly traded, be deemed to have occurred on April 28, 2023); provided, however, that if and only if the annual meeting is not scheduled to be held within a period that commences thirty (30) days before such anniversary date and ends seventy (70) days after such anniversary date, or if no annual meeting was held in the preceding year (other than for purposes of the Corporations first annual meeting of stockholders after its shares of Common Stock are first publicly traded), such stockholders notice must be delivered not earlier than the 120th day prior to the date of such annual meeting and by the later of (A) the tenth day following the day the Public Announcement (as defined in Section 12(e) of this ARTICLE II) of the date of the annual meeting is first made or (B) the date which is ninety (90) days prior to the date of the annual meeting. In no
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event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a stockholders notice as described above. Notices delivered pursuant to Section 12(a) of this ARTICLE II will be deemed received on any given day only if received prior to the Close of Business on such day (and otherwise shall be deemed received on the next succeeding Business Day).
(iii) To be in proper written form, a stockholders notice to the Secretary must set forth as to each matter of business the stockholder proposes to bring before the annual meeting:
(A) a brief description of the business desired to be brought before the annual meeting (including the specific text of any proposal, resolutions or actions proposed for consideration and if such business includes a proposal to amend these Bylaws, the specific language of the proposed amendment) and the reasons for conducting such business at the annual meeting,
(B) the name and address of the stockholder proposing such business, as they appear on the Corporations books, the name and address (if different from the Corporations books) of such proposing stockholder, and the name and address of any Stockholder Associated Person,
(C) the class or series and number of shares of stock of the Corporation which are directly or indirectly held of record or beneficially owned by such stockholder or by any Stockholder Associated Person, a description of any Derivative Positions (as defined in Section 12(e) of this ARTICLE II) directly or indirectly held or beneficially held by the stockholder or any Stockholder Associated Person, and whether and to the extent to which a Hedging Transaction (as defined in Section 12(e) of this ARTICLE II) has been entered into by or on behalf of such stockholder or any Stockholder Associated Person,
(D) a description of all arrangements or understandings between or among such stockholder or any Stockholder Associated Person and any other person or entity (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder, any Stockholder Associated Person or such other person or entity in such business,
(E) a representation that such stockholder is a stockholder of record of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the annual meeting to bring such business before the meeting,
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(F) any other information related to such stockholder or any Stockholder Associated Person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with the solicitation of proxies or consents (even if a solicitation is not involved) by such stockholder or Stockholder Associated Person in support of the business proposed to be brought before the meeting pursuant to Section 14 of the Exchange Act, and the rules, regulations and schedules promulgated thereunder,
(G) a representation as to whether such stockholder or any Stockholder Associated Person intends or is part of a group which intends to deliver a proxy statement and/or form of proxy to the holders of at least the percentage of the Corporations outstanding capital stock required to approve the proposal or otherwise to solicit proxies or votes from stockholders in support of the proposal (such representation, a Solicitation Statement),
(H) a description of any proxy (other than a revocable proxy given in response to a public proxy solicitation made pursuant to, and in accordance with, the Exchange Act), agreement, arrangement, understanding or relationship pursuant to which such stockholder or beneficial owner has or shares a right, directly or indirectly, to vote any shares of any class or series of capital stock of the Corporation,
(I) a description of any rights to dividends or other distributions on the shares of any class or series of capital stock of the Corporation, directly or indirectly, owned beneficially by such stockholder or beneficial owner that are separated or separable from the underlying shares of the Corporation,
(J) a description of any performance-related fees (other than an asset based fee) that such stockholder or beneficial owner, directly or indirectly, is entitled to based on any increase or decrease in the value of shares of any class or series of capital stock of the Corporation or any interests described in (C), and
(K) the names and addresses of other stockholders and beneficial owners known by any stockholder giving the notice (and/or beneficial owner, if any, on whose behalf the nomination or proposal is made) to support such nomination or proposal, and to the extent known, the class and number of all shares of the Corporations capital stock owned beneficially and/or of record by such other stockholder(s) and beneficial owner(s).
In addition, any stockholder who submits a notice pursuant to Section 12(a) of this ARTICLE II is required to update and supplement the information disclosed in such notice, if necessary, in accordance with Section 12(d) of this ARTICLE II.
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(iv) Notwithstanding anything in these Bylaws to the contrary, no business (other than nominations of persons for election to the Board of Directors, which must be made in compliance with and are governed exclusively by Section 12(b) of this ARTICLE II and business included in the Corporations proxy materials pursuant to the Exchange Act) shall be conducted at an annual meeting except in accordance with the procedures set forth in Section 12(a) of this ARTICLE II.
(b) Nominations at Annual Meetings of Stockholders.
(i) Only persons who are nominated in accordance and compliance with the procedures set forth in this Section 12(b) of ARTICLE II shall be eligible for election to the Board of Directors at an annual meeting of stockholders.
(ii) Nominations of persons for election to the Board of Directors of the Corporation may be made at an annual meeting of stockholders only (A) by or at the direction of the Board of Directors or any duly authorized committee thereof or (B) by any stockholder of the Corporation who (1) was a stockholder of record at the time of giving of notice provided for in this Section 12(b) of ARTICLE II on the record date for determination of stockholders of the Corporation entitled to vote at the meeting, and at the time of the annual meeting, (2) is entitled to vote at the meeting and (3) complies with the notice procedures set forth in this Section 12(b) of ARTICLE II. For the avoidance of doubt, clause (B) of this Section 12(b)(ii) of ARTICLE II shall be the exclusive means for a stockholder to make nominations of persons for election to the Board of Directors at an annual meeting of stockholders. For nominations to be properly brought by a stockholder at an annual meeting of stockholders, the stockholder must have given timely notice thereof in proper written form as described in Section 12(b)(iii) of this ARTICLE II to the Secretary and the stockholder and the Stockholder Associated Person must have acted in accordance with the representations set forth in the Nomination Solicitation Statement required by these Bylaws. To be timely, a stockholders notice for the nomination of persons for election to the Board of Directors must be delivered to the Secretary at the principal executive offices of the Corporation in proper written form not less than ninety (90) days and not more than one hundred twenty (120) days prior to the first anniversary of the preceding years annual meeting of stockholders (which date shall, for purposes of the Corporations first annual meeting of stockholders after its shares of Common Stock are first publicly traded, be deemed to have occurred on April 28, 2023); provided, however, that if and only if the annual meeting is not scheduled to be held within a period that commences thirty (30) days before such anniversary date and ends seventy (70) days after
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such anniversary date, or if no annual meeting was held in the preceding year (other than for purposes of the Corporations first annual meeting of stockholders after its shares of Common Stock are first publicly traded), such stockholders notice must be delivered not earlier than the 120th day prior to the date of such annual meeting and by the later of the tenth day following the day the Public Announcement of the date of the annual meeting is first made and the date which is ninety (90) days prior to the date of the annual meeting. In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a stockholders notice as described above. Notices delivered pursuant to this Section 12(b) of ARTICLE II will be deemed received on any given day if received prior to the Close of Business on such day (and otherwise on the next succeeding day). For the avoidance of doubt, a stockholder shall not be entitled to make additional or substitute nominations following the expiration of the time periods set forth in these Bylaws.
(iii) To be in proper written form, a stockholders notice to the Secretary shall set forth:
(A) as to each person that the stockholder proposes to nominate for election or re-election as a director of the Corporation, (1) the name, age, business address and residence address of the person, (2) the principal occupation or employment of the person, (3) the class or series and number of shares of capital stock of the Corporation which are directly or indirectly owned beneficially or of record by the person, (4) the date such shares were acquired and the investment intent of such acquisition and (5) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies or consents for a contested election of directors (even if an election contest or proxy solicitation is not involved), or is otherwise required, pursuant to Section 14 of the Exchange Act, and the rules, regulations and schedules promulgated thereunder (including such persons written consent to being named in the proxy statement as a nominee of the stockholder, if applicable, and to serving as a director if elected),
(B) as to the stockholder giving the notice, the name and address of such stockholder, as they appear on the Corporations books, the name and address (if different from the Corporations books) of such proposing stockholder, and the name and address of any Stockholder Associated Person,
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(C) the class or series and number of shares of stock of the Corporation which are directly or indirectly held of record or beneficially owned by such stockholder or by any Stockholder Associated Person with respect to the Corporations securities, a description of any Derivative Positions directly or indirectly held or beneficially held by the stockholder or any Stockholder Associated Person, and whether and the extent to which a Hedging Transaction has been entered into by or on behalf of such stockholder or any Stockholder Associated Person,
(D) a description of all arrangements or understandings (including financial transactions and direct or indirect compensation) between or among such stockholder or any Stockholder Associated Person and each proposed nominee and any other person or entity (including their names) pursuant to which the nomination(s) are to be made by such stockholder,
(E) a representation that such stockholder is a holder of record of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the persons named in its notice,
(F) any other information relating to such stockholder or any Stockholder Associated Person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies or consents for a contested election of directors (even if an election contest or proxy solicitation is not involved), or otherwise required, pursuant to Section 14 of the Exchange Act, and the rules, regulations and schedules promulgated thereunder, and
(G) a representation as to whether such stockholder or any Stockholder Associated Person intends or is part of a group which intends to deliver a proxy statement and/or form of proxy to the holders of a sufficient number of the Corporations outstanding shares reasonably believed by the stockholder or any Stockholder Associated Person, as the case may be, to elect each proposed nominee or otherwise to solicit proxies or votes from stockholders in support of the nomination or solicit proxies in support of any proposed nominee in accordance with Rule 14a-19 promulgated under the Exchange Act (such representation, a Nomination Solicitation Statement),
(H) a description of any proxy (other than a revocable proxy given in response to a public proxy solicitation made pursuant to, and in accordance with, the Exchange Act), agreement, arrangement, understanding or relationship pursuant to which such stockholder or beneficial owner has or shares a right, directly or indirectly, to vote any shares of any class or series of capital stock of the Corporation,
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(I) a description of any rights to dividends or other distributions on the shares of any class or series of capital stock of the Corporation, directly or indirectly, owned beneficially by such stockholder or beneficial owner that are separated or separable from the underlying shares of the Corporation,
(J) a description of any performance-related fees (other than an asset based fee) that such stockholder or beneficial owner, directly or indirectly, is entitled to based on any increase or decrease in the value of shares of any class or series of capital stock of the Corporation or any interests described in (C), and
(K) the names and addresses of other stockholders and beneficial owners known by any stockholder giving the notice (and/or beneficial owner, if any, on whose behalf the nomination or proposal is made) to support such nomination or proposal, and to the extent known, the class and number of all shares of the Corporations capital stock owned beneficially and/or of record by such other stockholder(s) and beneficial owner(s).
In addition, any stockholder who submits a notice pursuant to this Section 12(b) of ARTICLE II is required to update and supplement the information disclosed in such notice, if necessary, in accordance with Section 12(d) of this ARTICLE II and shall comply with Section 12(f) of this ARTICLE II.
(iv) Notwithstanding anything in Section 12(b)(ii) of this ARTICLE II to the contrary, if the number of directors to be elected to the Board of Directors is increased effective after the time period for which nominations would otherwise be due under paragraph 11(b)(ii) of this Article II and there is no Public Announcement naming the nominees for additional directorships at least ten (10) days prior to the last day a stockholder may deliver a notice of nomination in accordance with Section 12(b)(ii), a stockholders notice required by Section 12(b)(ii) of this ARTICLE II shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be received by the Secretary at the principal executive offices of the Corporation not later than the Close of Business on the tenth day following the day on which such Public Announcement is first made by the Corporation. The number of nominees a stockholder may nominate for election at the annual meeting on its own behalf (or in the case of a stockholder giving the notice on behalf of a beneficial owner, the number of nominees a stockholder may nominate for election at the annual meeting on behalf of such beneficial owner) shall not exceed the number of directors to be elected at such annual meeting.
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(c) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the notice of meeting. Only persons who are nominated in accordance and compliance with the procedures set forth in this Section 12(c) of ARTICLE II shall be eligible for election to the Board of Directors at a special meeting of stockholders at which directors are to be elected. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the notice of meeting only (i) by or at the direction of the Board of Directors, any duly authorized committee thereof, or stockholders (if stockholders are permitted to call a special meeting of stockholders pursuant to Section 2 of Article SEVEN of the Certificate of Incorporation) or (ii) provided that the Board of Directors or stockholders (if stockholders are permitted to call a special meeting of stockholders pursuant to Section 2 of Article SEVEN of the Certificate of Incorporation) has determined that directors are to be elected at such special meeting, by any stockholder of the Corporation who (A) was a stockholder of record at the time of giving of notice provided for in this Section 12(c) of ARTICLE II and at the time of the special meeting, (B) is entitled to vote at the meeting and (C) complies with the notice procedures provided for in this Section 12(c) of ARTICLE II. For nominations to be properly brought by a stockholder at a special meeting of stockholders, the stockholder must have given timely notice thereof in proper written form as described in this Section 12(c) of ARTICLE II to the Secretary. To be timely, a stockholders notice for the nomination of persons for election to the Board of Directors must be received by the Secretary at the principal executive offices of the Corporation not earlier than the 120th day prior to such special meeting and not later than the later of the 90th day prior to such special meeting or the tenth day following the day on which a Public Announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall any adjournment or postponement of a special meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a stockholders notice as described above. Notices delivered pursuant to this Section 12(c) of ARTICLE II will be deemed received on any given day if received prior to the Close of Business on such day (and otherwise on the next succeeding day). To be in proper written form, such stockholders notice shall set forth all of the information required by, and otherwise be in compliance with, Section 12(b)(iii) of this ARTICLE II. In addition, any stockholder who submits a notice pursuant to this Section 12(c) of ARTICLE II is required to update and supplement the information disclosed in such notice, if necessary, in accordance with Section 12(d) of this ARTICLE II and shall comply with Section 12(f) of this ARTICLE II. The number of nominees a stockholder may nominate for election at the special meeting on its own behalf (or in the case of a stockholder giving the notice on behalf of a beneficial owner, the number of nominees a stockholder may nominate for election at the special meeting on behalf of such beneficial owner) shall not exceed the number of directors to be elected at such special meeting.
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(d) Update and Supplement of Stockholders Notice. Any stockholder who submits a notice of proposal for business or nomination for election pursuant to this Section 12 of ARTICLE II is required to update and supplement the information disclosed in such notice, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for determining the stockholders entitled to notice of the meeting of stockholders and as of the date that is ten (10) Business Days prior to such meeting of the stockholders or any adjournment or postponement thereof, provided, that no such update or supplement shall cure or affect the accuracy (or inaccuracy) of any representation made by any stockholder, Stockholder Associated Person or nominee or the validity (or invalidity) of any nomination or proposal that failed to comply with this Section 12 of ARTICLE II or is rendered invalid as a result of any inaccuracy therein. Such update and supplement shall be received by the Secretary at the principal executive offices of the Corporation not later than the Close of Business on the fifth Business Day after the record date for the meeting of stockholders (in the case of the update and supplement required to be made as of the record date), and not later than the Close of Business on the eighth Business Day prior to the date for the meeting of stockholders or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten (10) Business Days prior to the meeting of stockholders or any adjournment or postponement thereof).
(e) Definitions. For purposes of this Section 12 of ARTICLE II, the term:
(i) Business Day shall mean each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in Battle Creek, Michigan or New York, New York are authorized or obligated by law or executive order to close;
(ii) Close of Business shall mean 5:00 p.m. local time at the principal executive offices of the Corporation, and if an applicable deadline falls on the Close of Business on a day that is not a Business Day, then the applicable deadline shall be deemed to be the Close of Business on the immediately preceding Business Day;
(iii) Derivative Positions means, with respect to a stockholder or any Stockholder Associated Person, any derivative positions including, without limitation, any short position, profits interest, option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the Corporation or otherwise and any performance-related fees to which such stockholder or any Stockholder Associated Person is entitled based, directly or indirectly, on any increase or decrease in the value of shares of capital stock of the Corporation;
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(iv) Hedging Transaction means, with respect to a stockholder or any Stockholder Associated Person, any hedging or other transaction (such as borrowed or loaned shares) or series of transactions, or any other agreement, arrangement or understanding, the effect or intent of which is to increase or decrease the voting power or economic or pecuniary interest of such stockholder or any Stockholder Associated Person with respect to the Corporations securities;
(v) Public Announcement means disclosure in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act; and
(vi) Stockholder Associated Person of any stockholder means (A) any person controlling, directly or indirectly, or acting in concert with, such stockholder, (B) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder or (C) any person directly or indirectly controlling, controlled by or under common control with such Stockholder Associated Person.
(f) Submission of Questionnaire, Representation and Agreement. To be qualified to be a nominee for election or re-election as a director of the Corporation, a person must deliver (in the case of a person nominated by a stockholder in accordance with Sections 11(b) or 11(c) of this ARTICLE II, in accordance with the time periods prescribed for delivery of notice under such sections) to the Secretary at the principal executive offices of the Corporation a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the Secretary upon written request of any stockholder of record identified by name within five Business Days of such written request) and a written representation and agreement (in the form provided by the Secretary upon written request written request of any stockholder of record identified by name within five Business Days of such) that such person (i) is not and will not become a party to (A) any agreement, arrangement or understanding (whether written or oral) with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a Voting Commitment) that has not been disclosed to the Corporation or (B) any Voting Commitment that could limit or interfere with such persons ability to comply, if elected as a director of the Corporation, with such persons fiduciary duties under applicable law, (ii) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed to the Corporation and (iii) would be in compliance, and if elected as a director of the Corporation will comply, with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation.
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(g) Update and Supplement of Nominee Information. The Corporation may also, as a condition to any such nomination or business being deemed properly brought before an annual meeting, require any Stockholder Associated Person or proposed nominee to deliver to the Secretary, within five Business Days of any such request, such other information as may reasonably be requested by the Corporation, including such other information as may be reasonably required by the Board of Directors, in its sole discretion, to determine (A) the eligibility of such proposed nominee to serve as a director of the Corporation, (B) whether such nominee qualifies as an independent director or audit committee financial expert under applicable law, Securities and Exchange Commission and stock exchange rules or regulation, or any publicly disclosed corporate governance guideline or committee charter of the Corporation and (C) such other information that the Board of Directors determines, in its sole discretion, could be material to a reasonable stockholders understanding of the independence, or lack thereof, of such nominee.
(h) Authority of Chair; General Provisions. Except as otherwise provided by applicable law, the Certificate of Incorporation or these Bylaws, the chair of the meeting shall have the power and duty to determine whether any nomination or other business proposed to be brought before the meeting was made or brought in accordance with the procedures set forth in these Bylaws (including whether the stockholder or Stockholder Associated Person, if any, on whose behalf the nomination or proposal is made or solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies or votes in support of such stockholders nominee or proposal in compliance with such stockholders representation as required by Section 12(a)(iii)(G) or Section 12(b)(iii)(G), as applicable, of these Bylaws) and, if any nomination or other business is not made or brought in compliance with these Bylaws, to declare that such nomination or proposal of other business be disregarded and not acted upon. Notwithstanding the foregoing provisions of this Section 12, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or proposed business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that such proposal or nomination is set forth in the notice of meeting or other proxy materials and notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 12, to be considered a qualified representative of the stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of stockholders. Notwithstanding anything to the contrary in these Bylaws, unless otherwise required by law, if any stockholder or Stockholder Associated Person (i) provides notice pursuant to Rule 14a-19(b) promulgated under the Exchange Act with respect to any proposed nominee and (ii) subsequently fails to comply with
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the requirements of Rule 14a-19(a)(2) or Rule 14a-19(a)(3) promulgated under the Exchange Act (or fails to timely provide reasonable evidence sufficient to satisfy the Corporation that such stockholder has met the requirements of Rule 14a-19(a)(3) promulgated under the Exchange Act in accordance with the following sentence), then the nomination of each such proposed nominee shall be disregarded, notwithstanding that the nominee is included as a nominee in the Corporations proxy statement, notice of meeting or other proxy materials for any annual meeting (or any supplement thereto) and notwithstanding that proxies or votes in respect of the election of such proposed nominees may have been received by the Corporation (which proxies and votes shall be disregarded). If any stockholder or Stockholder Associated Person provides notice pursuant to Rule 14a-19(b) promulgated under the Exchange Act, such stockholder shall deliver to the Corporation, no later than five (5) business days prior to the applicable meeting, reasonable evidence that it or such Stockholder Associated Person has met the requirements of Rule 14a-19(a)(3) promulgated under the Exchange Act.
(i) Compliance with Exchange Act. Notwithstanding the foregoing provisions of these Bylaws, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules, regulations and schedules promulgated thereunder with respect to the matters set forth in these Bylaws; provided, however, that any references in these Bylaws to the Exchange Act or the rules, regulations and schedules promulgated thereunder are not intended to and shall not limit the requirements applicable to any nomination or other business to be considered pursuant to Section 12 of this ARTICLE II.
(j) Effect on Other Rights. Nothing in these Bylaws shall be deemed to (A) affect any rights of the stockholders to request inclusion of proposals in the Corporations proxy statement pursuant to Rule 14a-8 under the Exchange Act, (B) confer upon any stockholder a right to have a nominee or any proposed business included in the Corporations proxy statement, except as set forth in the Certificate of Incorporation or these Bylaws or (C) affect any rights of the holders of any series of preferred stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation.
Section 13. Fixing a Record Date for Stockholder Meetings. In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting. If the Board of Directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the next day preceding the day on which notice is first given, or, if notice is waived, at the close of business on the day
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next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting in conformity herewith; and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance with the foregoing provisions of this Section 12 at the adjourned meeting.
Section 14. Conduct of Meetings.
(a) Generally. Meetings of stockholders shall be presided over by the Chair of the Board of Directors, if any, or in the Chairs absence or disability, by the Chief Executive Officer, or in the Chief Executive Officers absence or disability, by the President, or in the Presidents absence or disability, by a Vice President (in the order as determined by the Board of Directors), or in the absence or disability of the foregoing persons by a chair designated by the Board of Directors, or in the absence or disability of such person, by a chair chosen at the meeting. The Secretary shall act as secretary of the meeting, but in the Secretarys absence or disability the chair of the meeting may appoint any person to act as secretary of the meeting.
(b) Rules, Regulations and Procedures. The Board of Directors may adopt by resolution such rules, regulations and procedures for the conduct of any meeting of stockholders of the Corporation as it shall deem appropriate including, without limitation, such guidelines and procedures as it may deem appropriate regarding the participation by means of remote communication of stockholders and proxyholders not physically present at a meeting. Except to the extent inconsistent with such rules, regulations and procedures as adopted by the Board of Directors, the chair of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chair, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chair of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chair of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; (v) limitations on the time allotted to questions or comments by participants; and (vi) restrictions on the use of mobile phones, audio or video recording devices and similar devices at the meeting. The chair of the meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if the facts warrant, determine and declare to the meeting that a nomination or matter or business was not properly brought before the meeting and if such chair should so determine, such chair shall so declare to the meeting and any such matter or business not properly brought
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before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board of Directors or the chair of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. The chair of the meeting shall announce at the meeting when the polls for each matter to be voted upon at the meeting will be opened and closed. After the polls close, no ballots, proxies or votes or any revocations or changes thereto may be accepted. The chair of the meeting shall have the power, right and authority, for any or no reason, to convene, recess and/or adjourn any meeting of stockholders.
(c) Inspectors of Elections. The Corporation may, and to the extent required by law shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. One or more other persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chair of the meeting shall appoint one or more inspectors to act at the meeting. Unless otherwise required by law, inspectors may be officers, employees or agents of the Corporation. No person who is a candidate for an office at an election may serve as an inspector at such election. Each inspector, before entering upon the discharge of such inspectors duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspectors ability. The inspector shall have the duties prescribed by law and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by law.
Section 15. Remote Communication. If authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may adopt, stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication:
(a) participate in a meeting of stockholders; and
(b) be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication,
provided, that
(c) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder;
(d) the Corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings; and
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(e) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation.
ARTICLE III
DIRECTORS
Section 1. General Powers. Except as otherwise provided in the Certificate of Incorporation or the DGCL, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
Section 2. Regular Meetings and Special Meetings. Regular meetings, other than the annual meeting, of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by resolution of the Board of Directors and publicized among all directors. Special meetings of the Board of Directors may be called by (i) the Chair of the Board of Directors, if any, or (ii) by the Secretary upon the written request of a majority of the directors then in office and in each case shall be held at the place, if any, on the date and at the time as he, she or they shall fix. Any and all business may be transacted at a special meeting of the Board of Directors.
Section 3. Notice of Meetings. Notice of regular meetings of the Board of Directors need not be given except as otherwise required by law or these Bylaws. Notice of each special meeting of the Board of Directors, and of each regular and annual meeting of the Board of Directors for which notice is required, shall be given by the Secretary as hereinafter provided in this Section 4. Such notice shall be state the date, time and place, if any, of the meeting. Notice of any special meeting, and of any regular or annual meeting for which notice is required, shall be given to each director at least (a) twenty-four (24) hours before the meeting if by telephone or by being personally delivered or sent by overnight courier, telecopy, electronic transmission, email or similar means or (b) five (5) days before the meeting if delivered by mail to the directors residence or usual place of business. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage prepaid, or when transmitted if sent by telex, telecopy, electronic transmission, email or similar means. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.
Section 4. Waiver of Notice and Presumption of Assent. Any director may waive notice of any meeting of directors by a writing signed by the director or by electronic transmission. Any member of the Board of Directors or any committee thereof who is present at a meeting shall have waived notice of such meeting except when such member attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened and does not further participate in the meeting. Such member shall be conclusively presumed to have assented to any action taken unless his or her dissent shall be entered in the minutes of the meeting or unless his or her written dissent to such action shall be filed with the person acting as the secretary of the meeting before the adjournment thereof or shall be forwarded by registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to any member who voted in favor of such action.
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Section 5. Chair of the Board of Directors, Quorum, Required Vote and Adjournment. The Board of Directors may elect a Chair of the Board of Directors. The Chair of the Board of Directors must be a director and may be an officer of the Corporation. Subject to the provisions of these Bylaws and the direction of the Board of Directors, he or she shall perform all duties and have all powers which are commonly incident to the position of Chair of the Board of Directors or which are delegated to him or her by the Board of Directors, preside at all meetings of the stockholders and Board of Directors at which he or she is present and have such powers and perform such duties as the Board of Directors may from time to time prescribe. If the Chair of the Board is not present at a meeting of the Board of Directors, the Chief Executive Officer (if the Chief Executive Officer is a director and is not also the Chair of the Board of Directors) shall preside at such meeting, and, if the Chief Executive Officer is not present at such meeting, a majority of the directors present at such meeting shall elect one of the directors present at the meeting to so preside. At all meetings of the Board of Directors, a majority of the directors then in office shall constitute a quorum for the transaction of business, provided, however, that a quorum shall never be less than one-third the total number of directors. Unless by express provision of an applicable law, the Certificate of Incorporation or these Bylaws a different vote is required, the vote of a majority of directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board of Directors may from time to time determine. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may, to the fullest extent permitted by law, adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 6. Committees.
(a) The Board of Directors may designate one or more committees, including an executive committee, consisting of one or more of the directors of the Corporation, and any committees required by the rules and regulations of such exchange as any securities of the Corporation are listed. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Except to the extent restricted by applicable law or the Certificate of Incorporation, each such committee, to the extent provided by the DGCL and in the resolution creating it, shall have and may exercise all the powers and authority of the Board of Directors. Each such committee shall serve at the pleasure of the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors upon request.
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(b) Each committee of the Board of Directors may fix its own rules of procedure and shall hold its meetings as provided by such rules, except as may otherwise be provided by a resolution of the Board of Directors designating such committee. Unless otherwise provided in such a resolution, the presence of at least a majority of the members of the committee shall be necessary to constitute a quorum. All matters shall be determined by a majority vote of the members present at a meeting at which a quorum is present. Unless otherwise provided in such a resolution, in the event that a member and that members alternate, if alternates are designated by the Board of Directors, of such committee is or are absent or disqualified, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member.
Section 7. Action by Written Consent. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing or by electronic transmission. After the action is taken, the consent or consents relating thereto shall be filed with the minutes of proceedings of the Board of Directors or committee in the same paper form or electronic form as the minutes are maintained.
Section 8. Compensation. The Board of Directors shall have the authority to fix the compensation, including fees, reimbursement of expenses and equity compensation, of directors for services to the Corporation in any capacity, including for attendance of meetings of the Board of Directors or participation on any committees. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.
Section 9. Reliance on Books and Records. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall, in the performance of such members duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporations officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other persons professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.
Section 10. Telephonic and Other Meetings. Unless restricted by the Certificate of Incorporation, any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting.
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ARTICLE IV
OFFICERS
Section 1. Number and Election. Subject to the authority of Chief Executive Officer to appoint officers as set forth in Section 11 of this Article IV, the officers of the Corporation shall be elected by the Board of Directors and shall consist of a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Chief Financial Officer, a Treasurer and such other officers and assistant officers as may be deemed necessary or desirable by the Board of Directors. Any number of offices may be held by the same person. In its discretion, the Board of Directors may choose not to fill any office for any period as it may deem advisable.
Section 2. Term of Office. Each officer shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as hereinafter provided.
Section 3. Removal. Any officer or agent of the Corporation may be removed with or without cause by the Board of Directors, a duly authorized committee thereof or by such officers as may be designated by a resolution of the Board of Directors, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer appointed by the Chief Executive Officer in accordance with Section 11 of this Article IV may also be removed by the Chief Executive Officer in his or her sole discretion.
Section 4. Vacancies. Any vacancy occurring in any office because of death, resignation, removal, disqualification or otherwise may be filled by the Board of Directors or the Chief Executive Officer in accordance with Section 11 of this Article IV.
Section 5. Compensation. Compensation of all executive officers shall be approved by the Board of Directors or a duly authorized committee thereof, and no officer shall be prevented from receiving such compensation by virtue of his or her also being a director of the Corporation.
Section 6. Chief Executive Officer. The Chief Executive Officer shall have the powers and perform the duties incident to that position. The Chief Executive Officer shall, in the absence of the Chair of the Board of Directors, or if a Chair of the Board of Directors shall not have been elected, preside at each meeting of (a) the Board of Directors if the Chief Executive Officer is a director and (b) the stockholders. Subject to the powers of the Board of Directors and the Chair of the Board, the Chief Executive Officer shall be in general and active charge of the entire business and affairs of the Corporation, and shall be its chief policy making officer. The Chief Executive Officer shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or provided in these Bylaws. The Chief Executive Officer is authorized to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Whenever the President is unable to serve, by reason of sickness, absence or otherwise, the Chief Executive Officer shall perform all the duties and responsibilities and exercise all the powers of the President.
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Section 7. The President. The President of the Corporation shall, subject to the powers of the Board of Directors, the Chair of the Board of Directors and the Chief Executive Officer, have general charge of the business, affairs and property of the Corporation, and control over its officers, agents and employees. The President shall see that all orders and resolutions of the Board of Directors are carried into effect. The President is authorized to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The President shall, in the absence of the Chief Executive Officer, act with all of the powers and be subject to all of the restrictions of the Chief Executive Officer. The President shall have such other powers and perform such other duties as may be prescribed by the Chair of the Board of Directors, the Chief Executive Officer, the Board of Directors or as may be provided in these Bylaws or otherwise are incident to the position of President.
Section 8. Vice Presidents. The Vice President, or if there shall be more than one, the Vice Presidents, in the order determined by the Board of Directors or the Chair of the Board of Directors, shall, perform such duties and have such powers as the Board of Directors, the Chair of the Board of Directors, the Chief Executive Officer, the President or these Bylaws may, from time to time, prescribe or which otherwise are incident to the position of Vice President. The Vice Presidents may also be designated as Executive Vice Presidents or Senior Vice Presidents, as the Board of Directors may from time to time prescribe.
Section 9. The Secretary and Assistant Secretaries. The Secretary shall attend all meetings of the Board of Directors (other than executive sessions thereof) and all meetings of the stockholders and record all the proceedings of the meetings in a book or books to be kept for that purpose or shall ensure that his or her designee attends each such meeting to act in such capacity. Under the Board of Directors supervision, the Secretary shall give, or cause to be given, all notices required to be given by these Bylaws or by law; shall have such powers and perform such duties as the Board of Directors, the Chair of the Board of Directors, the Chief Executive Officer, the President or these Bylaws may, from time to time, prescribe or which otherwise are incident to the position of Secretary; and shall have custody of the corporate seal of the Corporation. The Secretary, or an Assistant Secretary, shall have authority to affix the corporate seal to any instrument requiring it and when so affixed, it may be attested by his or her signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his or her signature. The Assistant Secretary, or if there be more than one, any of the assistant secretaries, shall in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors, the Chair of the Board of Directors, the Chief Executive Officer, the President, or Secretary may, from time to time, prescribe.
Section 10. The Chief Financial Officer and the Treasurer. The Chief Financial Officer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation as shall be necessary or desirable in accordance with applicable law or generally accepted accounting principles; shall deposit all monies and other valuable effects in the name and to the credit of the Corporation as may be ordered by the Chair of the Board of
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Directors or the Board of Directors; shall receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; shall cause the funds of the Corporation to be disbursed when such disbursements have been duly authorized, taking proper vouchers for such disbursements; and shall render to the Board of Directors, at its regular meeting or when the Board of Directors so requires, an account of the financial condition and operations of the Corporation; shall have such powers and perform such duties as the Board of Directors, the Chair of the Board of Directors, the Chief Executive Officer, the President or these Bylaws may, from time to time, prescribe or which otherwise are incident to the position of Chief Financial Officer. The Treasurer, if any, shall in the absence or disability of the Chief Financial Officer, perform the duties and exercise the powers of the chief financial officer, subject to the power of the Board of Directors. The Treasurer, if any, shall perform such other duties and have such other powers as the Board of Directors may, from time to time, prescribe.
Section 11. Appointed Officers. In addition to officers designated by the Board of Directors in accordance with this ARTICLE IV, the Chief Executive Officer shall have the authority to appoint other officers below the level of Board of Directors-appointed Vice President as the Chief Executive Officer may from time to time deem expedient and may designate for such officers titles that appropriately reflect their positions and responsibilities. Such appointed officers shall have such powers and shall perform such duties as may be assigned to them by the Chief Executive Officer or the senior officer to whom they report, consistent with corporate policies. An appointed officer shall serve until the earlier of such officers resignation or such officers removal by the Chief Executive Officer or the Board of Directors at any time, either with or without cause.
Section 12. Other Officers, Assistant Officers and Agents. Officers, assistant officers and agents, if any, other than those whose duties are provided for in these Bylaws, shall have such authority and perform such duties as may from time to time be prescribed by resolution of the Board of Directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board of Directors.
Section 13. Officers Bonds or Other Security. If required by the Board of Directors, any officer of the Corporation shall give a bond or other security for the faithful performance of his duties, in such amount and with such surety as the Board of Directors may require.
Section 14. Delegation of Authority. The Board of Directors may by resolution delegate the powers and duties of such officer to any other officer or to any director, or to any other person whom it may select.
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ARTICLE V
CERTIFICATES OF STOCK
Section 1. Form. The shares of stock of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. If shares are represented by certificates, the certificates shall be in such form as required by applicable law and as determined by the Board of Directors. Each certificate shall certify the number of shares owned by such holder in the Corporation and shall be signed by, or in the name of the Corporation by two authorized officers of the Corporation including, but not limited to, the Chair of the Board of Directors (if an officer), the Chief Executive Officer, the President, a Vice President, the Chief Financial Officer, the Treasurer, the Secretary and an Assistant Secretary of the Corporation. Any or all signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer, transfer agent or registrar of the Corporation whether because of death, resignation or otherwise before such certificate or certificates have been issued by the Corporation, such certificate or certificates may nevertheless be issued as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer, transfer agent or registrar of the Corporation at the date of issue. All certificates for shares shall be consecutively numbered or otherwise identified. The Board of Directors may appoint a bank or trust company organized under the laws of the United States or any state thereof to act as its transfer agent or registrar, or both in connection with the transfer of any class or series of securities of the Corporation. The Corporation, or its designated transfer agent or other agent, shall keep a book or set of books to be known as the stock transfer books of the Corporation, containing the name of each holder of record, together with such holders address and the number and class or series of shares held by such holder and the date of issue. When shares are represented by certificates, the Corporation shall issue and deliver to each holder to whom such shares have been issued or transferred, certificates representing the shares owned by such holder, and shares of stock of the Corporation shall only be transferred on the books of the Corporation by the holder of record thereof or by such holders attorney duly authorized in writing, upon surrender to the Corporation or its designated transfer agent or other agent of the certificate or certificates for such shares endorsed by the appropriate person or persons, with such evidence of the authenticity of such endorsement, transfer, authorization and other matters as the Corporation may reasonably require, and accompanied by all necessary stock transfer stamps. In that event, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate or certificates and record the transaction on its books. When shares are not represented by certificates, shares of stock of the Corporation shall only be transferred on the books of the Corporation by the holder of record thereof or by such holders attorney duly authorized in writing, with such evidence of the authenticity of such transfer, authorization and other matters as the Corporation may reasonably require, and accompanied by all necessary stock transfer stamps, and within a reasonable time after the issuance or transfer of such shares, the Corporation shall, if required by applicable law, send the holder to whom such shares have been issued or transferred a written statement of the information required by applicable law. Unless otherwise provided by applicable law, the Certificate of Incorporation, Bylaws or any other instrument, the rights and obligations of the holders of uncertificated stock and the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical.
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Section 2. Lost Certificates. The Corporation may issue or direct a new certificate or certificates or uncertificated shares to be issued in place of any certificate or certificates previously issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the owner of the lost, stolen or destroyed certificate. When authorizing such issue of a new certificate or certificates or uncertificated shares, the Corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his or her legal representative, to give the Corporation a bond in such sum as it may direct, sufficient to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
Section 3. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends, to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as otherwise required by applicable law. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise required by applicable law.
Section 4. Fixing a Record Date for Purposes Other Than Stockholder Meetings. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment or any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purposes of any other lawful action (other than stockholder meetings which are expressly governed by Section 12 of ARTICLE II hereof), the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
ARTICLE VI
GENERAL PROVISIONS
Section 1. Dividends. Subject to and in accordance with applicable law, the Certificate of Incorporation and any certificate of designation relating to any series of preferred stock, dividends upon the shares of capital stock of the Corporation may be declared and paid by the Board of Directors, in accordance with applicable law. Dividends may be paid in cash, in property or in shares of the Corporations capital stock, subject to the provisions of applicable law and the Certificate of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends a reserve or reserves for any proper purpose. The Board of Directors may modify or abolish any such reserves in the manner in which they were created.
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Section 2. Checks, Notes, Drafts, Etc. All checks, notes, drafts or other orders for the payment of money of the Corporation shall be signed, endorsed or accepted in the name of the Corporation by such officer, officers, person or persons as from time to time may be designated by the Board of Directors or by an officer or officers authorized by the Board of Directors to make such designation.
Section 3. Contracts. In addition to the powers otherwise granted to officers pursuant to ARTICLE IV hereof, the Board of Directors may authorize any officer or officers, or any agent or agents, in the name and on behalf of the Corporation to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.
Section 5. Corporate Seal. The Board of Directors may provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the Corporation and the words Corporate Seal, Delaware. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Notwithstanding the foregoing, no seal shall be required by virtue of this Section.
Section 6. Voting Securities Owned By Corporation. Voting securities in any other corporation or entity held by the Corporation shall be voted by the Chair of the Board of Directors, Chief Executive Officer, the President or the Chief Financial Officer, unless the Board of Directors specifically confers authority to vote with respect thereto, which authority may be general or confined to specific instances, upon some other person or officer. Any person authorized to vote securities shall have the power to appoint proxies, with general power of substitution.
Section 7. Facsimile/Electronic Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, docusign, facsimile and other forms of electronic signatures of any officer or director of the Corporation may be used to the fullest extent permitted by applicable law.
Section 8. Section Headings. Section headings in these Bylaws are for convenience of reference only and shall not be given any substantive effect in limiting or otherwise construing any provision herein.
Section 9. Inconsistent Provisions. In the event that any provision (or part thereof) of these Bylaws is or becomes inconsistent with any provision of the Certificate of Incorporation, the DGCL or any other applicable law, the provision (or part thereof) of these Bylaws shall be construed to be consistent with such other provision or provisions, and to the extent such provision may not be so construed, such provision shall be deemed amended to incorporate such other provision so as to eliminate any such inconsistency and as so amended shall be given full force and effect.
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ARTICLE VII
INDEMNIFICATION
Section 1. Right to Indemnification and Advancement. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved (including involvement, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative (a proceeding), by reason of the fact that he or she is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, manager, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (an indemnitee), whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys fees and related disbursements, judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended from time to time (ERISA) and any other penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitees heirs, executors and administrators; provided, however, that, except as provided in this Section 2 of this ARTICLE VII with respect to proceedings to enforce rights to indemnification and advance of expenses (as defined below), the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized in the specific case by the Board of Directors of the Corporation. In addition to the right to indemnification conferred herein, an indemnitee shall also have the right, to the fullest extent not prohibited by law, to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (an advance of expenses); provided, however, that if and to the extent that the DGCL requires, an advance of expenses shall be made only upon delivery to the Corporation of an undertaking (an undertaking), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (a final adjudication) that such indemnitee is not entitled to be indemnified for such expenses under this Section 1 or otherwise. The Corporation may also, by action of its Board of Directors, provide indemnification and advancement to employees and agents of the Corporation. Any reference to an officer of the Corporation in this ARTICLE VII shall be deemed to refer exclusively to the Chair of the Board of Directors, Chief Executive Officer, President, Secretary and Treasurer of the Corporation appointed pursuant to ARTICLE IV, and to any Vice President, Assistant Secretary, Assistant Treasurer or other officer of the Corporation appointed by the Board of Directors pursuant to ARTICLE IV of these Bylaws, and any reference to an officer of any other enterprise shall be deemed to refer exclusively to an officer appointed by the board of directors or equivalent governing body of such other entity pursuant to the certificate of incorporation and bylaws or equivalent organizational documents of such other enterprise. The fact that any person who is or was an employee of the Corporation
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or an employee of any other enterprise has been given or has used the title of Vice President or any other title, including any titled granted to such person by the Chief Executive Officer pursuant to ARTICLE IV, Section 11, that could be construed to suggest or imply that such person is or may be an officer of the Corporation or of such other enterprise shall not result in such person being constituted as, or being deemed to be, an officer of the Corporation or of such other enterprise for purposes of this ARTICLE VII unless such persons appointment to such office was approved by the Board of Directors pursuant to ARTICLE IV.
Section 2. Procedure for Indemnification. Any claim for indemnification or advance of expenses by an indemnitee under this Section 2 of ARTICLE VII shall be made promptly, and in any event within forty-five days (or, in the case of an advance of expenses, twenty days, provided that the director or officer has delivered the undertaking contemplated by Section 1 of this ARTICLE VII if required), upon the written request of the indemnitee. If the Corporation denies a written request for indemnification or advance of expenses, in whole or in part, or if payment in full pursuant to such request is not made within forty-five days (or, in the case of an advance of expenses, twenty days, provided that the indemnitee has delivered the undertaking contemplated by Section 1 of this ARTICLE VII if required), the right to indemnification or advances as granted by this ARTICLE VII shall be enforceable by the indemnitee in any court of competent jurisdiction. Such persons costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation to the fullest extent permitted by applicable law. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of expenses where the undertaking required pursuant to Section 1 of this ARTICLE VII, if any, has been tendered to the Corporation) that the claimant has not met the applicable standard of conduct which make it permissible under the DGCL for the Corporation to indemnify the claimant for the amount claimed, but the burden of proof shall be on the Corporation to the fullest extent permitted by law. Neither the failure of the Corporation (including its Board of Directors, a committee thereof, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.
Section 3. Insurance. The Corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was or has agreed to become a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, member, trustee, administrator, employee or agent of another corporation, partnership, joint venture, limited liability company, trust or other enterprise against any expense, liability or loss asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify such person against such expenses, liability or loss under the DGCL.
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Pursuant to 17 C.F.R. Section 200.83
Section 4. Service for Subsidiaries. Any person serving as a director, officer, partner, member, trustee, administrator, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, at least 50% of whose equity interests are owned by the Corporation (a subsidiary for purposes of this ARTICLE VII) shall be conclusively presumed to be serving in such capacity at the request of the Corporation.
Section 5. Reliance. Persons who after the date of the adoption of this provision become or remain directors or officers of the Corporation or who, while a director or officer of the Corporation, become or remain a director, manager, officer, employee or agent of a subsidiary, shall be conclusively presumed to have relied on the rights to indemnity, advance of expenses and other rights contained in this ARTICLE VII in entering into or continuing such service. To the fullest extent permitted by law, the rights to indemnification and to the advance of expenses conferred in this ARTICLE VII shall apply to claims made against an indemnitee arising out of acts or omissions which occurred or occur both prior and subsequent to the adoption hereof. Any amendment, alteration or repeal of this ARTICLE VII that adversely affects any right of an indemnitee or its successors shall be prospective only and shall not limit, eliminate, or impair any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment or repeal.
Section 6. Non-Exclusivity of Rights; Continuation of Rights of Indemnification. The rights to indemnification and to the advance of expenses conferred in this ARTICLE VII shall not be exclusive of any other right which any person may have or hereafter acquire under the Certificate of Incorporation or under any statute, by-law, agreement, vote of stockholders or disinterested directors or otherwise. All rights to indemnification under this ARTICLE VII shall be deemed to be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this ARTICLE VII is in effect. Any repeal or modification of this ARTICLE VII or repeal or modification of relevant provisions of the DGCL or any other applicable laws shall not in any way diminish any rights to indemnification and advancement of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to any proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such repeal or modification.
Section 7. Merger or Consolidation. For purposes of this ARTICLE VII, references to the Corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this ARTICLE VII with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued.
34
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Section 8. Savings Clause. To the fullest extent permitted by law, if this ARTICLE VII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and advance expenses to each person entitled to indemnification under Section 1 of this ARTICLE VII as to all expense, liability and loss (including attorneys fees and related disbursements, judgments, fines, ERISA excise taxes and penalties and any other penalties and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person and for which indemnification and advancement of expenses is available to such person pursuant to this ARTICLE VII to the fullest extent permitted by any applicable portion of this ARTICLE VII that shall not have been invalidated.
ARTICLE VIII
AMENDMENTS
These Bylaws may be amended, altered, changed or repealed or new Bylaws adopted only in accordance with Section 1 of Article SEVEN of the Certificate of Incorporation.
* * * * *
35
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Exhibit 10.1
EMPLOYEE MATTERS AGREEMENT
BY AND BETWEEN
KELLOGG COMPANY
AND
WK KELLOGG CO
DATED AS OF _________, 2023
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
TABLE OF CONTENTS
Page | ||||||
ARTICLE I | ||||||
DEFINITIONS | ||||||
Section 1.01 |
Definitions | 1 | ||||
ARTICLE II | ||||||
GENERAL PRINCIPLES FOR ALLOCATION OF LIABILITIES | ||||||
Section 2.01 |
General Principles | 9 | ||||
Section 2.02 |
Comparable Benefit Plans | 11 | ||||
Section 2.03 |
Adoption and Transfer and Assumption of Benefit Plans | 12 | ||||
ARTICLE III | ||||||
ASSIGNMENT OF EMPLOYEES | ||||||
Section 3.01 |
Active Employees | 13 | ||||
Section 3.02 |
Individual Agreements | 14 | ||||
Section 3.03 |
WKKC Delayed Transfer Employees | 15 | ||||
Section 3.04 |
Consultation with Labor Representatives; Labor Agreements | 16 | ||||
Section 3.05 |
No Hire and Non-Solicitation | 16 | ||||
ARTICLE IV | ||||||
EQUITY, INCENTIVE AND EXECUTIVE COMPENSATION | ||||||
Section 4.01 |
Generally | 17 | ||||
Section 4.02 |
Equity Incentive Awards | 17 | ||||
Section 4.03 |
Employee Stock Purchase Plans | 22 | ||||
Section 4.04 |
Non-Equity Incentive Plans | 22 | ||||
Section 4.05 |
Director Compensation | 23 | ||||
ARTICLE V | ||||||
U.S. RETIREMENT PLANS | ||||||
Section 5.01 |
Kellanova Defined Benefit Plan | 24 | ||||
Section 5.02 |
Kellanova Nonqualified Defined Benefit Plans | 24 | ||||
Section 5.03 |
WKKC Defined Contribution Retirement Plans | 24 | ||||
Section 5.04 |
No Distributions | 25 | ||||
ARTICLE VI | ||||||
NONQUALIFIED DEFERRED COMPENSATION PLANS | ||||||
ARTICLE VII | ||||||
OTHER BENEFIT PLANS |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Section 7.01 |
Welfare Plans | 26 | ||||
Section 7.02 |
Vacation, PTO, Holidays and Leaves of Absence | 27 | ||||
Section 7.03 |
Severance and Unemployment Compensation | 27 | ||||
Section 7.04 |
Workers Compensation | 28 | ||||
ARTICLE VIII | ||||||
NON-U.S. EMPLOYEES | ||||||
ARTICLE IX | ||||||
MISCELLANEOUS | ||||||
Section 9.01 |
Information Sharing and Access | 29 | ||||
Section 9.02 |
Preservation of Rights to Amend | 30 | ||||
Section 9.03 |
Fiduciary Matters | 30 | ||||
Section 9.04 |
Further Assurances | 30 | ||||
Section 9.05 |
Reimbursement of Costs and Expenses | 30 | ||||
Section 9.06 |
Dispute Resolution | 30 | ||||
Section 9.07 |
Third-Party Beneficiaries | 30 | ||||
Section 9.08 |
Incorporation of Separation Agreement Provisions | 31 |
Schedule A | ||
Schedule B | ||
Schedule 2.03(b) | ||
Schedule 4.02(d) | ||
Schedule 6(b) |
ii
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
EMPLOYEE MATTERS AGREEMENT
This EMPLOYEE MATTERS AGREEMENT, dated as of _______ ___, 2023 (this Agreement), is by and between Kellogg Company, a Delaware corporation (Kellanova), and WK Kellogg Co, a Delaware corporation (WKKC).
R E C I T A L S:
WHEREAS, the board of directors of Kellanova (the Kellanova Board) has determined that it is in the best interests of Kellanova and its shareholders to create a new publicly traded company that shall operate the WKKC Business;
WHEREAS, in furtherance of the foregoing, the Kellanova Board has determined that it is appropriate and desirable to separate the WKKC Business from the Kellanova Business (the Internal Reorganization) and, following the Internal Reorganization, make a distribution to holders of Kellanova Shares on the Record Date of all of the outstanding WKKC Shares owned by Kellanova (the Distribution);
WHEREAS, prior to the Internal Reorganization and Distribution, Kellanova and WKKC intend to become substantially more operationally independent on July 30, 2023 (the CIC Date), except that operations in respect of Canada-based employees will become operationally independent at the time of the Distribution;
WHEREAS, in order to effectuate the Internal Reorganization and Distribution, Kellanova and WKKC have entered into a Separation and Distribution Agreement, dated as of _______ ___, 2023 (the Separation Agreement);
WHEREAS, in addition to the matters addressed by the Separation Agreement, the Parties desire to enter into this Agreement to set forth the terms and conditions of certain employment, compensation and benefit matters; and
WHEREAS, the Parties acknowledge that this Agreement, the Separation Agreement and the other Ancillary Agreements represent the integrated agreement of Kellanova and WKKC relating to the Internal Reorganization and Distribution, are being entered into together and would not have been entered into independently.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Definitions. For purposes of this Agreement, the following terms have the meanings set forth below, and capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Separation Agreement.
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
2023 PSU shall have the meaning set forth in Section 4.02(f).
2023 RSU shall have the meaning set forth in Section 4.02(c).
Agreement shall have the meaning set forth in the Preamble to this Agreement and shall include all Schedules hereto and all amendments, modifications, and changes hereto entered into pursuant to Section 9.08.
Applicable Exchange shall mean the securities exchange as may at the applicable time be the principal market for Kellanova Shares or WKKC Shares, as applicable.
Assets shall have the meaning set forth in the Separation Agreement.
Automatically Assigned Individual Agreement shall have the meaning set forth in Section 3.02.
Benefit Plan shall mean any contract, agreement, policy, practice, program, plan, trust, commitment or arrangement providing for benefits, perquisites or compensation of any nature to any Employee or Former Employee, or to any family member, dependent, or beneficiary of any such Employee or Former Employee, including, but not limited to, cash or deferred arrangement plans, profit sharing plans, post-employment programs, pension plans, thrift plans, supplemental pension plans, welfare plans, stock options, stock purchase plans, stock appreciation rights, restricted stock, restricted stock units, performance stock units, other equity-based compensation and contracts, agreements, policies, practices, programs, plans, trusts, commitments and arrangements providing for terms of employment, fringe benefits, severance benefits, retention, change in control protections or benefits, travel and accident, life, accidental death and dismemberment, disability and accident insurance, tuition reimbursement, adoption assistance, travel reimbursement, vacation, paid time off, sick, personal or bereavement days, leaves of absences and holidays; provided, however, that the term Benefit Plan does not include any government-sponsored benefits, such as workers compensation, unemployment or any similar plans, programs, policies or individual agreements.
Canadian Defined Benefit Plans shall mean, collectively, all Benefit Plans that provide for defined benefit retirement benefits to Employees and Former Employees primarily located in Canada, including the defined benefit portion of any hybrid plan or plan design.
CIC Date shall have the meaning set forth in the Recitals.
Code shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.
Commissions shall have the meaning set forth in Section 4.04(a)(ii).
Continuation Period shall have the meaning set forth in Section 2.02.
Distribution shall have the meaning set forth in the Recitals.
2
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Distribution Date shall mean the date of the consummation of the Distribution, which shall be determined by the Kellanova Board in its sole and absolute discretion.
Earned Kellanova PSU shall have the meaning set forth in Section 4.02(f)(i).
Earned WKKC PSU shall have the meaning set forth in Section 4.02(f)(ii).
Effective Time shall mean 12:01 a.m., New York City time, on the Distribution Date.
Employee shall mean each person who is an employee of Kellanova or any of its direct or indirect subsidiaries as of immediately prior to the Effective Time.
Employment Tax shall mean all fees, Taxes, social insurance payments or similar contributions to a fund of a Governmental Authority with respect to wages or other compensation of an employee or other service provider.
ERISA shall mean the U.S. Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.
Excluded Benefits shall have the meaning set forth in Section 2.02.
Former Employee shall mean each person who was employed by Kellanova or any of its direct or indirect subsidiaries at any time before the Effective Time, but who is no longer so employed as of immediately prior to the Effective Time. For the avoidance of doubt, any person whose employment with Kellanova or any of its direct or indirect subsidiaries was terminated prior to the Effective Time but is still receiving severance payments or benefits will still be deemed a Former Employee under this Agreement.
Former Grain Millers Employee shall mean each individual listed on Schedule A hereto, which shall include any Former Employee who is or has been a member of the Bakery, Confectionery, Tobacco Workers and Grain Millers Union Local Nos.3G, 50G, 252G, 372G and 401G with respect to such former employment with the Kellanova Group.
Group shall mean either the WKKC Group or the Kellanova Group, as the context requires.
Individual Agreement shall mean any individual (a) employment contract or offer letter or demotion letter or related arrangement, (b) retention, severance or change in control agreement, (c) expatriate (including any international assignee) contract or agreement (including agreements and obligations regarding repatriation, relocation, equalization of Taxes and living standards in the host country), or (d) other agreement, including, but not limited to, any arbitration agreement or agreement containing restrictive covenants (including confidentiality, non-competition and non-solicitation provisions), in each case, between a member of the Kellanova Group and a WKKC Group Employee, as in effect immediately prior to the Effective Time. For the avoidance of doubt, Individual Agreement shall not include any Labor Agreement.
Internal Reorganization shall have the meaning set forth in the Recitals.
3
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Kellanova shall have the meaning set forth in the Preamble.
Kellanova 401(k) Plan shall mean the Kellogg Company Savings and Investment Plan.
Kellanova AIP shall mean the Kellogg Company Annual Incentive Plan, as may be in effect for each plan year.
Kellanova Award shall mean each Kellanova Option Award, Kellanova RSU Award, Kellanova Retention RSU Award, Kellanova Special RSU Award and Kellanova PSU Award, collectively.
Kellanova Benefit Plan shall mean any Benefit Plan established, sponsored or maintained by Kellanova or any of its Subsidiaries immediately prior to the Effective Time, but excluding any WKKC Benefit Plan.
Kellanova Board shall have the meaning set forth in the Recitals.
Kellanova Canada SERP shall mean the Savings and Investment Plan for Employees of Kellogg Canada Inc. and the The Kellogg Canada Inc. Notional Supplemental Retirement Income Plan.
Kellanova Cash Incentive Plan shall mean, collectively, the Kellanova AIP and the Kellanova Sales Incentive Plans.
Kellanova Compensation Committee shall mean the Compensation and Talent Management Committee of the Kellanova Board.
Kellanova Deferred Compensation Plans shall mean, collectively, the Kellanova SERP, the Kellanova Canada SERP and the Kellanova Non-Employee Directors DCP.
Kellanova Defined Benefit Plans shall mean the Kellogg Company Pension Plan and any qualified plan into which the assets and liabilities for Employees and Former Employees at the Muncy, Pennsylvania location have been transferred.
Kellanova ESPP shall mean the Amended and Restated Kellogg Company 2002 Employee Stock Purchase Plan, effective July 1, 2020.
Kellanova Group shall mean Kellanova and its subsidiaries, excluding the WKKC Group.
Kellanova Group Employee shall mean each Employee and Former Employee who, in each case, is not a WKKC Group Employee.
Kellanova Liabilities shall have the meaning set forth in Section 2.01(b).
Kellanova LTIP shall mean the Kellogg Company 2013 Long-Term Incentive Plan, Kellogg Company 2017 Long-Term Incentive Plan and the Kellogg Company 2022 Long-Term Incentive Plan, collectively.
4
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Kellanova Non-Employee Director means an individual who serves or served as a non-employee director of the Kellanova Board.
Kellanova Non-Employee Directors DCP shall mean the Kellogg Company Deferred Compensation Plan for Non-Employee Directors, as amended and restated.
Kellanova Nonqualified Defined Benefit Plans shall mean the Kellogg Company Executive Excess Plan for accruals after December 31, 2004, and the Kellogg Company Excess Benefit Retirement Plan for accruals on or before December 31, 2004, collectively.
Kellanova Option Award shall mean an award of an option (excluding, for the avoidance of doubt, any right to purchase Kellanova Shares pursuant to the Kellanova ESPP) to purchase a Kellanova Share at a per-share exercise price designated in the applicable award agreement, terms and conditions document, compensation statement or other similar document, as applicable.
Kellanova PSU Award shall mean an award of performance-based restricted stock units granted pursuant to a Kellanova LTIP that is outstanding as of immediately prior to the Effective Time (including, for the avoidance of doubt, any outstanding Executive Performance Plan awards granted under a Kellanova LTIP).
Kellanova Ratio shall mean _______.
Kellanova RSU Award shall mean an award of time-based restricted stock units granted pursuant to a Kellanova LTIP (including each Kellanova Special RSU Award, but excluding each Retention RSU Award), in each case, that is outstanding as of immediately prior to the Effective Time.
Kellanova Sales Incentive Plans shall mean, collectively, all commission and other similar sale-based bonus plans and programs maintained by Kellanova.
Kellanova SERP shall mean the Kellanova Supplemental Savings and Investment (Restoration Plan) as amended and restated effective January 1, 2005, for pre 2005 accruals and the Kellanova Supplemental Savings and Investment (Restoration Plan) as amended and restated effective January 1, 2020, for post-2004 accruals.
Kellanova Shares shall mean shares of common stock of Kellanova.
Kellanova Special RSU Award shall mean a one-time award of time-based restricted stock units granted outside of the ordinary course pursuant to a Kellanova LTIP that is not a Kellanova Retention RSU Award and is outstanding as of immediately prior to the Effective Time.
Kellanova Welfare Plans shall mean any Kellanova Benefit Plan which is a Welfare Plan.
Labor Agreement shall have the meaning set forth in Section 2.01.
Liabilities shall have the meaning set forth in the Separation Agreement.
5
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Liability Retention Date shall have the meaning set forth in Article VI(a).
Measurement Date shall have the meaning set forth in Section 2.02.
Parties shall mean the parties to this Agreement.
Post-Separation Employer shall have the meaning set forth in Section 4.02(a).
Post-Separation Kellanova Awards shall mean the Kellanova Option Awards, Kellanova RSU Awards, Kellanova Special RSU Awards and Kellanova PSU Awards, collectively, that are adjusted and continued by Kellanova in accordance with Section 4.02.
Post-Separation Kellanova Stock Value shall mean _______.
Pre-2023 PSU shall have the meaning set forth in Section 4.02(e).
Pre-2023 RSU shall have the meaning set forth in Section 4.02(b).
Pre-Distribution Earned Amounts shall have the meaning set forth in Section 4.04(a)(i).
Pre-Separation Kellanova Stock Value shall mean _______.
Remaining 2023 Performance Period shall have the meaning set forth in Section 4.04(a)(i).
Requesting Party shall have the meaning set forth in Section 9.05.
Restricted Employee shall have the meaning set forth in Section 3.05(a).
Retention Agreement shall mean a Retention Agreement and General Release, by and between Kellanova or its affiliates and an Employee or a Former Employee, that were granted in connection with the spin-off.
Retention Bonus shall mean the cash portion(s) of any retention award granted pursuant to a Retention Agreement.
Retention RSU Award shall mean an award of time-based restricted stock units granted in connection with the spin-off pursuant to a Retention Agreement.
Separation Agreement shall have the meaning set forth in the Recitals.
Transfer Rejection Employee shall mean each Employee or Former Employee who, despite the Kellanova Group and the WKKC Group allocating such individual to the WKKC Group and attempting to transfer such individual from the Kellanova Group to the WKKC Group in accordance with Section 3.01, does not transfer to WKKC Group solely due to such individual rejecting a transfer to the WKKC Group for any reason. For the avoidance of doubt, each Transfer Rejection Employee is deemed a WKKC Group Employee for purposes of this Agreement.
6
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Welfare Plan shall mean any welfare plan (as defined in Section 3(1) of ERISA) or a cafeteria plan under Section 125 of the Code, and any benefits offered thereunder, and any other plan offering health benefits (including medical, prescription drug, dental, vision, mental health, substance abuse and retiree health), disability benefits, or life, accidental death and dismemberment, and business travel insurance, pre-Tax premium conversion benefits, dependent care assistance programs, employee assistance programs, contribution funding toward a health savings account, or flexible spending accounts.
WKKC shall have the meaning set forth in the Preamble.
WKKC 2023 Annual Bonuses shall have the meaning set forth in Section 4.04(a)(i).
WKKC AIP shall mean the annual incentive plan to be adopted by WKKC in accordance with Section 2.03(a) and Article IV.
WKKC Awards shall mean WKKC RSU Awards and WKKC PSU Awards, collectively, that are assumed by WKKC in accordance with Section 4.02.
WKKC Benefit Plan shall mean any Benefit Plan established, sponsored, maintained or contributed to by a member of the WKKC Group as of or after the Effective Time, including any Benefit Plans assumed, retained or adopted by WKKC pursuant to Section 2.03(a) and Section 2.03(b).
WKKC Board shall mean the board of directors of WKKC.
WKKC Canada Defined Contribution Plans shall have the meaning set forth in Section 5.03(a).
WKKC Canada SERP shall mean the WKKC Salaried Plan Notional DC SERP for Canada, to be adopted by WKKC in accordance with Section 2.03(a) and Article VI.
WKKC Cash Incentive Plans shall mean, collectively, the WKKC AIP and the WKKC Sales Incentive Plans.
WKKC Compensation Committee shall mean the Compensation and Talent Management Committee or a similar committee of the WKKC Board.
WKKC Deferred Compensation Plans shall mean, collectively, the WKKC SERP and the WKKC Canada SERP, to be adopted by WKKC as of the Effective Time pursuant to Section 2.03(a) and Article VI.
WKKC Delayed Transfer Employee shall have the meaning set forth in Section 3.03.
WKKC ESPP shall mean an employee stock purchase plan that shall be adopted by WKKC in accordance with Section 4.03.
WKKC ESPP Participant shall have the meaning set forth in Section 4.03(a).
7
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
WKKC Group shall mean WKKC and its direct and indirect subsidiaries.
WKKC Group Employee shall mean each (i) Employee who has been, or Former Employee who was, allocated to the WKKC Group on or before the Effective Time (including each WKKC Delayed Transfer Employee, Transfer Rejection Employee, Former Grain Millers Employee and Employee based in Canada who is allocated to the WKKC Group by the Effective Time), or (ii) Employee or Former Employee who is set forth on Schedule B hereto. Kellanova Group may update Schedule B from time to time (including after the Effective Time) to include Employees and/or Former Employees whom Kellanova and WKKC mutually believe in good faith would have been allocated to WKKC Group based upon such Employees or Former Employees, as applicable, services before the Effective Time, including any such individual who was an hourly or salaried intact Employee, or who worked at the ready-to-eat cereal plants, and taking into account the handling of Employees and Former Employees under this Agreement.
WKKC Group Liabilities shall have the meaning set forth in Section 2.01(a).
WKKC LTIP shall mean the WKKC 2023 Long-Term Incentive Plan, as established by WKKC as of the Effective Time pursuant to Section 2.03(a) and Section 4.01.
WKKC Mirrored Welfare Plans shall have the meaning set forth in Section 7.01(a).
WKKC Mirrored Welfare Plans Effective Date shall have the meaning set forth in Section 7.01(a).
WKKC PSU Award shall mean an award of performance-based restricted stock units, assumed by WKKC under the WKKC LTIP in accordance with Section 4.02.
WKKC PTO Policies shall mean the policies established by WKKC that provides paid time off and vacation benefits.
WKKC Ratio shall mean _______.
WKKC RSU Award shall mean an award of time-based restricted stock units assumed by WKKC under the WKKC LTIP in accordance with Section 4.02.
WKKC Sales Incentive Plans shall mean, collectively, the commission or other similar sale-based bonus plans or programs established by WKKC in accordance with Section 2.03(a) and Article IX.
WKKC Savings & Investment Plan shall have the meaning set forth in Section 5.03(a).
WKKC SERP shall mean the WK Kellogg Co Supplemental Savings and Investment Plan (Restoration Plan), to be established by WKKC in accordance with Section 2.03(a) and Article VI.
WKKC Severance Plan shall mean the plan established by WKKC that provides severance benefits.
8
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
WKKC Shares shall mean shares of common stock of WKKC.
WKKC Stock Value shall mean _______.
ARTICLE II
GENERAL PRINCIPLES FOR ALLOCATION OF LIABILITIES
Section 2.01 General Principles. All provisions herein shall be subject to the requirements of all applicable Laws and any collective bargaining, works council or similar agreements or arrangements with any labor union, works council or other labor representative to which Kellanova or WKKC is party or otherwise bound (each, a Labor Agreement). Notwithstanding anything in this Agreement to the contrary, the terms and conditions of employment for any Employees or Former Employees covered by a Labor Agreement shall be governed by the applicable Labor Agreement until the expiration, modification or termination of such Labor Agreement in accordance with its terms or applicable Law. To the extent permitted by applicable law and as set forth in Article VIII, the provisions of this Agreement shall apply in respect of all jurisdictions.
(a) Acceptance and Assumption of WKKC Liabilities. Except as otherwise expressly provided by this Agreement, subject to the occurrence of the Effective Time, WKKC shall, or shall cause another member of the WKKC Group to, accept, assume and agree faithfully to perform, discharge and fulfill, and indemnify the Kellanova Group against, all WKKC Group Liabilities. For purposes of this Agreement, WKKC Group Liabilities means, collectively, except as otherwise expressly provided by this Agreement, all Liabilities (regardless of when any such Liability arose, accrued or is asserted) related to (I) any WKKC Group Employee, (II) any WKKC Benefit Plan, and (III) any Liability specifically transferred to or assumed by the WKKC Group under this Agreement, which includes, but is not limited to, the following Liabilities:
(i) any and all wages, salaries, incentive compensation, commissions, bonuses (including Retention Bonuses) and any other employee compensation or benefits payable to or on behalf of any WKKC Group Employees, without regard to when such wages, salaries, incentive compensation, equity compensation, commissions, bonuses (including Retention Bonuses) or other employee compensation or benefits are or may have been awarded or earned;
(ii) any and all Liabilities whatsoever with respect to claims under a WKKC Benefit Plan, including any Liabilities related to (A) Benefit Plans relating to WKKC Group Employees located in Mexico and (B) WKKC Awards assumed by WKKC pursuant to Section 4.02;
(iii) any and all Liabilities arising out of, relating to or resulting from the employment, engagement or service, or termination of employment, engagement or service of all WKKC Group Employees, and applicants, candidates or current or former individuals in the position of employees, directors, officers, agents, independent contractors, consultants or other service providers of any member of the WKKC Group (including all such Liabilities relating to claims made by such individuals), excluding, for the avoidance of doubt, all Kellanova Group Employees;
9
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(iv) any and all Liabilities arising out of or relating to the provision of post-retirement or post-termination welfare benefits for (A) WKKC Group Employees covered by a Labor Agreement in the United States; (B) WKKC Group Employees who are salaried or non-union hourly employees located in the United States; (C) WKKC Group Employees located in Belleville, Canada; and (D) WKKC Group Employees who are a salaried or non-union hourly employees located in Canada; and
(v) any and all Liabilities assumed or retained by any member of the WKKC Group pursuant to the Separation Agreement.
(b) Acceptance and Assumption of Kellanova Liabilities. Except as otherwise expressly provided by this Agreement, subject to the occurrence of the Effective Time, Kellanova shall, or shall cause a member of the Kellanova Group to, accept, assume and agree faithfully to perform, discharge and fulfill, and indemnify the WKKC Group against, all of the Kellanova Liabilities. For purposes of this Agreement, Kellanova Liabilities means, collectively, except as otherwise expressly provided by this Agreement, all Liabilities (regardless of when any such Liability arose, accrued or is asserted) relating to (I) any Kellanova Group Employee, (II) any Kellanova Benefit Plan, and (III) any liability specifically transferred to or assumed by the Kellanova Group under this Agreement, which includes, but is not limited to:
(i) any and all wages, salaries, incentive compensation, commissions, bonuses (including Retention Bonuses) and any other employee compensation or benefits payable to or on behalf of any Kellanova Group Employees, without regard to when such wages, salaries, incentive compensation, equity compensation, commissions, bonuses (including Retention Bonuses) or other employee compensation or benefits are or may have been awarded or earned;
(ii) any and all Liabilities whatsoever with respect to claims under a Kellanova Benefit Plan, including with respect to self-funded health and welfare claims of WKKC Group Employees incurred prior to the WKKC Mirrored Welfare Plans Effective Date, as applicable, subject to the terms of the Separation Agreement;
(iii) any and all Liabilities arising out of or relating to the provision of post-retirement or post-termination welfare benefits for all Kellanova Group Employees;
(iv) any and all Liabilities whatsoever with respect to Canadian Defined Benefit Plans;
(v) any and all Liabilities arising out of, relating to or resulting from the employment, engagement or service, or termination of employment, engagement or service of all Kellanova Group Employees, and applicants, candidates or current or former employees, directors, officers, agents, independent contractors, consultants or other service providers of any member of the Kellanova Group (including all such Liabilities relating to claims made by such individuals), excluding, for the avoidance of doubt, any WKKC Group Employees; and
(vi) any and all Liabilities expressly assumed or retained by any member of the Kellanova Group pursuant to the Separation Agreement.
10
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(c) Ordering of Liabilities. To the extent there is any conflict in the terms of this Agreement and the Separation Agreement, the following terms shall control in the following order: first, any terms provided in the Separation Agreement that expressly assign Liabilities, then, any terms provided in this Agreement that expressly assign Liabilities, and then, any general provision set forth in this Agreement or the Separation Agreement.
(d) Unaddressed Assets and Liabilities. Nothing in this Agreement shall require a transfer of Assets or Liabilities with respect to a Benefit Plan or otherwise with respect to any Kellanova Group Employees or the WKKC Group Employees, in each case, except as specifically set forth herein or as otherwise required by applicable Law. To the extent that this Agreement does not address particular Assets or Liabilities under any Benefit Plan or with respect to any Kellanova Group Employees or the WKKC Group Employees, and Kellanova later determines that they should be allocated in connection with the Distribution, Kellanova shall decide in good faith on the allocation, taking into account the handling of comparable Assets and Liabilities under this Agreement.
Section 2.02 Comparable Benefit Plans. For at least 12 months following the Effective Time (or, if sooner, when employment terminates) (the Continuation Period), WKKC shall, unless agreed otherwise with the WKKC Group Employee, provide, or cause to be provided, to each WKKC Group Employee who is not covered by a Labor Agreement and who is employed during the Continuation Period by the WKKC Group in the same role that such WKKC Group Employee was in immediately prior to the Effective Time: (i) base salary or wage rate that is no less than the base salary or wage rate provided to such WKKC Group Employee immediately prior to the Effective Time or, if applicable, that goes into effect as of the Effective Time (as applicable, the Measurement Date); (ii) target annual or short-term cash incentive opportunities (excluding any retention awards or arrangements) that are comparable to those provided to such WKKC Group Employee as of the Measurement Date; (iii) employee benefits (excluding equity and equity-based compensation, long-term incentives, retention awards, severance (which is addressed below), defined benefit pension benefits and retiree medical (collectively, the Excluded Benefits)) that are comparable in the aggregate to the employee benefits (other than the Excluded Benefits) provided to such WKKC Group Employee immediately prior to the Effective Time (taking into account any compensation-related changes in respect of such WKKC Group Employee that go into effect as of the Effective Time); (iv) long-term equity-based award opportunities (excluding any retention awards or arrangements) that are no less favorable than those provided to such WKKC Group Employee as of the Measurement Date; and (v) to the extent that any such WKKC Group Employee is involuntarily terminated during the Continuation Period, severance benefits that are comparable to those that would have been provided to such WKKC Group Employee had such termination occurred immediately prior to the Effective Time (taking into account any compensation-related changes in respect of such WKKC Group Employee that go into effect as of the Effective Time). For the avoidance of doubt, the foregoing obligations shall not apply to the extent that any WKKC Group Employee is no longer in the same role during the Continuation Period and nothing herein shall require WKKC Group to continue to employee any WKKC Group Employee in the same role.
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Section 2.03 Adoption and Transfer and Assumption of Benefit Plans.
(a) Adoption by WKKC of Benefit Plans. As of no later than the Effective Time (or such other time as is set forth herein), WKKC shall, or shall cause the members of the WKKC Group to, adopt Benefit Plans (and related trusts, to the extent applicable), as contemplated and in accordance with the terms of this Agreement, which Benefit Plans are generally intended to contain terms substantially similar to those of the corresponding Kellanova Benefit Plans as in effect immediately prior to the Effective Time.
(b) Retention by WKKC of WKKC Benefit Plans. From and after the Effective Time, WKKC shall assume and/or retain all the WKKC Benefits Plans, including all related Liabilities and Assets, and any related trusts and other funding vehicles and insurance contracts of any of such plans other than as specifically provided in this Agreement; provided, however, that WKKC may make such changes, modifications or amendments to the WKKC Benefit Plans as may be required by applicable Law or to reflect the Separation Agreement. The material WKKC Benefit Plans are set forth on Schedule 2.03(b).
(c) Plans Not Required to Be Adopted. With respect to any Benefit Plan not specifically addressed in this Agreement, including with respect to any WKKC Group Employees outside of the U.S., Kellanova shall decide in good faith on the treatment of such plan taking into account the handling of any comparable plan under this Agreement and, WKKC shall remain obligated to pay or provide any previously accrued or incurred benefits to the WKKC Group Employees in respect of any such plan consistent with Section 2.01(a) of this Agreement.
(d) Information and Operation. Each Party shall use its commercially reasonable efforts to provide the other Party with information describing each Benefit Plan election made by a WKKC Group Employee or Kellanova Group Employee, as applicable, that may have application to such Partys Benefit Plans from and after the Effective Time, and each Party shall use its commercially reasonable efforts to administer its Benefit Plans using those elections, including any beneficiary designations. Each Party shall, upon reasonable request, use its commercially reasonable efforts to provide the other Party and the other Partys respective Affiliates, agents, and vendors all information reasonably necessary to the other Partys operation or administration of its Benefit Plans.
(e) No Duplication or Acceleration of Benefits. Notwithstanding anything to the contrary in this Agreement, the Separation Agreement or any Ancillary Agreement, no participant in any Benefit Plan shall receive service credit or benefits to the extent that receipt of such service credit or benefits would result in duplication of benefits provided to such participant by the corresponding Benefit Plan or any other plan, program or arrangement sponsored or maintained by a member of the Group that sponsors the corresponding Benefit Plan. Furthermore, unless expressly provided for in this Agreement, the Separation Agreement or in any Ancillary Agreement or required by applicable Law, no provision in this Agreement shall be construed to create any right to accelerate vesting distributions or entitlements under any Benefit Plan sponsored or maintained by a member of the Kellanova Group or member of the WKKC Group on the part of any WKKC Group Employee or Kellanova Group Employee, as applicable.
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(f) Beneficiaries. References to WKKC Group Employees and Kellanova Group Employees shall be deemed to refer to their beneficiaries, dependents, survivors and alternate payees, as applicable.
ARTICLE III
ASSIGNMENT OF EMPLOYEES
Section 3.01 Active Employees.
(a) Assignment and Transfer of Employees. Effective no later than the Effective Time, and except as otherwise agreed by the Parties, (i) the applicable member of the Kellanova Group shall have taken such actions as are necessary to ensure that each individual who is intended to be a WKKC Group Employee as of immediately after the Effective Time (including any such individual who is not actively working as of the Effective Time as a result of an illness, injury or leave of absence approved by the Kellanova Human Resources department or otherwise taken in accordance with applicable Law) is employed by a member of the WKKC Group as of immediately after the Effective Time and (ii) the applicable member of the Kellanova Group shall have taken such actions as are necessary to ensure that each individual who is intended to be a Kellanova Group Employee as of immediately after the Effective Time (including any such individual who is not actively working as of the Effective Time as a result of an illness, injury or leave of absence approved by the Kellanova Human Resources department or otherwise taken in accordance with applicable Law) is employed by a member of the Kellanova Group as of immediately after the Effective Time. Each of the Parties agrees to execute, and to seek to have the applicable Employees execute, such documentation, if any, as may be necessary to reflect such assignment and/or transfer.
(b) Employees with Work Visas or Permits; License to Do Business. Notwithstanding anything to the contrary in this Section 3.01, any WKKC Group Employee who, immediately prior to the Effective Time, is employed pursuant to a work or training visa or permit that authorizes employment only by a member of the Kellanova Group shall remain employed by such member of the Kellanova Group following the Effective Time until the visa or permit is amended or a new visa or permit is granted to authorize employment by a member of the WKKC Group. Any such WKKC Group Employee shall be treated as a WKKC Delayed Transfer Employee for purposes of this Agreement. As of the Effective Time, the applicable member of the Kellanova Group shall cease to serve and the WKKC Group shall commence to serve as the sponsoring and petitioning employer for U.S. immigration Law purposes with respect to such WKKC Delayed Transfer Employees. The WKKC Group shall assume all immigration-related obligations and Liabilities that have arisen or will hereafter arise in connection with the submission of petitions, applications or other filings to certain U.S. government authorities within the U.S. Department of Homeland Security (U.S. Citizenship and Immigration Services, Immigration and Customs Enforcement, and Customs and Border Protection), the U.S. Department of Labor or the U.S. Department of State (including any U.S. embassy or consular post) requesting the grant of employment-based nonimmigrant and immigrant visa benefits on behalf of such WKKC Delayed Transfer Employees. The Parties intend that the WKKC Group (by agreeing to employ the WKKC Group Employees and agreeing, as a sponsoring employer, to assume the immigration-related obligations and Liabilities described above) shall be considered the successor in interest to the applicable member of the Kellanova Group for U.S. immigration Law.
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(c) At-Will Status. Nothing in this Agreement shall create any obligation on the part of any member of the Kellanova Group or any member of the WKKC Group to (i) continue the employment of any Kellanova Group Employee or WKKC Group Employee, as applicable, for any period or permit the return from a leave of absence for any period after the date of this Agreement (except as required by applicable Law) or (ii) change the employment status of any Employee from at-will, to the extent that such Kellanova Group Employee or WKKC Group Employee, as applicable, is an at-will employee under applicable Law. Except as provided in this Agreement, this Agreement shall not limit the ability of the Kellanova Group or the WKKC Group to change the position, compensation or benefits of any Kellanova Group Employee or WKKC Group Employee, as applicable, for performance-related, business or any other reasons.
(d) Severance. The Parties acknowledge and agree that the Internal Reorganization, the Distribution and the assignment, transfer or continuation of the employment of any Kellanova Group Employees or WKKC Group Employees, as applicable, as contemplated by this Section 3.01 shall not be deemed an involuntary termination of employment or other triggering event pursuant to any Benefit Plan, practice or policy of the Kellanova Group or the WKKC Group entitling any Kellanova Group Employee or WKKC Group Employee, as applicable, to severance payments or benefits, except as otherwise required by applicable Laws.
(e) Not a Change in Control. The Parties acknowledge and agree that neither the consummation of the Internal Reorganization, the Distribution nor any transaction contemplated by this Agreement, the Separation Agreement or any other Ancillary Agreement shall be deemed a change in control, change of control or term of similar import for purposes of any Benefit Plan sponsored or maintained by any member of the Kellanova Group or member of the WKKC Group and except as provided in this Agreement or as otherwise required by applicable Law or Individual Agreement, no provision of this Agreement shall be construed to accelerate any vesting or create a right or entitlement to any compensation or benefits on the part of any Kellanova Group Employee or WKKC Group Employee.
(f) Payroll and Related Taxes. To the extent applicable, the Parties agree to follow the alternate procedure for U.S. Employment Tax withholding as provided in Section 5 of Rev. Proc. 2004-53, I.R.B. 2004-35. Accordingly, except as otherwise provided, Kellanova shall not have any Employment Tax reporting responsibilities, and WKKC shall have full Employment Tax reporting responsibilities for WKKC Group Employees in the United States on and after the Effective Time. For WKKC Group Employees outside of the United States, Employment Tax withholding and reporting shall occur as required under applicable Law.
Section 3.02 Individual Agreements. Kellanova hereby assigns, or causes the applicable member of the Kellanova Group to assign, to WKKC or the applicable member of the WKKC Group (as designated by WKKC), each Individual Agreement that is a Retention Agreement, employment contract, offer letter or demotion letter (or related arrangement) or standalone restrictive covenant agreement (collectively, the Automatically Assigned Individual Agreement), which assignment shall be effective as of the Effective Time; provided, however, that to the extent that assignment of any such Individual Agreement is not permitted by the terms of such agreement or by applicable Law, effective as of the Effective Time, each member of the WKKC Group shall be considered to be a successor to each member of the Kellanova Group for purposes of, and a third-party beneficiary with respect to, such agreement, such that each member
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of the WKKC Group shall enjoy all of the rights and benefits under such agreement (including rights and benefits as a third-party beneficiary), with respect to the business operations of the WKKC Group; provided, further, that, except as provided otherwise in Section 3.05, Kellanova hereby waives, and in no event shall Kellanova be permitted to enforce, any Individual Agreement (including any agreement containing non-competition, non-solicitation, non-interference, non-disclosure or non-disparagement covenants) against a WKKC Group Employee for action taken in such individuals capacity as a WKKC Group Employee or relating to work for WKKC as a WKKC Group Employee. The Kellanova Group and the WKKC Group shall mutually agree in good faith upon the treatment of any other Individual Agreements that are not Automatically Assigned Individual Agreements. Without limiting the foregoing, Kellanova and WKKC shall work together in good faith to cause WKKC Group to enter into new offer letters (or, for WKKC Group Employees located in Belleville, Canada, transfer letters) with WKKC Group Employees that are based in Canada no later than the Effective Time.
Section 3.03 WKKC Delayed Transfer Employees. In the case of a WKKC Group Employee who remains employed by a member of the Kellanova Group as of immediately prior to the Effective Time because his or her employment cannot commence with, or be transferred to, the WKKC Group or whose transfer of employment to the WKKC Group is otherwise delayed (each, a WKKC Delayed Transfer Employee), the Parties shall cooperate in good faith to cause such WKKC Delayed Transfer Employee to provide services to the WKKC Group while remaining employed by the Kellanova Group until such time as such WKKC Delayed Transfer Employees employment can be transferred to the WKKC Group or otherwise terminates with the Kellanova Group. In Kellanovas discretion, Kellanova may elect to treat any WKKC Group Employee who is providing services pursuant to any applicable transition services agreement as a WKKC Delayed Transfer Employee should the circumstances regarding the provision of that WKKC Group Employees services and the termination and/or transition thereof so require. The Parties shall cooperate in good faith to cause each WKKC Delayed Transfer Employee to commence employment with a member of the WKKC Group as soon as reasonably practicable following the Effective Time as permitted by applicable Law in such a manner that, to the maximum extent practical, does not trigger the right of such WKKC Delayed Transfer Employee to redundancy, severance, termination or similar pay and is otherwise consistent with the terms and conditions of this Agreement and applicable Law or Labor Agreement. In respect of the WKKC Delayed Transfer Employees, unless otherwise specified, references to the Distribution Date, Effective Time or CIC Date shall be treated as references to the first date and time at which the applicable WKKC Delayed Transfer Employees employment commences with or transfers to a member of the WKKC Group. Notwithstanding the delayed transfer of a WKKC Delayed Transfer Employee, any Liability related to a WKKC Delayed Transfer Employee (including with respect to compensation and benefits paid by Kellanova) shall be considered a WKKC Liability; provided that, during such period, Kellanova will make such WKKC Delayed Transferred Employee available to provide services to the WKKC Group. Notwithstanding the foregoing, if any WKKC Delayed Transfer Employee provides services to the WKKC Group through a transition services agreement for which Kellanova Group is paid, compensation and benefit Liabilities accrued during such period will be a Kellanova Liability. For the avoidance of doubt, the provisions of this Section 3.03 shall not apply to any Transfer Rejection Employees, who shall not be considered WKKC Delayed Transfer Employees for purposes of this Agreement.
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Section 3.04 Consultation with Labor Representatives; Labor Agreements. To the extent applicable, the Parties shall cooperate to notify, inform and/or consult with any labor union, works council or other labor representative regarding the Internal Reorganization and Distributions to the extent required by applicable Law or Labor Agreement. Prior to the Effective Time, (a) WKKC shall have taken, or caused another member of the WKKC Group to take, all actions that are necessary (if any) for WKKC or another member of the WKKC Group to (i) assume any Labor Agreements in effect with respect to WKKC Group Employees (excluding obligations thereunder with respect to any Kellanova Group Employees, to the extent applicable) and (ii) unless otherwise provided in this Agreement, assume and honor any obligations of the Kellanova Group under any Labor Agreements as such obligations relate to WKKC Group Employees, and (b) Kellanova shall have taken, or caused another member of the Kellanova Group to take, all actions that are necessary (if any) for Kellanova or another member of the Kellanova Group to (i) assume any Labor Agreements in effect with respect to Kellanova Group Employees (excluding obligations thereunder with respect to any WKKC Group Employees) and (ii) assume and honor any obligations of the WKKC Group under any Labor Agreements as such obligations relate to Kellanova Group Employees.
Section 3.05 No Hire and Non-Solicitation.
(a) Each Party agrees that it shall not, and shall cause each member in its Group not, to (i) for a period of twelve (12) months from the Effective Time, hire any individual who is a salaried employee of a member of the other Group, and (ii) for a period of twenty-four (24) months from the Effective Time, solicit for employment any individual who is an employee (whether salaried, hourly or otherwise) of a member of the other Group (each of the foregoing restricted employees described in clauses (i) and (ii) of this sentence, a Restricted Employee); provided that the foregoing restrictions shall not apply to: (1) any Restricted Employee whose prospective employment is agreed to in writing by both the Chief Human Resources Officer from WKKC Group and Kellanova Group; (2) the solicitation or hire of any Restricted Employee who applies and is hired through a general solicitation from WKKC Group or Kellanova Group, as applicable, that is not directly intended for such Restricted Employee, other than any hire of a salaried employee for a period of twelve (12) months from the Effective Time; or (3) any Restricted Employee set forth on Schedule 3.05(a).
(b) Remedies; Enforcement. Each Party acknowledges and agrees that (i) injury to the employing Party from any breach by the other Party of the obligations set forth in this Section 3.05 would be irreparable and impossible to measure and (ii) the remedies at Law for any breach or threatened breach of this Section 3.05, including monetary damages, would therefore be inadequate compensation for any loss and the employing Party shall have the right to specific performance and injunctive or other equitable relief in accordance with this Section 3.05, in addition to any and all other rights and remedies at Law or in equity, and all such rights and remedies shall be cumulative. Each Party understands and acknowledges that the restrictive covenants and other agreements contained in this Section 3.05 are an essential part of this Agreement and the transactions contemplated hereby. It is the intent of the Parties that the provisions of this Section 3.05 shall be enforced to the fullest extent permissible under applicable Law applied in each jurisdiction in which enforcement is sought. If any particular provision or portion of this Section 3.05 shall be adjudicated to be invalid or unenforceable, such provision or portion thereof shall be deemed amended to the minimum extent necessary to render such provision or portion valid and enforceable, such amendment to apply only with respect to the operation of such provision or portion thereof in the particular jurisdiction in which such adjudication is made.
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ARTICLE IV
EQUITY, INCENTIVE AND EXECUTIVE COMPENSATION
Section 4.01 Generally. Each Kellanova Award that is outstanding as of immediately prior to the Effective Time shall be adjusted as described below; provided, however, effective immediately prior to the Effective Time, the Kellanova Compensation Committee may provide for different adjustments with respect to some or all Kellanova Awards to the extent that the Kellanova Compensation Committee deems such adjustments necessary and appropriate. Any adjustments made by the Kellanova Compensation Committee pursuant to the foregoing sentence shall be deemed incorporated by reference herein as if fully set forth below and shall be binding on the Parties and their respective Affiliates. Prior to the Effective Time, the WKKC LTIP shall be established, with such terms as are necessary to permit the implementation of the provisions of Section 4.02 and otherwise are substantially similar to those in effect, as of immediately prior to the Effective Time, under the corresponding Kellanova LTIP, other than any changes that are necessary and appropriate to reflect the Internal Reorganization and the Distribution and such other changes, modifications or amendments to the WKKC LTIP as may be required by applicable Law.
Section 4.02 Equity Incentive Awards.
(a) Option Awards. Each Kellanova Option Award, whether vested or unvested, that is outstanding as of immediately prior to the Effective Time shall remain at Kellanova on the same terms and conditions (including, with respect to each unvested Kellanova Option Award, the applicable vesting terms) after the Effective Time as were applicable to such Kellanova Option Award immediately prior to the Effective Time; provided, however, that, from and after the Effective Time, (I) each unvested Kellanova Option Award shall continue to vest based on the holders continued service with the Kellanova Group or WKKC Group (as applicable, the Post-Separation Employer) through the applicable vesting date(s), (II) each Kellanova Option Award held by a WKKC Group Employee shall expire upon the earlier to occur of (x) the fifth (5th) anniversary of the date on which the Effective Time occurs and (y) the original expiration date of the Kellanova Option Award and (III):
(i) the number of Kellanova Shares underlying each Kellanova Option Award shall be equal to the product, rounded down to the nearest whole share, of (x) the number of Kellanova Shares underlying the Kellanova Option Award immediately prior to the Effective Time, multiplied by (y) the Kellanova Ratio; and
(ii) the per-share exercise price of each Kellanova Option Award shall be equal to the quotient, rounded up to the nearest cent, of (I) the per-share exercise price of the Kellanova Option Award immediately prior to the Effective Time, divided by (II) the Kellanova Ratio.
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Notwithstanding anything to the contrary in this Section 4.02(a), the exercise price, the number of Kellanova Shares underlying each Kellanova Option Award and the terms and conditions of exercise of such awards shall be determined in a manner consistent with the requirements of Section 409A of the Code.
(b) Pre-2023 RSU Awards. Each Kellanova RSU Award that was granted prior to June 21, 2022 and is outstanding as of immediately prior to the Effective Time (each, a Pre-2023 RSU) shall remain at Kellanova and on the same terms and conditions (including with respect to vesting and settlement) after the Effective Time as were applicable to such Pre-2023 RSU immediately prior to the Effective Time; provided, however, that, from and after the Effective Time, (I) the number of Kellanova Shares subject to such Pre-2023 RSU shall be equal to the product of (x) the number of Kellanova Shares subject to the Pre-2023 RSU immediately prior to the Effective Time, multiplied by (y) the Kellanova Ratio, and (II) each Pre-2023 RSU shall continue to vest based on the holders continued service with the applicable Post-Separation Employer through the applicable vesting date(s).
(c) 2023 RSU Awards. Each Kellanova RSU Award that was granted on or after June 21, 2022 and is outstanding as of immediately prior to the Effective Time (each, a 2023 RSU) shall be subject to the following treatment:
(i) Kellanova Group Employee. If the holder is a Kellanova Group Employee, such 2023 RSU shall remain at Kellanova on the same terms and conditions (including with respect to vesting and settlement) after the Effective Time as were applicable to such 2023 RSU immediately prior to the Effective Time; provided, however, that, from and after the Effective Time, the number of Kellanova Shares subject to such 2023 RSU shall be equal to the product of (x) the number of Kellanova Shares subject to the 2023 RSU immediately prior to the Effective Time, multiplied by (y) the Kellanova Ratio.
(ii) WKKC Group Employee. If the holder is a WKKC Group Employee, such 2023 RSU shall be converted, as of the Effective Time, into a WKKC RSU Award on the same terms and conditions (including with respect to vesting and settlement) after the Effective Time as were applicable to the corresponding 2023 RSU immediately prior to the Effective Time; provided, however, that (I) from and after the Effective Time, the number of WKKC Shares subject to such WKKC RSU Award shall be equal to the product of (A) the number of Kellanova Shares subject to the corresponding 2023 RSU immediately prior to the Effective Time, multiplied by (B) the WKKC Ratio, and (II) such WKKC RSU Award shall continue to vest based on the holders continued service with WKKC Group through the applicable vesting date(s).
(d) Other RSU Awards. Each Retention RSU Award shall be subject to the treatment specified in Schedule 4.02(d).
(e) Pre-2023 PSU Awards. Each Kellanova PSU Award that was granted prior to June 21, 2022 and is outstanding as of immediately prior to the Effective Time (each, a Pre-2023 PSU) shall (whether the holder is a Kellanova Group Employee or WKKC Group Employee), remain at Kellanova on the same terms and conditions (including with respect to time-based vesting conditions and settlement) after the Effective Time as were applicable to such Pre-2023 PSU immediately prior to the Effective Time; provided, however, that, from and after the Effective Time, (I) the number of Kellanova Shares subject to such Pre-2023 PSU shall be equal to the
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product of (x) the number of Kellanova Shares subject to the Pre-2023 PSU immediately prior to the Effective Time, multiplied by (y) the Kellanova Ratio, with the number of Kellanova Shares ultimately provided upon settlement (if any) based on the achievement of actual performance through the Effective Time, as determined by the Kellanova Compensation Committee in its sole discretion, (II) each Pre-2023 PSU shall vest solely based on the holders continued service with the applicable Post-Separation Employer through the applicable vesting date(s) (and, for the avoidance of doubt, no longer remain subject to any performance-based vesting conditions following the Effective Time) and (III) each Pre-2023 PSU held by a Kellanova Group Employee or WKKC Group Employee that experiences a termination of service and is eligible for pro-rata vesting in accordance with the terms of such Pre-2023 PSU, as applicable, shall be pro-rated based on the number of days such individual was employed during the original performance period (and not through the Effective Time).
(f) 2023 PSU Awards. Each Kellanova PSU Award that was granted on or after June 21, 2022 and is outstanding as of immediately prior to the Effective Time (each, a 2023 PSU) shall be subject to the following treatment:
(i) Kellanova Group Employee. If the holder is a Kellanova Group Employee, such 2023 PSU shall remain at Kellanova on the same terms and conditions (including with respect to time-based vesting conditions and settlement) after the Effective Time as were applicable to such 2023 PSU immediately prior to the Effective Time; provided, however, that, (I) from and after the Effective Time, the number of Kellanova Shares subject to such 2023 PSU shall be equal to the product of (x) the target number of Kellanova Shares subject to the 2023 PSU immediately prior to the Effective Time, multiplied by (y) the Kellanova Ratio, (II) the performance period applicable to such 2023 PSU will continue to apply after the Effective Time and the Kellanova Compensation Committee will have discretion to adjust the performance goals to reflect the Internal Reorganization and the Distribution in accordance with the terms of the applicable award agreement, and (III) each Earned Kellanova PSU or 2023 PSU, as applicable, shall continue to vest based on the holders continued service with the Kellanova Group through the applicable vesting date(s) and settled on the current applicable settlement date(s).
(ii) WKKC Group Employee. If the holder is a WKKC Group Employee, such 2023 PSU shall be converted, as of the Effective Time, into a WKKC PSU Award and on the same terms and conditions (including with respect to time-based vesting conditions and settlement) after the Effective Time as were applicable to such 2023 PSU immediately prior to the Effective Time; provided, however, that (I) from and after the Effective Time, the number of WKKC Shares subject to such WKKC PSU Award shall be equal to the product of (x) the target number of Kellanova Shares subject to the corresponding 2023 PSU immediately prior to the Effective Time, multiplied by (y) the WKKC Ratio, (II) the performance period applicable to such 2023 PSU will, in the discretion of the WKKC Compensation Committee, either (A) be terminated as of the Effective Time, in which case, the number of WKKC Shares subject to the corresponding 2023 PSU will be calculated based on performance through the Effective Time, as determined by the Kellanova Compensation Committee in its sole discretion (each, an Earned WKKC PSU), or (B) continue to apply after the Effective Time, in which case, the WKKC Compensation Committee will have discretion to make adjustments to the performance goals to reflect the
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Internal Reorganization and the Distribution, in either case, in accordance with the terms of the applicable award agreement, and (III) from and after the Effective Time, each Earned WKKC PSU or 2023 PSU, as applicable, shall continue to vest based on the holders continued service with WKKC Group through the applicable vesting date(s) and settled on the current applicable settlement date(s).
(g) Miscellaneous Award Terms.
(i) None of the Internal Reorganization, the Distribution or any employment transfer described in Section 3.01(a) shall constitute, in and of itself, a termination of employment for any WKKC Group Employee or Kellanova Group Employee for purposes of any Post-Separation Kellanova Award or any WKKC Award.
(ii) After the Effective Time, for any award adjusted under this Section 4.02, any reference to a change in control, change of control or similar definition in an award agreement, employment agreement or Kellanova LTIP applicable to such award, (x) with respect to Post-Separation Kellanova Awards, shall be deemed to refer to a change in control, change of control or similar definition as set forth in the applicable award agreement, employment agreement or Kellanova LTIP, and (y) with respect to WKKC Awards, shall be deemed to refer to a Change in Control as defined in the WKKC LTIP.
(h) Settlement; Tax Reporting and Withholding.
(i) After the Effective Time, Post-Separation Kellanova Awards, regardless of by whom held, shall be settled by Kellanova, and WKKC Awards shall be settled by WKKC. Following the Effective Time, if any Post-Separation Kellanova Award shall fail to become vested, such Post-Separation Kellanova Award shall be forfeited to Kellanova, and if any WKKC Award shall fail to become vested, such WKKC Award shall be forfeited to WKKC.
(ii) Unless otherwise required by applicable Laws, (A) WKKC shall be responsible for all income, payroll, fringe benefit, social insurance, payment on account, or other taxes related to or otherwise owed on income of WKKC Group Employees related to WKKC Awards or Post-Separation Kellanova Awards, and Kellanova shall be responsible for all income, payroll, fringe benefit, social insurance, payment on account, or other taxes related to or otherwise owed on income of Kellanova Group Employees related to Post-Separation Kellanova Awards; (B) upon vesting or settlement of WKKC Awards, WKKC shall be solely responsible for ensuring the satisfaction of all applicable tax withholding requirements and employer tax on behalf of each WKKC Group Employee and for ensuring the collection and remittance of any employee withholding taxes to the Kellanova Group with respect to each WKKC Group Employee (with Kellanova Group being responsible for remittance of any applicable employee withholding taxes and payment and remittance of the applicable employer taxes relating to Kellanova Group Employees to the applicable Governmental Authority); (C) upon the vesting or settlement of Post-Separation Kellanova Awards, Kellanova shall be solely responsible for ensuring the satisfaction of all applicable tax withholding requirements on behalf of each Kellanova Group Employee and for ensuring the collection and remittance of any employee
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Pursuant to 17 C.F.R. Section 200.83
withholding taxes to the WKKC Group with respect to each WKKC Group Employee (with the WKKC Group being responsible for remittance of any applicable employee withholding taxes and payment and remittance of the applicable employer taxes relating to WKKC Group Employees to the applicable Governmental Authority); (D) following the Effective Time, Kellanova shall be responsible for all income tax reporting in respect of Post-Separation Kellanova Awards and Kellanova Non-Employee Directors, and WKKC will be responsible for all income tax reporting in respect of Post-Separation Kellanova Awards and WKKC Awards held by WKKC Group Employees. Notwithstanding the foregoing, to the extent necessary (and permissible) to effectuate the foregoing, either Kellanova or WKKC may act as agent for the other Party by remitting amounts withheld in relation to WKKC Awards or Post-Separation Kellanova Awards to the applicable Governmental Authority.
(iii) Without limiting the generality of Section 3.01(f), Kellanova shall be responsible for all Liabilities associated with awards that relate to Kellanova Shares following the Effective Time, and WKKC shall be responsible for all Liabilities associated with awards that relate to WKKC Shares following the Effective Time. In the event the treatment specified in this Section 4.02(h)(iii) does not comply with applicable Law or results in the Party who bore the economic Liability associated with the award not being the Party entitled to the corresponding tax deduction under applicable Law, the Parties agree to negotiate in good faith an alternative treatment that complies with applicable Law and does not result in such adverse economic consequence to a Party.
(i) Cooperation. Each of the Parties shall establish an appropriate administration system to administer, in an orderly manner, (i) exercises of vested Kellanova Option Awards, (ii) the vesting and forfeiture of unvested Post-Separation Kellanova Awards and (iii) the withholding and reporting requirements with respect to Post-Separation Kellanova Awards and WKKC Awards. To the extent necessary, each of the Parties shall work together to unify and consolidate all indicative data and payroll and employment information on regular timetables and make certain that each applicable Persons data and records in respect of such awards are correct and updated on a timely basis. The foregoing shall include employment status and information required for vesting and forfeiture of awards and Tax withholding/remittance, compliance with trading windows and compliance with the requirements of the Exchange Act and other applicable Laws.
(j) Registration and Other Regulatory Requirements. WKKC agrees to file the appropriate registration statements with respect to, and to cause to be registered pursuant to the Securities Act, the WKKC Shares authorized for issuance under the WKKC LTIP, as required pursuant to the Securities Act, no later than the Effective Time and in any event before the date of issuance of any WKKC Shares pursuant to the WKKC LTIP. The Parties shall take such additional actions as are deemed necessary or advisable to effectuate the foregoing provisions of this Section 4.02(j), including, to the extent applicable, compliance with securities Laws and other legal requirements associated with equity compensation awards in affected non-U.S. jurisdictions. Kellanova agrees to facilitate the adoption and approval of the WKKC LTIP.
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Section 4.03 Employee Stock Purchase Plans.
(a) Establishment of WKKC ESPP. (i) Prior to the Effective Time, WKKC shall adopt the WKKC ESPP that will become effective as of the Effective Time and have the same terms as the Kellanova ESPP, except for changes as are necessary and appropriate to reflect the Internal Reorganization and the Distribution and such other changes, modifications or amendments to the WKKC ESPP as may be required by applicable Law, (ii) effective as of the Effective Time, any participant in the Kellanova ESPP who is a WKKC Group Employee shall become a participant in the WKKC ESPP (each, a WKKC ESPP Participant) and shall cease participating under the Kellanova ESPP and no longer be eligible to exercise a right to purchase Kellanova Shares under the Kellanova ESPP, (iii) all amounts previously credited by WKKC ESPP Participants under the Kellanova ESPP shall be assumed by WKKC Group at the Effective Time and credited to each WKKC ESPP Participants account under the WKKC ESPP, and WKKC Group shall continue to withhold the same amounts of contributions as applied under the Kellanova ESPP to the applicable WKKC ESPP Participant as of immediately prior to the Effective Time, and (iv) unless the WKKC ESPP Participant has otherwise requested a refund of their account balance, elected to withdraw their contributions or opted out of participating in the WKKC ESPP, each WKKC ESPP Participants account balance will be used to purchase WKKC Shares under the WKKC ESPP at the end of the first purchase period under the WKKC ESPP.
(b) Elections under the ESPP. Kellanova and WKKC shall use their reasonable best efforts to cooperate to facilitate: (i) the carryover of current elections made by each WKKC Group Employee in effect under the Kellanova ESPP to the WKKC ESPP and (ii) the transfer of contributions associated with such elections from the Kellanova ESPP to the WKKC ESPP for any WKKC Group Employees that have not otherwise requested refunds of their account balances or opted out of participating in the WKKC ESPP.
(c) Tax Reporting and Deductions. Following the Effective Time, the Kellanova Group shall be responsible for all income, payroll and other tax reporting in respect of Kellanova Shares issued (or WKKC Shares received in respect of Kellanova Shares) under the Kellanova ESPP to the extent permitted by applicable Law.
Section 4.04 Non-Equity Incentive Plans.
(a) WKKC Group Annual and Short-Term Incentives. From and after the CIC Date, the WKKC Group shall assume or retain all Liabilities with respect to all non-equity incentive awards, bonuses and commissions that would otherwise be payable to WKKC Group Employees.
(i) WKKC 2023 Annual Bonuses. For all 2023 annual bonus opportunities in respect of the WKKC Group Employees under the Kellanova AIP (the WKKC 2023 Annual Bonuses), (x) the Kellanova Compensation Committee will determine in its sole discretion the level of performance achieved based on actual performance through the Effective Time (such earned amount, as pro-rated to reflect the date in which the Effective Time occurs during the calendar year, the Pre-Distribution Earned Amounts), (y) on, or as soon as practicable following, the Effective Time, WKKC Group shall assume and be solely responsible for the accrued Pre-Distribution Earned Amounts for WKKC Employees, and (z) following the Effective Time, the WKKC Compensation Committee
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shall determine, with respect to the WKKC 2023 Annual Bonuses and any remaining performance period thereunder (the Remaining 2023 Performance Period), (I) whether to implement additional or alternative, or make any adjustments to, performance criteria following the Effective Time for the Remaining 2023 Performance Period, and if so, determine in its sole discretion the extent to which such performance criteria have been met for the Remaining 2023 Performance Period, and (II) the payment level for each WKKC Group Employee under the Remaining 2023 Performance Period; provided, that, notwithstanding the foregoing, if the WKKC Group Employee remains employed with the WKKC Group through the end of the 2023 performance year, the amount paid in respect of any earned WKKC 2023 Annual Bonus shall be no less than such WKKC Group Employees Pre-Distribution Earned Amount. All WKKC 2023 Annual Bonus payments will be made by at the same time that annual bonuses are typically made by Kellanova in the ordinary course in the first quarter of the 2024 calendar year.
(ii) WKKC Group Commissions. WKKC Group Employees may continue to earn and/or receive commission or other similar sale-based bonuses under the Kellanova Sales Incentive Plans (collectively, the Commissions) in accordance with their terms thereof; provided, that, any adjustments to the terms of any Commissions in respect of the third and fourth quarters of the 2023 calendar year (if any) shall be made by, and, if earned, paid by, the WKKC Group, and, for the avoidance of doubt, any such Commissions shall be deemed a WKKC Liability.
(b) Kellanova Group Annual Incentive Awards. The Kellanova Group shall retain all Liabilities with respect to any non-equity incentive awards, bonuses and commissions payable to Kellanova Group Employees and such non-equity incentive awards, bonuses and commissions shall continue to remain subject to their terms, unless adjusted by Kellanova in its discretion.
(c) WKKC Cash Incentive Plans. The WKKC Cash Incentive Plans shall be established following the Effective Time, depending on the date in which the Effective Time occurs, and shall have terms and opportunities that are comparable to those in effect as of immediately prior to the Effective Time under the corresponding Kellanova Cash Incentive Plan, except for any changes that are necessary and appropriate to reflect the Internal Reorganization and the Distribution and such other changes, modifications or amendments that may be required by applicable Law.
(d) Retention Bonuses. Following the Effective Time, the WKKC Group will make any Retention Bonus payments that have been earned by WKKC Group Employees in connection with the First Payment Event (as defined in the applicable Retention Agreement) in accordance with, and subject to, the terms of the applicable Retention Agreement(s).
Section 4.05 Director Compensation. Kellanova shall be responsible for the payment of any fees for service on the Kellanova Board, and WKKC shall not have any responsibility for any such payments. With respect to any WKKC non-employee director, WKKC shall be responsible for the payment of any fees for service on the WKKC Board and Kellanova shall not have any responsibility for any such payments. No later than the Effective Time, the Nominating and Governance Committee of the Kellanova Board will adopt the director compensation policy for the WKKC Board that will be ratified by the WKKC Board and apply to WKKC non-employee directors following the Effective Time.
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ARTICLE V
U.S. RETIREMENT PLANS
Section 5.01 Kellanova Defined Benefit Plan. Kellanova shall retain the Kellanova Defined Benefit Plans and Canadian Defined Benefit Plans; and no member of the WKKC Group shall assume or retain any Liability with respect to the Kellanova Defined Benefit Plans or Canadian Defined Benefit Plans. Following the Effective Time, no WKKC Group Employee shall be credited with any additional service under the Kellanova Defined Benefit Plans; except that for purposes of vesting and eligibility for early retirement subsidies only, any WKKC Group Employee participating in the Kellanova Company Pension Plan immediately prior to the Effective Time who does not take a distribution of his or her benefit from the Kellanova Company Pension Plan shall receive credit for his or her continuous service with WKKC Group on and after the Effective Time solely for purposes of vesting and early retirement subsidies, until such time as Kellanova determines otherwise.
Section 5.02 Kellanova Nonqualified Defined Benefit Plans.
(a) Retention of Liabilities. Kellanova shall retain the Kellanova Nonqualified Defined Benefit Plans as of the Effective Time and no member of the WKKC Group shall assume or retain any Liability with respect to the Kellanova Nonqualified Defined Benefit Plans. Following the Effective Time, no WKKC Group Employee shall be credited with any additional service under the Kellanova Nonqualified Defined Benefit Plans; except that for purposes of vesting and eligibility for early retirement subsidies only, any WKKC Group Employee participating in the Kellanova Supplemental Savings & Retirement Plan (Restoration Plan) immediately prior to the Effective Time who does not take a distribution of his or her benefit from the Kellanova Supplemental Savings & Retirement Plan (Restoration Plan) shall receive credit for his or her continuous service with WKKC Group on and after the Effective Time solely for purposes of vesting and early retirement subsidies, until such time as Kellanova determines otherwise.
(b) Cooperation. Following the Effective Time, WKKC shall, or shall cause a member of the WKKC Group or the WKKC Group Employee, as applicable, to, notify and cooperate with Kellanova as soon as possible in advance of, or following, any event that would trigger vesting, funding and/or payment under the applicable Kellanova Nonqualified Defined Benefit Plan on or after the Effective Time in respect of any WKKC Group Employee who participates in the Kellanova Nonqualified Defined Benefit Plans (including, for example and without limitation, when any such WKKC Group Employee experiences a separation from service within the meaning of Section 409A of the Code).
Section 5.03 WKKC Defined Contribution Retirement Plans.
(a) Establishment of Plan. Prior to the Effective Time, WKKC shall or shall cause the members of the WKKC Group to adopt or establish a defined contribution retirement plan which shall be intended to meet the tax qualification requirements of Section 401(a) of the Code and the Puerto Rico Code (the WKKC Savings & Investment Plan). Effective as of the Effective Time,
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WKKC shall or shall cause the members of the WKKC Group to adopt or establish defined contribution retirement plans for WKKC Group Employees based in Canada (the WKKC Canada Defined Contribution Plans), including a defined contribution pension plan, registered retirement savings plan, deferred profit sharing plan, non-registered retirement savings plan and tax-free savings components.
(b) Transfer of Account Balances. Either prior to or as soon as practicable after the Effective Time, Kellanova shall cause the trustee of the Kellanova 401(k) Plan to transfer from the trust which forms a part of the Kellanova 401(k) Plan to the WKKC Savings & Investment Plan, the account balances of active WKKC Group Employees who are salaried or non-union hourly employees (U.S. and Puerto Rico) under the Kellanova 401(k) Plan, determined as of the date of the transfer. Unless otherwise agreed by the parties, such transfers shall be made in kind, including promissory notes evidencing the transfer of outstanding loans. Any Asset and Liability transfers pursuant to this Section 5.03 shall comply in all respects with Sections 414(l) and 411(d)(6) of the Code and if required, shall be made not less than 30 days after Kellanova shall have filed the notice under Section 6058(b) of the Code. The parties agree that to the extent that any Assets are not transferred in kind, the Assets transferred will be mapped into an appropriate investment vehicle which may include the WKKC Savings & Investment Plans qualified default investment alternative. As soon as practicable after the Effective Time and in accordance with applicable law, Kellanova shall cause the relevant trustees to transfer account balances of active WKKC Group Employees (Canada) to the analogous WKKC Canada Defined Contribution Plans through a trust-to-trust transfer, including any defined contribution account balances for active WKKC Group Employees (Canada) held in hybrid defined contribution/defined benefit plans.
(c) Transfer of Liabilities. Effective as of the CIC Date but subject to the Asset transfer specified in Section 5.03(b) above, the WKKC Savings & Investment Plan shall assume and be solely responsible for all the Liabilities for or relating to active WKKC Group Employees who are salaried or non-union hourly employees (U.S. and Puerto Rico) under the Kellanova 401(k) Plan. WKKC shall be responsible for all ongoing rights of or relating to WKKC Group Employees who are salaried or non-union hourly employees (U.S. and Puerto Rico) for future participation (including the right to make payroll deductions) in the WKKC Savings & Investment Plan.
(d) Belleville Defined Contribution Plan. WKKC shall cause the WKKC Group to assume and accept sponsorship and all assets and liabilities under The Retirement Income Plan for Employees of Kellogg Canada Inc. (Belleville Location).
Section 5.04 No Distributions. No WKKC Group Employee shall be entitled to a right to a distribution of his or her benefit under the Kellanova 401(k) Plan as a result of the Internal Reorganization, Distribution or the assignment of his or her transfer of employment contemplated by Section 3.01.
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ARTICLE VI
NONQUALIFIED DEFERRED COMPENSATION PLANS
(a) Establishment of WKKC Deferred Compensation Plans. Effective as of no later than the Effective Time (the Liability Retention Date), the WKKC Group shall establish the WKKC Deferred Compensation Plans, each of which shall have substantially the same terms as the terms of the corresponding Kellanova Deferred Compensation Plan in effect as of immediately prior to the Liability Retention Date. The Kellanova Group shall retain all Liabilities and account balances relating to WKKC Group Employees that are incurred or accrued under the Kellanova Deferred Compensation Plans on and prior to the Liability Retention Date. The WKKC Group shall assume or retain any Liabilities and account balances relating to WKKC Group Employees that are incurred or accrued under the WKKC Deferred Compensation Plans following the Liability Retention Date. Notwithstanding the foregoing, WKKC may make such changes, modifications or amendments to the WKKC Deferred Compensation Plans as may be required by applicable Law or as are necessary and appropriate to reflect the Internal Reorganization and Distribution or as WKKC otherwise determines to be advisable; provided, that, any such modifications shall made in a manner that is compliant with Code Section 409A.
(b) Kellanova Nonqualified Plans. From and after the Effective Time, no WKKC Group Employees shall participate in or accrue any benefits under the Kellanova Deferred Compensation Plans, and Kellanova shall continue to be responsible for Liabilities in respect of Kellanova Group Employees and Kellanova Non-Employee Directors under the Kellanova Deferred Compensation Plans. The Kellogg Company Executive Compensation Deferred Plan (as amended and restated from time to time) and the Kellanova Non-Employee Directors DCP shall also be subject to the terms set forth in Schedule 6(b).
(c) Distributions; Cooperation. The parties acknowledge that none of the transactions contemplated by this Agreement, the Separation Agreement or any Transaction Document will, in and of itself, trigger a payment or distribution of compensation under the Kellanova Deferred Compensation Plans or the WKKC Deferred Compensation Plans. Kellanova and the WKKC Group shall cooperate to ensure that any distributions made under the Kellanova Deferred Compensation Plans or the WKKC Deferred Compensation Plans are made in a timely manner. Following the Effective Time, WKKC shall, or shall cause a member of the WKKC Group or the WKKC Group Employee, as applicable, to, notify and cooperate with Kellanova as soon as possible in advance of, or following, any event that would trigger vesting, funding and/or payment under the applicable Kellanova Deferred Compensation Plan on or after the Effective Time in respect of any WKKC Group Employee who participates in the Kellanova Deferred Compensation Plans (including, for example and without limitation, when any such WKKC Group Employee experiences a separation from service within the meaning of Section 409A of the Code).
ARTICLE VII
OTHER BENEFIT PLANS
Section 7.01 Welfare Plans.
(a) Establishment of WKKC Welfare Plans. Except as otherwise provided in this Article VII, no later than the Effective Time (such applicable date of establishment, the WKKC Mirrored Welfare Plans Effective Date), WKKC shall, or shall cause the members of the WKKC Group to, establish the WKKC Welfare Plans that generally correspond to the Kellanova Welfare Plans in which such WKKC Group Employees in the United States and Canada participated immediately prior to such date (the WKKC Mirrored Welfare Plans), including any post-termination or post-retirement welfare plans, as necessary.
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(b) Flexible Spending Accounts. Kellanova and WKKC shall use commercially reasonable efforts to ensure that, no later than the Effective Time, any health or dependent care flexible spending accounts of WKKC Employees under Kellanova Welfare Plans are transferred from the Kellanova Welfare Plans to the corresponding WKKC Mirrored Welfare Plans.
(c) Post-Retirement Plan for Belleville. WKKC shall or shall cause the WKKC Group to assume sponsorship and all liabilities under the Belleville Postretirement plan.
(d) Voluntary Employees Beneficiary Association (VEBA). Prior to the Effective Time, Kellanova shall divide the assets under the Kellanova Company Retiree Employees Welfare Benefit Trust for Collectively Bargained Employees and transfer a portion of such assets to a new voluntary employees beneficiary association established under Section 501(c)(9) of the Code sponsored by WKKC or an affiliate of WKKC. Such transfer of assets shall be in accordance with applicable law and with asset division methodology determined in Kellanovas discretion.
Section 7.02 Vacation, PTO, Holidays and Leaves of Absence. On or before the Effective Time, WKKC shall, or shall cause the members of the WKKC Group to, establish the WKKC PTO Policies, which shall have terms substantially similar in all material respects to those of the corresponding Kellanova Benefit Plans. Subject to the occurrence of the Effective Time, (a) the WKKC Group shall assume and/or retain all Liabilities with respect to vacation, paid time off, holiday, annual leave or other leave of absence, and required payments related thereto, for each WKKC Group Employee (including with respect to any WKKC Group Employees who appropriately elect to be paid out in cash for accrued, unused vacation amounts at the time of their transfer from the Kellanova Group to the WKKC Group), unless otherwise required by applicable Law, and (b) the Kellanova Group shall assume and/or retain all Liabilities with respect to vacation, paid time off, holiday, annual leave or other leave of absence, and required payments related thereto, for each Kellanova Group Employee (including with respect to any Kellanova Group Employees who appropriately elect to be paid out in cash for accrued, unused vacation or paid time off amounts at the time of their transfer from the WKKC Group to the Kellanova Group), unless otherwise required by applicable Law. Notwithstanding the foregoing, (i) in the event that any WKKC Group Employee transfers to the Kellanova Group following the Effective Time, the Kellanova Group shall not be obligated to assume any Liabilities addressed in this Section 7.02 with respect to such Employee and (ii) in the event that any Kellanova Group Employee transfers to the WKKC Group following the Effective Time, the WKKC Group shall not be obligated to assume any Liabilities addressed in this Section 7.02 with respect to such Employee. Without limiting the generality of Section 9.02, WKKC may modify the terms of the WKKC PTO Policies as it deems necessary and appropriate to comply with applicable Laws.
Section 7.03 Severance and Unemployment Compensation. As of or before the Effective Time, WKKC shall, or shall cause the members of the WKKC Group to, establish the WKKC Severance Plan, which shall have the same terms as those of the corresponding Kellanova Benefit Plan. Subject to the occurrence of the Effective Time, (a) the WKKC Group shall retain any and all Liabilities to, or relating to, WKKC Group Employees in respect of severance and unemployment compensation, regardless of when the event giving rise to the Liability occurred, and (b) the Kellanova Group shall retain any and all Liabilities to, or relating to, Kellanova Group Employees in respect of severance and unemployment compensation, regardless of when the event giving rise to the Liability occurred. Without limiting the generality of Section 9.02, WKKC may
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modify the terms of the WKKC Severance Plan as it deems necessary and appropriate to comply with applicable Laws. Notwithstanding the terms of this Agreement, Kellanova Group hereby assigns, or causes the applicable member of the Kellanova Group to assign, to WKKC or the applicable member of the WKKC Group (as designated by WKKC), the Belleville Severance Plan, as may be amended from time to time, and all related Liabilities thereunder, which assignment shall be effective as of the Effective Time.
Section 7.04 Workers Compensation. With respect to claims for workers compensation, (a) the WKKC Group shall be responsible for claims in respect of WKKC Group Employees that are incurred on or after the CIC Date (or, for the WKKC Group Employees based in Canada, on or after the Effective Time) and (b) the Kellanova Group shall be responsible for all claims in respect of Kellanova Group Employees, whether occurring before, at or after the CIC Date and for WKKC Group Employees for occurrences prior to the CIC Date (or, for the WKKC Group Employees based in Canada, prior to the Effective Time). The treatment of workers compensation claims by WKKC with respect to Kellanova insurance policies shall be governed by Section 5.1 of the Separation Agreement.
ARTICLE VIII
NON-U.S. EMPLOYEES
All actions taken under this Agreement with respect to benefits and Liabilities related to WKKC Group Employees and Kellanova Group Employees who are residents outside of the United States or otherwise subject to non-U.S. Law shall be subject to and accomplished in accordance with the applicable Laws of such jurisdictions (including as required by any applicable Labor Agreement). Except as otherwise expressly set forth in this Agreement, in the event that such applicable non-U.S. Law does not require the Kellanova Group and/or the WKKC Group to take any specific action with respect to any such benefit or Liability, such benefits and Liabilities shall be treated in the same manner as those related to WKKC Group Employees and Kellanova Group Employees who are residents of the United States and who are not subject to non-U.S. Law. For the avoidance of doubt, the Parties shall, in consultation with each other, have the authority to adjust any treatment described in this Agreement with respect to WKKC Group Employees and Kellanova Group Employees who are located outside of the United States in order to ensure compliance with applicable non-U.S. Laws and Labor Agreements and/or to preserve the tax benefits provided under local tax Law prior to the Effective Time; provided that the Parties shall take all necessary action to otherwise preserve the economic terms of the allocation of Assets and Liabilities contemplated by this Agreement. For the avoidance of doubt, any benefit or compensation plan, policy, program, arrangement or agreement shall be operated in accordance with applicable non-U.S. Law.
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ARTICLE IX
MISCELLANEOUS
Section 9.01 Information Sharing and Access.
(a) Sharing of Information. Subject to any limitations imposed by applicable Law, each of Kellanova and WKKC (acting directly or through members of the Kellanova Group or the WKKC Group, respectively) shall provide to the other Party and its authorized agents and vendors all information necessary (including information for purposes of determining benefit eligibility, participation, vesting, calculation of benefits) on a timely basis under the circumstances for the Party to perform its duties under this Agreement. Such information shall include information relating to equity awards under stock plans. To the extent that such information is maintained by a third-party vendor, each Party shall use its commercially reasonable efforts to require the third-party vendor to provide the necessary information and assist in resolving discrepancies or obtaining missing data.
(b) Transfer of Personnel Records and Authorization. Subject to any limitation imposed by applicable Law and to the extent not already accomplished prior to the Effective Time, as soon as practicable at or after the Effective Time, the Kellanova Group shall transfer to the WKKC Group copies of any and all employment records (including any Forms I-9, Forms W-2 or other IRS forms) with respect to WKKC Group Employees (including WKKC Delayed Transfer Employees) and other records reasonably required by the WKKC Group to enable the WKKC Group properly to carry out its obligations under this Agreement; provided, that the Kellanova Group shall retain the original copies of such records as and to the extent permitted by applicable Law; provided, further, that to the extent any WKKC Delayed Transfer Employee does not transfer to the WKKC Group in the manner contemplated in Section 3.03 above, the WKKC Group shall be obligated to timely delete all copies of such records. To the extent permitted by applicable Law, each Party shall permit the other Party reasonable access to the WKKC Group Employee or Kellanova Group Employee-related records, as applicable, in accordance with Article VI of the Separation Agreement, to the extent reasonably necessary for such accessing Party to carry out its obligations hereunder, including pursuant to Article II hereof and as set forth in Section 9.01(c) below. Each of the Kellanova Group and WKKC Group shall materially comply with applicable Law and internal policy regarding the retention, destruction, transfer, copying, and permission of access to WKKC Group Employee and Kellanova Group Employee-Related information.
(c) Cooperation. Each Party shall use commercially reasonable efforts to cooperate and work together to unify, consolidate and share (to the extent permissible under applicable privacy/data protection Laws) all relevant documents, resolutions, government filings, data, payroll, WKKC Group Employee-related and Kellanova Group Employee-related and benefit plan files and information on regular timetables and cooperate as needed with respect to (i) any claim by a Former Dedicated Employee which shall be considered a WKKC Liability pursuant to Section 2.01(a) of this Agreement, (ii) any claims under or audit of or litigation with respect to any employee benefit plan, policy or arrangement contemplated by this Agreement, (iii) efforts to seek a determination letter, private letter ruling or advisory opinion from the IRS or U.S. Department of Labor on behalf of any employee benefit plan, policy or arrangement contemplated by this Agreement, (iv) any filings that are required to be made or supplemented to the IRS, U.S. Pension Benefit Guaranty Corporation, U.S. Department of Labor, U.S. Securities Exchange Commission or any other Governmental Authority and (v) any audits by a Governmental Authority or corrective actions, relating to any Benefit Plan, labor or payroll practices; provided, however, that requests for cooperation must be reasonable and not interfere with daily business operations.
(d) Confidentiality. Notwithstanding anything in this Agreement to the contrary, all confidential records and data relating to WKKC Group Employees and Kellanova Group Employees to be shared or transferred pursuant to this Agreement shall be subject to Section 6.9 of the Separation Agreement and the requirements of applicable Law.
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Section 9.02 Preservation of Rights to Amend. Except as specifically set forth in this Agreement, the rights of each member of the Kellanova Group and each member of the WKKC Group to amend, waive, or terminate any plan, arrangement, agreement, program, or policy referred to herein shall not be limited in any way by this Agreement.
Section 9.03 Fiduciary Matters. Kellanova and WKKC each acknowledges that actions required to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable Law, and no Party shall be deemed to be in violation of this Agreement if it fails to comply with any provisions hereof based upon its good-faith determination (as supported by advice from counsel experienced in such matters) that to do so would violate such a fiduciary duty or standard. Each Party shall be responsible for taking such actions as are deemed necessary and appropriate to comply with its own fiduciary responsibilities and shall fully release and indemnify the other Party for any Liabilities caused by the failure to satisfy any such responsibility.
Section 9.04 Further Assurances. Each Party hereto shall take, or cause to be taken, any and all reasonable actions, including the execution, acknowledgment, filing and delivery of any and all documents and instruments that any other Party hereto may reasonably request in order to effect the intent and purpose of this Agreement and the transactions contemplated hereby.
Section 9.05 Reimbursement of Costs and Expenses. The Parties shall promptly reimburse one another, upon reasonable request of the Party requesting reimbursement (the Requesting Party) as soon as practicable, but in any event within 30 days of receipt of an invoice detailing all costs, expenses and other Liabilities paid or incurred by the Requesting Party (or any of its Affiliates), and any other substantiating documentation as the other Party shall reasonably request, that are, or have been made pursuant to this Agreement, the responsibility of the other Party (or any of its Affiliates).
Section 9.06 Dispute Resolution. The dispute resolution procedures set forth in Article VII of the Separation Agreement shall apply to any dispute, controversy or claim arising out of or relating to this Agreement.
Section 9.07 Third-Party Beneficiaries. The provisions of this Agreement are solely for the benefit of the Parties and are not intended to confer upon any other Person except the Parties any rights or remedies hereunder. There are no third-party beneficiaries of this Agreement and this Agreement shall not provide any Third Person with any remedy, claim, Liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement. Without limiting the generality of the foregoing, (a) nothing in this Agreement is intended to amend any employee benefit plan or affect the applicable plan sponsors right to amend or terminate any employee benefit plan pursuant to the terms of such plan and (b) the provisions of this Agreement are solely for the benefit of the Parties, and no WKKC Group Employee, Kellanova Group Employee, or current or former officer, director, candidate for employment, agent, independent contractor, service provider or any other individual associated therewith shall be regarded for any purpose as a third-party beneficiary of this Agreement.
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Section 9.08 Incorporation of Separation Agreement ProvisionsSection 9.09 . Article X of the Separation Agreement is incorporated herein by reference and shall apply to this Agreement as if set forth herein mutatis mutandis.
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IN WITNESS WHEREOF, the Parties have caused this Employee Matters Agreement to be executed by their duly authorized representatives as of the date first written above.
[Signature Page to Employee Matters Agreement]
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Exhibit 10.5
TAX MATTERS AGREEMENT
by and between
KELLOGG COMPANY
and
WK Kellogg Co
Dated as of [], 2023
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
TABLE OF CONTENTS
Page
ARTICLE I
Definitions
Section 1.1 |
General |
2 | ||||
ARTICLE II | ||||||
PAYMENTS AND TAX REFUNDS | ||||||
Section 2.1 |
Allocation of Tax Liabilities |
9 | ||||
Section 2.2 |
Determination of Taxes Attributable to the WKKC Business |
9 | ||||
Section 2.3 |
Employment Taxes |
10 | ||||
Section 2.4 |
Transaction Taxes |
10 | ||||
Section 2.5 |
Delayed WKKC Assets; Delayed WKKC Liabilities; Delayed Kellanova Assets; Delayed Kellanova Liabilities |
10 | ||||
Section 2.6 |
Tax Refunds |
10 | ||||
Section 2.7 |
Tax Benefits |
11 | ||||
Section 2.8 |
Prior Agreements |
11 | ||||
ARTICLE III | ||||||
PREPARATION AND FILING OF TAX RETURNS | ||||||
Section 3.1 |
Kellanovas Responsibility |
11 | ||||
Section 3.2 |
WKKCs Responsibility |
11 | ||||
Section 3.3 |
Right To Review Tax Returns |
11 | ||||
Section 3.4 |
Cooperation |
11 | ||||
Section 3.5 |
Tax Reporting Practices |
12 | ||||
Section 3.6 |
Reporting of the Transactions |
12 | ||||
Section 3.7 |
Protective Section 336(e) Election |
12 | ||||
Section 3.8 |
Payment of Taxes |
13 | ||||
Section 3.9 |
Amended Returns and Carrybacks |
13 | ||||
Section 3.10 |
Tax Attributes |
14 | ||||
ARTICLE IV | ||||||
TAX-FREE STATUS OF THE TRANSACTIONS | ||||||
Section 4.1 |
Representations and Warranties |
14 | ||||
Section 4.2 |
Certain Restrictions Relating to the Tax-Free Status of the Transactions |
15 | ||||
ARTICLE V | ||||||
INDEMNITY OBLIGATIONS | ||||||
Section 5.1 |
Indemnity Obligations |
17 | ||||
Section 5.2 |
Indemnification Payments |
17 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Section 5.3 |
Payment Mechanics |
18 | ||||
Section 5.4 |
Treatment of Payments |
18 | ||||
ARTICLE VI | ||||||
TAX CONTESTS | ||||||
Section 6.1 |
Notice |
18 | ||||
Section 6.2 |
Separate Returns |
19 | ||||
Section 6.3 |
Joint Returns |
19 | ||||
Section 6.4 |
Obligation of Continued Notice |
19 | ||||
Section 6.5 |
Settlement Rights |
19 | ||||
ARTICLE VII | ||||||
COOPERATION | ||||||
Section 7.1 |
General |
20 | ||||
Section 7.2 |
Consistent Treatment |
20 | ||||
ARTICLE VIII | ||||||
RETENTION OF RECORDS; ACCESS | ||||||
Section 8.1 |
Retention of Records |
21 | ||||
Section 8.2 |
Access to Tax Records |
21 | ||||
ARTICLE IX | ||||||
DISPUTE RESOLUTION | ||||||
Section 9.1 |
Dispute Resolution |
21 | ||||
ARTICLE X | ||||||
MISCELLANEOUS PROVISIONS | ||||||
Section 10.1 |
Conflicting Agreements |
22 | ||||
Section 10.2 |
Interest on Late Payments |
22 | ||||
Section 10.3 |
Successors |
22 | ||||
Section 10.4 |
Assignability |
22 | ||||
Section 10.5 |
No Fiduciary Relationship |
22 | ||||
Section 10.6 |
Further Assurances |
22 | ||||
Section 10.7 |
Survival |
23 | ||||
Section 10.8 |
Notices |
23 | ||||
Section 10.9 |
Distribution Date |
23 |
ii
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
TAX MATTERS AGREEMENT
This TAX MATTERS AGREEMENT (this Agreement), is entered into as of [], 2023 by and between Kellogg Company, a Delaware corporation (Kellanova), and WK Kellogg Co, a Delaware corporation (WKKC, and together with Kellanova, the Parties). Capitalized terms used in this Agreement and not defined herein shall have the meanings ascribed to such terms in the Separation and Distribution Agreement, dated as of the date hereof, by and between the Parties (the Separation Agreement).
R E C I T A L S
WHEREAS, the board of directors of Kellanova (the Kellanova Board) has determined that it is in the best interests of Kellanova and its shareholders to create a new publicly traded company that shall operate the WKKC Business;
WHEREAS, in furtherance of the foregoing, the Kellanova Board has determined that it is appropriate and desirable to separate the WKKC Business from the Kellanova Business (the Internal Reorganization) and, following the Internal Reorganization, make a distribution, on a pro rata basis, to holders of Kellanova Shares on the Record Date of all of the outstanding WKKC Shares owned by Kellanova (the Distribution);
WHEREAS, WKKC has been incorporated solely for these purposes and has not engaged in activities except in connection with the Internal Reorganization and the Distribution;
WHEREAS, Kellanova will effect certain restructuring transactions described in the Internal Reorganization Step Plan for the purpose of aggregating the WKKC Business in the WKKC Group prior to the Distribution, and, in connection therewith, Kellanova will undertake the Contribution, in exchange for which WKKC (i) shall issue to Kellanova WKKC Shares, pay to Kellanova the WKKC Contribution Payment, and assume certain liabilities related to the WKKC Business, and (ii) may issue to Kellanova certain debt securities of WKKC (the WKKC Securities);
WHEREAS, Kellanova intends to effect the Distribution in a transaction that, taken together with the Contribution, is intended to qualify as tax-free to both Kellanova and its shareholders for U.S. federal income tax purposes under Sections 368(a)(1)(D), 355, and 361 of the Code (except with respect to cash received in lieu of a fractional share);
WHEREAS, certain members of the Kellanova Group, on the one hand, and certain members of the WKKC Group, on the other hand, file certain Tax Returns on a consolidated, combined, or unitary basis for certain federal, state, local, and foreign Tax purposes; and
WHEREAS, the Parties desire to (i) provide for the payment of Tax liabilities and entitlement to refunds thereof, allocate responsibility for, and cooperation in, the filing of Tax Returns, and provide for certain other matters relating to Taxes, and (ii) set forth certain covenants and indemnities relating to the preservation of the Tax-Free Status of the Transactions.
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 General. As used in this Agreement (including the recitals hereof), the following terms shall have the following meanings:
Active Trade or Business means, with respect to WKKC or any member of the WKKC Group, the active conduct (as defined in Section 355(b)(2) of the Code and the Treasury Regulations thereunder) of the WKKC Business as conducted by such entity immediately prior to the Distribution.
Adjustment shall mean an adjustment of any item of income, gain, loss, deduction, credit, or any other item affecting Taxes of a taxpayer pursuant to a Final Determination.
Affiliate shall have the meaning set forth in the Separation Agreement.
Agreement shall have the meaning set forth in the preamble hereto.
Ancillary Agreement shall have the meaning set forth in the Separation Agreement.
Business Day shall mean any day other than a Saturday, a Sunday or a day on which banking institutions are generally authorized or required by law to close in the United States, New York, New York or Chicago, Illinois.
Code shall mean the Internal Revenue Code of 1986, as amended.
Contribution shall have the meaning set forth in the Separation Agreement.
Controlling Party shall mean, with respect to a Tax Contest, the Party entitled to control such Tax Contest pursuant to Sections 6.2 and 6.3 of this Agreement.
Distribution shall have the meaning set forth in the Separation Agreement.
Distribution Date shall have the meaning set forth in the Separation Agreement.
Employee Matters Agreement shall have the meaning set forth in the Separation Agreement.
Employment Tax shall mean those Liabilities (as defined in the Separation Agreement) for Taxes which are allocable pursuant to the provisions of the Employee Matters Agreement.
Federal Income Tax shall mean (i) any Tax imposed by Subtitle A of the Code other than an Employment Tax, and (ii) any interest, penalties, additions to tax, or additional amounts in respect of the foregoing.
2
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Fifty-Percent or Greater Interest shall have the meaning ascribed to such term for purposes of Section 355(d) and (e) of the Code.
Final Determination shall mean the final resolution of liability for any Tax for any taxable period, by or as a result of (i) a final decision, judgment, decree, or other order by any court of competent jurisdiction that can no longer be appealed, (ii) a final settlement with the IRS, a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or a comparable agreement under the Laws of a state, local, or foreign taxing jurisdiction, which resolves the entire Tax liability for any taxable period, (iii) any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund or credit may be recovered (including by way of withholding or offset) by the jurisdiction imposing the Tax, or (iv) any other final resolution, including by reason of the expiration of the applicable statute of limitations or the execution of a pre-filing agreement with the IRS or other Taxing Authority.
Group shall mean either the Kellanova Group or the WKKC Group, as the context requires.
Income Tax means all Taxes based upon, measured by, or calculated with respect to (i) net income or profits (including any capital gains, minimum Tax or any Tax on items of tax preference, but not including sales, use, real or personal property, gross or net receipts, value added, excise, leasing, transfer or similar Taxes), or (ii) multiple bases (including corporate franchise, doing business and occupation Taxes) if one or more bases upon which such Tax is determined is described in clause (i) of this definition, together with any interest, penalty, additions to tax, or additional amounts in respect of the foregoing.
Indemnifying Party shall have the meaning set forth in Section 5.2.
Indemnitee shall have the meaning set forth in Section 5.2.
Internal Distribution shall mean any transaction (or series of transactions) effected as part of the Transactions (other than the Contribution and the Distribution) that is intended to qualify as a tax-free transaction under Section 355 and/or Section 368(a)(1)(D) of the Code, as described in the Tax Materials.
Internal Reorganization shall have the meaning set forth in the preamble hereto.
Internal Reorganization Step Plan shall mean have the meaning set forth in the Separation Agreement.
IRS shall mean the U.S. Internal Revenue Service or any successor agency, including, but not limited, to its agents, representatives, and attorneys.
IRS Ruling shall mean any U.S. federal income tax ruling issued to Kellanova by the IRS in connection with the Transactions.
3
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
IRS Ruling Request shall mean the letter filed by Kellanova with the IRS requesting a ruling regarding certain U.S. federal income tax consequences of the Transactions and any amendment or supplement to such ruling request letter.
Joint Return shall mean any Tax Return that includes, by election or otherwise, one or more members of the Kellanova Group together with one or more members of the WKKC Group.
Kellanova shall have the meaning set forth in the preamble hereto.
Kellanova Affiliated Group shall mean the affiliated group (as that term is defined in Section 1504 of the Code and the Treasury Regulations thereunder) of which Kellanova is the common parent.
Kellanova Business shall have the meaning set forth in the Separation Agreement.
Kellanova Federal Consolidated Income Tax Return shall mean any U.S. Federal Income Tax Return for the Kellanova Affiliated Group.
Kellanova Group shall have the meaning set forth in the Separation Agreement.
Kellanova Separate Return shall mean any Tax Return of or including any member of the Kellanova Group (including any consolidated, combined, or unitary return) that does not include any member of the WKKC Group.
Kellanova Shares shall have the meaning set forth in the Separation Agreement.
Law shall have the meaning set forth in the Separation Agreement.
Non-Controlling Party shall mean, with respect to a Tax Contest, the Party that is not the Controlling Party with respect to such Tax Contest.
Parties shall have the meaning set forth in the preamble hereto.
Past Practices shall have the meaning set forth in Section 3.5.
Person shall have the meaning set forth in the Separation Agreement.
Post-Distribution Period shall mean any taxable period (or portion thereof) beginning after the Distribution Date, including, for the avoidance of doubt, the portion of any Straddle Period beginning after the Distribution Date.
Pre-Distribution Period shall mean any taxable period (or portion thereof) ending on or before the Distribution Date, including, for the avoidance of doubt, the portion of any Straddle Period ending at the end of the day on the Distribution Date.
4
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Proposed Acquisition Transaction shall mean a transaction or series of transactions (or any agreement, understanding, or arrangement, within the meaning of Section 355(e) of the Code and Treasury Regulation Section 1.355-7, or any other Treasury Regulations promulgated thereunder, to enter into a transaction or series of transactions), whether such transaction is supported by WKKC management or shareholders, is a hostile acquisition, or otherwise, as a result of which WKKC (or any successor thereto) would merge or consolidate with any other Person or as a result of which one or more Persons would (directly or indirectly) acquire, or have the right to acquire, from WKKC (or any successor thereto) and/or one or more holders of WKKC Capital Stock, respectively, any amount of WKKC Capital Stock, that would, when combined with any other direct or indirect changes in ownership of WKKC Capital Stock pertinent for purposes of Section 355(e) of the Code and the Treasury Regulations promulgated thereunder, comprise thirty-five percent (35%) or more of (i) the value of all outstanding shares of stock of WKKC as of immediately after such transaction, or in the case of a series of transactions, immediately after the last transaction of such series, or (ii) the total combined voting power of all outstanding shares of voting stock of WKKC as of immediately after such transaction, or in the case of a series of transactions, immediately after the last transaction of such series. Notwithstanding the foregoing, a Proposed Acquisition Transaction shall not include (i) the adoption by WKKC of a shareholder rights plan, or (ii) issuances by WKKC that satisfy Safe Harbor VIII (relating to acquisitions in connection with a persons performance of services) or Safe Harbor IX (relating to acquisitions by a retirement plan of an employer) of Treasury Regulation Section 1.355-7(d). For purposes of determining whether a transaction constitutes an indirect acquisition, any recapitalization resulting in a shift of voting power or any redemption of shares of stock shall be treated as an indirect acquisition of shares of stock by the non-exchanging shareholders. This definition and the application thereof are intended to monitor compliance with Section 355(e) of the Code and the Treasury Regulations promulgated thereunder and shall be interpreted accordingly. Any clarification of, or change in, the statute or Treasury Regulations promulgated under Section 355(e) of the Code shall be incorporated in this definition and its interpretation.
Reasonable Basis shall mean a reasonable basis within the meaning of Section 6662(d)(2)(B)(ii)(II) of the Code and the Treasury Regulations promulgated thereunder (or such other level of confidence required by the Code at that time to avoid the imposition of penalties).
Refund shall mean any refund, reimbursement, offset, credit, or other similar benefit in respect of Taxes (including any overpayment of Taxes that can be refunded or, alternatively, applied against other Taxes payable), including any interest paid on or with respect to such refund of Taxes; provided, however, that the amount of any refund of Taxes shall be net of any Taxes imposed by any Taxing Authority on, related to, or attributable to, the receipt of or accrual of such refund, including any Taxes imposed by way of withholding or offset.
Responsible Party shall mean, with respect to any Tax Return, the Party having responsibility for preparing and filing such Tax Return pursuant to this Agreement.
Restricted Period shall mean the period which begins with the Distribution Date and ends two (2) years thereafter.
Separate Return shall mean a Kellanova Separate Return or a WKKC Separate Return, as the case may be.
Separation Agreement shall have the meaning set forth in the preamble hereto.
5
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
State Tax shall mean (i) any Tax imposed by any State of the United States, the District of Columbia or by any political subdivision of any such State or the District of Columbia, and (ii) any interest, penalties, additions to tax, or additional amounts in respect of the foregoing.
Straddle Period shall mean any taxable period that begins on or before, and ends after, the Distribution Date.
Subsidiary shall have the meaning set forth in the Separation Agreement.
Tax or Taxes shall mean (i) all taxes, charges, fees, duties, levies, imposts, rates, or other assessments or governmental charges of any kind imposed by any federal, state, local, or foreign Taxing Authority, including, without limitation, income, gross receipts, employment, estimated, excise, severance, stamp, occupation, premium, windfall profits, environmental, custom duties, property, escheat, unclaimed property, sales, use, license, capital stock, transfer, franchise, registration, payroll, withholding, social security, unemployment, disability, value added, alternative or add-on minimum, or other taxes, whether disputed or not, and including any interest, penalties, charges, or additions attributable thereto, (ii) liability for the payment of any amount of the type described in clause (i) above arising as a result of being (or having been) a member of any consolidated, combined, unitary, or similar group or being (or having been) included or required to be included in any Tax Return related thereto, and (iii) liability for the payment of any amount of the type described in clauses (i) or (ii) above as a result of any express or implied obligation to indemnify or otherwise assume or succeed to the liability of any other Person, whether by contract, by operation of law, or otherwise.
Tax Advisor shall mean a tax counsel or accountant of recognized national standing.
Tax Attribute shall mean net operating losses, capital losses, research and experimentation credit carryovers, investment tax credit carryovers, earnings and profits, foreign tax credit carryovers, overall foreign losses, overall domestic losses, previously taxed earnings and profits, separate limitation losses, and any other losses, deductions, credits, or other comparable items that could affect a Tax liability for a past or future taxable period.
Tax Benefit Actually Realized means with respect to a Party and its Affiliates a reduction in the amount of Taxes that are required to be paid or an increase in refund due, whether resulting from a deduction, from reduced gain or increased loss from disposition of an asset, or otherwise, such reduction or increase in refund due determined on an actually realized basis. For purposes of this definition, a Party or its Subsidiaries will be deemed to have actually realized such reduction or increase in refund due at the time the amount of Taxes such Party or any of its Subsidiaries is required to pay is reduced or the amount of any refund due is increased. The amount of any Tax Benefit Actually Realized shall be computed on a with and without basis.
Tax Certificates shall mean any officers certificates, representation letters, or similar documents provided by Kellanova and WKKC to Kirkland & Ellis LLP or any other law or accounting firm in connection with any Tax Opinion delivered or deliverable to Kellanova in connection with the Transactions.
Tax Contest shall have the meaning set forth in Section 6.1.
6
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Tax-Free Status of the Transactions shall mean (i) the qualification of the Contribution (including Kellanovas receipt of WKKC Shares, the WKKC Contribution Payment, and any WKKC Securities in connection therewith) and the Distribution, taken together, as a reorganization described in Sections 368(a)(1)(D) and 355 of the Code, (ii) the qualification of the Distribution as a transaction in which the WKKC Shares distributed to holders of Kellanova Shares is qualified property for purposes of Section 361(c) of the Code, (iii) the nonrecognition of income, gain, or loss by Kellanova, WKKC, and holders of Kellanova Shares on the Contribution and the Distribution under Sections 355, 361, and 1032 of the Code (except with respect to any cash received in lieu of fractional WKKC Shares), and (iv) the qualification of the transactions described on Schedule A as being free from Tax to the extent set forth therein.
Tax Item shall mean any item of income, gain, loss, deduction, or credit, or any other item which increases or decreases Taxes paid or payable in any taxable period.
Tax Law shall mean the law of any governmental entity or political subdivision thereof relating to any Tax.
Tax Materials shall have the meaning set forth in Section 4.1(a).
Tax Opinion shall mean any written opinion delivered or deliverable to Kellanova by Kirkland & Ellis LLP or any other law or accounting firm regarding the tax consequences of the Transactions (including, for the avoidance of doubt, any Internal Distribution or other action or transaction preceding the Distribution).
Tax Records shall have the meaning set forth in Section 8.1.
Tax-Related Losses shall mean, with respect to any Taxes, (i) all accounting, legal and other professional fees, and court costs incurred in connection with such Taxes, as well as any other out-of-pocket costs incurred in connection with such Taxes, and (ii) all costs, expenses and damages associated with stockholder litigation or controversies and any amounts paid by Kellanova (or any of its Affiliates) or WKKC (or any of its Affiliates) in respect of the liability of shareholders, whether paid to shareholders or to the IRS or any other Taxing Authority, in each case, resulting from the failure of the Transactions to qualify for the Tax-Free Status of the Transactions.
Tax Return shall mean any return, report, certificate, form, or similar statement or document (including any related supporting information or schedule attached thereto and any information return, amended tax return, claim for refund or declaration of estimated tax) supplied to or filed with, or required to be supplied to or filed with, a Taxing Authority, or any bill for or notice related to ad valorem or other similar Taxes received from a Taxing Authority, in each case, in connection with the determination, assessment, or collection of any Tax or the administration of any laws, regulations, or administrative requirements relating to any Tax.
Taxing Authority shall mean any governmental authority or any subdivision, agency, commission, or entity thereof having jurisdiction over the assessment, determination, collection, or imposition of any Tax (including the IRS).
7
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Transactions shall mean the Internal Reorganization, the Distribution, any other transaction described in the Internal Reorganization Step Plan, and any related transactions.
Transaction Taxes shall mean all Transfer Taxes and other Taxes (including Taxes imposed on any member of the Kellanova Group under Sections 951 or 951A of the Code, as determined by Kellanova in its discretion) imposed on or with respect to the Transactions, other than any Taxes resulting from the failure of the Transactions to qualify for the Tax-Free Status of the Transactions; provided, however, that Transaction Taxes shall not include any amounts for which WKKC has an indemnification obligation pursuant to Article V.
Transfer Tax shall mean (i) all transfer, sales, use, excise, stock, stamp, stamp duty, stamp duty reserve, stamp duty land, documentary, filing, recording, registration, value-added and other similar Taxes (excluding, for the avoidance of doubt, any income, gains, profits, or similar Taxes, however assessed), and (ii) any interest, penalties, additions to tax, or additional amounts in respect of the foregoing.
Treasury Regulations shall mean the regulations promulgated from time to time under the Code as in effect for the relevant taxable period.
Unqualified Tax Opinion shall mean an unqualified will opinion of a Tax Advisor, which Tax Advisor is acceptable to Kellanova on which Kellanova may rely to the effect that a transaction will not affect the Tax-Free Status of the Transactions. Any such opinion must assume that the Transactions would have qualified for Tax-Free Status of the Transactions if the transaction in question did not occur.
WKKC shall have the meaning set forth in the preamble hereto.
WKKC Business shall have the meaning set forth in the Separation Agreement.
WKKC Capital Stock shall mean all classes or series of capital stock of WKKC, including (i) WKKC Shares, (ii) all options, warrants, and other rights to acquire such capital stock, and (iii) all other instruments properly treated as stock of WKKC for U.S. federal income tax purposes.
WKKC Contribution Payment shall have the meaning set forth in the Separation Agreement.
WKKC Disqualifying Action shall mean (i) any action (or failure to take any action) by any member of the WKKC Group after the Distribution (including entering into any agreement, understanding, arrangement, or negotiations with respect to any transaction or series of transactions), (ii) any event (or series of events) after the Distribution involving WKKC Capital Stock or the assets of any member of the WKKC Group, or (iii) any breach by any member of the WKKC Group after the Distribution of any representation, warranty, or covenant made by them in this Agreement, that, in each case, would adversely affect the Tax-Free Status of the Transactions or result in any Taxes described in Schedule B; provided, however, that the term WKKC Disqualifying Action shall not include any action entered into pursuant to any Ancillary Agreement (other than this Agreement) or that is undertaken pursuant to the Internal Reorganization or the Distribution.
8
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
WKKC Group shall have the meaning set forth in the Separation Agreement.
WKKC Separate Return shall mean any Tax Return of or including any member of the WKKC Group (including any consolidated, combined, or unitary return) that does not include any member of the Kellanova Group.
WKKC Shares shall have the meaning set forth in the Separation Agreement.
ARTICLE II
PAYMENTS AND TAX REFUNDS
Section 2.1 Allocation of Tax Liabilities. Except as otherwise provided in this Article II and Section 5.1, Taxes shall be allocated as follows:
(a) Allocation of Taxes Relating to Joint Returns.
(i) Allocation for Pre-Distribution Periods. Kellanova shall pay and be responsible for any and all Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) for all Pre-Distribution Periods.
(ii) Allocation to WKKC for Post-Distribution Periods. WKKC shall pay and be responsible for any and all Taxes attributable to the WKKC Business that are due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) for all Post-Distribution Periods.
(iii) Allocation to Kellanova for Post-Distribution Periods. Kellanova shall pay and be responsible for any and all Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) other than those Taxes described in Section 2.1(a)(ii) for all Post-Distribution Periods.
(b) Allocation of Taxes Relating to Separate Returns.
(i) Except as otherwise provided in Section 2.1(b)(iii), Kellanova shall pay and be responsible for any and all Taxes due with respect to or required to be reported on (A) any Kellanova Separate Return (including any increase in such Tax as a result of a Final Determination) for all taxable periods and (B) any WKKC Separate Return (including any increase in such Tax as a result of a Final Determination) with respect to a taxable period ending on or before the Distribution Date.
(ii) Except as otherwise provided in Section 2.1(b)(iii), WKKC shall pay and be responsible for any and all Taxes due with respect to or required to be reported on any WKKC Separate Return (including any increase in such Tax as a result of a Final Determination) for all taxable periods other than taxable periods ending on or before the Distribution Date (excluding, for the avoidance of doubt, any Transaction Taxes allocated to the Kellanova Group pursuant to Section 2.3).
9
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(iii) The Party that directly or indirectly owns real or personal property following the Distribution shall pay and be responsible for any real property, personal property or similar Taxes imposed with respect to such property.
Section 2.2 Employment Taxes. Liability for Employment Taxes shall be determined pursuant to the Employee Matters Agreement.
Section 2.3 Transaction Taxes. The Group liable under applicable Law shall be responsible for any and all Transaction Taxes, as reasonably determined by Kellanova.
Section 2.4 Tax Refunds.
(a) Kellanova shall be entitled to all Refunds related to Taxes the liability for which is allocated to Kellanova pursuant to this Agreement. WKKC shall be entitled to all Refunds related to Taxes the liability for which is allocated to WKKC pursuant to this Agreement.
(b) WKKC shall pay to Kellanova any Refund received by WKKC or any member of the WKKC Group that is allocable to Kellanova pursuant to this Section 2.4 no later than fifteen (15) Business Days after the receipt of such Refund. Kellanova shall pay to WKKC any Refund received by Kellanova or any member of the Kellanova Group that is allocable to WKKC pursuant to this Section 2.4 no later than fifteen (15) Business Days after the receipt of such Refund. For purposes of this Section 2.4, any Refund that arises as a result of an offset, credit, or other similar benefit in respect of Taxes other than a receipt of cash shall be deemed to be received on the earlier of (i) the date on which a Tax Return is filed claiming such offset, credit, or other similar benefit, and (ii) the date on which payment of the Tax which would have otherwise been paid absent such offset, credit, or other similar benefit is due (determined without taking into account any applicable extensions).
Section 2.5 Tax Benefits. All amounts required to be paid by one Party to another pursuant to this Agreement shall be reduced by the Tax Benefit Actually Realized by the Indemnitee or its Affiliates as a result of the claim giving rise to the payment to the extent such Tax Benefit Actually Realized arises in the taxable year the applicable loss is incurred. If the receipt or accrual of any such payment (other than payments of interest pursuant to Section 10.2) results in taxable income to the Indemnitee or its Affiliates, such payment shall be increased so that, after the payment of any Taxes with respect to the payment, the Indemnified Party or its Affiliates shall have realized the same net amount it would have realized had the payment not resulted in taxable income.
Section 2.6 Prior Agreements. Except as set forth in this Agreement and in consideration of the mutual indemnities and other obligations of this Agreement, any and all prior Tax sharing or allocation agreements or practices between any member of the Kellanova Group and any member of the WKKC Group shall be terminated with respect to the WKKC Group as of the Distribution Date. No member of the WKKC Group or the Kellanova Group shall have any continuing rights or obligations to any member of the other Group under any such agreement.
10
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
ARTICLE III
PREPARATION AND FILING OF TAX RETURNS
Section 3.1 Kellanovas Responsibility. Kellanova shall prepare and file when due (taking into account any applicable extensions), or shall cause to be prepared and filed, all Joint Returns, all Kellanova Separate Returns (including pursuant to Section 2.1(b)(iii)), and all WKKC Separate Returns for which Kellanova is liable pursuant to Section 2.1(b)(i), including any amendments to such Tax Returns.
Section 3.2 WKKCs Responsibility. WKKC shall prepare and file when due (taking into account any applicable extensions), or shall cause to be prepared and filed, all Tax Returns, including any amended Tax Returns, required to be filed by or with respect to members of the WKKC Group other than those Tax Returns which Kellanova is required to prepare and file under Section 3.1. The Tax Returns required to be prepared and filed by WKKC under this Section 3.2 shall include any WKKC Separate Returns with respect to Straddle Periods and any amended WKKC Separate Returns with respect to Straddle Periods (including pursuant to Section 2.1(b)(iii)).
Section 3.3 Right To Review Tax Returns. To the extent that the positions taken on any Tax Return would reasonably be expected to materially affect the Tax position of the Party other than the Party that is required to prepare and file any such Tax Return pursuant to Section 3.1 or 3.2 (the Reviewing Party), the Party required to prepare and file such Tax Return (the Preparing Party) shall prepare the portion of such Tax Return that relates to the business of the Reviewing Party (the Kellanova Business or the WKKC Business, as the case may be), shall provide a draft of such portion of such Tax Return to the Reviewing Party for its review and comment at least thirty (30) days prior to the due date for such Tax Return (taking into account any applicable extensions), and shall modify such portion of such Tax Return before filing to include the Reviewing Partys reasonable comments.
Section 3.4 Cooperation. The Parties shall provide, and shall cause their Affiliates to provide, assistance and cooperation to one another in accordance with Article VII with respect to the preparation and filing of Tax Returns, including providing information required to be provided under Article VIII. Notwithstanding anything to the contrary in this Agreement, Kellanova shall not be required to disclose to WKKC any consolidated, combined, unitary, or other similar Joint Return of which a member of the Kellanova Group is the common parent or any information related to such a Joint Return other than information relating solely to the WKKC Group. If an amended Separate Return for State Taxes for which WKKC is responsible under this Article III is required to be filed as a result of an amendment made to a Joint Return for Federal Income Tax pursuant to an audit adjustment, then the Parties shall cooperate to ensure that such amended Separate Return can be prepared and filed in a manner that preserves confidential information including through the use of third-party preparers.
Section 3.5 Tax Reporting Practices. Except as provided in Section 3.6, with respect to any Tax Return for any taxable period that begins on or before the second anniversary of the Distribution Date with respect to which WKKC is the Responsible Party, such Tax Return shall be prepared in a manner (i) consistent with past practices, accounting methods, elections and conventions (Past Practices) used with respect to the Tax Returns in question (unless there is
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no Reasonable Basis for the use of such Past Practices), and to the extent any items are not covered by Past Practices (or in the event that there is no Reasonable Basis for the use of such Past Practices), in accordance with reasonable Tax accounting practices selected by WKKC; and (ii) that, to the extent consistent with clause (i), minimizes the overall amount of Taxes due and payable on such Tax Return for all of the Parties by cooperating in making such elections or applications for group or other relief or allowances available in the taxing jurisdiction in which such Tax Return is filed. WKKC shall not take any action inconsistent with the assumptions made (including with respect to any Tax Item) in determining all estimated or advance payments of Taxes on or prior to the Distribution Date. In addition, WKKC (i) shall not be permitted, and shall not permit any member of the WKKC Group, without Kellanovas prior written consent, to make a change in any of its methods of accounting for Tax purposes for any taxable period that begins on or before the second anniversary of the Distribution Date, and (ii) shall notify Kellanova of, and consider in good faith any reasonable comments provided by Kellanova regarding, any such change in method of accounting for any taxable period that begins after the second anniversary of the Distribution Date and on or before the fourth anniversary of the Distribution Date. Such notification and consideration described in clause (ii) of the preceding sentence shall occur prior to the making of any such change in method of accounting.
Section 3.6 Reporting of the Transactions. The Tax treatment of any step in or portion of the Transactions shall be reported on each applicable Tax Return consistently with the Tax Materials and the Tax-Free Status of the Transactions, taking into account the jurisdiction in which such Tax Return is filed, unless there is no Reasonable Basis for such Tax treatment. In the event that a Party shall determine that there is no Reasonable Basis for such Tax treatment, such Party shall notify the other Party no later than twenty (20) Business Days prior to filing the relevant Tax Return, and the Parties shall attempt in good faith to agree on the manner in which the relevant portion of the Transactions shall be reported on such Tax Return.
Section 3.7 Protective Section 336(e) Election. After the date hereof, Kellanova shall determine, in its sole and absolute discretion, whether to make a protective election under Section 336(e) of the Code and the Treasury Regulations promulgated thereunder (and any corresponding or analogous provisions of state and local Tax Law) in connection with the Distribution with respect to WKKC and each other member of the WKKC Group that is a domestic corporation for U.S. federal income tax purposes (a Section 336(e) Election). If Kellanova determines that a Section 336(e) Election would be beneficial:
(a) Kellanova, WKKC, and their respective Affiliates shall cooperate in making the Section 336(e) Election, including by filing any statements, amending any Tax Returns, or taking such other actions as are reasonably necessary to carry out the Section 336(e) Election;
(b) if the Distribution fails to qualify (in whole or in part) for the Tax-Free Status of the Transactions and WKKC or any member of the WKKC Group realizes an increase in Tax basis as a result of the Section 336(e) Election (the Section 336(e) Tax Basis), then the Tax Benefit Actually Realized by WKKC and each member of the WKKC Group as a result of the Section 336(e) Tax Basis shall be shared between Kellanova and WKKC in the same proportion as the Taxes giving rise to the Section 336(e) Tax Basis were borne by Kellanova and WKKC (after giving effect to the indemnification obligations in this Agreement); and
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(c) to the extent the Section 336(e) Election becomes effective, each Party agrees not to take any position (and to cause each of its Affiliates not to take any position) that is inconsistent with the Section 336(e) Election on any Tax Return, in connection with any Tax Contest, or otherwise, except as may be required by a Final Determination.
Section 3.8 Payment of Taxes.
(a) With respect to any Tax Return required to be filed pursuant to this Agreement, the Responsible Party shall remit or cause to be remitted to the applicable Taxing Authority in a timely manner any Taxes due in respect of any such Tax Return.
(b) In the case of any Tax Return for which the Party that is not the Responsible Party is obligated pursuant to this Agreement to pay all or a portion of the Taxes reported as due on such Tax Return, the Responsible Party shall notify the other Party, in writing, of its obligation to pay such Taxes and, in reasonably sufficient detail, its calculation of the amount due by such other Party, and the Party receiving such notice shall pay such amount to the Responsible Party no later than the later of (i) five (5) Business Days prior to the date on which such payment is due, and (ii) fifteen (15) Business Days after the receipt of such notice.
(c) With respect to any estimated Taxes, the Party that is or will be the Responsible Party with respect to any Tax Return that will reflect (or otherwise give credit for) such estimated Taxes shall remit or cause to be remitted to the applicable Taxing Authority in a timely manner any estimated Taxes due. In the case of any estimated Taxes for which the Party that is not the Responsible Party is obligated pursuant to this Agreement to pay all or a portion of the Taxes that will be reported as due on any Tax Return that will reflect (or otherwise give credit for) such estimated Taxes, the Responsible Party shall notify the other Party, in writing, of its obligation to pay such estimated Taxes and, in reasonably sufficient detail, its calculation of the amount due by such other Party and the Party receiving such notice shall pay such amount to the Responsible Party no later than the later of (i) five (5) Business Days prior to the date on which such payment is due, and (ii) fifteen (15) Business Days after the receipt of such notice.
Section 3.9 Amended Returns and Carrybacks.
(a) WKKC shall not, and shall not permit any member of the WKKC Group to, file or allow to be filed any request for an Adjustment for any Pre-Distribution Period without the prior written consent of Kellanova, such consent to be exercised in Kellanovas sole and absolute discretion.
(b) WKKC shall, and shall cause each member of the WKKC Group to, make any available elections to waive the right to carry back any Tax Attribute from a Post-Distribution Period to a Pre-Distribution Period.
(c) WKKC shall not, and shall cause each member of the WKKC Group not to, without the prior written consent of Kellanova, make any affirmative election to carry back any Tax Attribute from a Post-Distribution Period to a Pre-Distribution Period, such consent to be exercised in Kellanovas sole and absolute discretion.
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(d) Receipt of consent by WKKC or a member of the WKKC Group from Kellanova pursuant to the provisions of this Section 3.9 shall not limit or modify WKKCs continuing indemnification obligation pursuant to Article V.
Section 3.10 Tax Attributes. Kellanova shall in good faith advise WKKC in writing of the amount (if any) of any Tax Attributes which Kellanova determines, in its sole and absolute discretion, shall be allocated or apportioned to the WKKC Group under applicable Tax Law. WKKC and all members of the WKKC Group shall prepare all Tax Returns in accordance with such written notice. WKKC agrees that it shall not dispute Kellanovas determination of Tax Attributes. For the avoidance of doubt, Kellanova shall not be required in order to comply with this Section 3.10 to create or cause to be created any books and records or reports or other documents based thereon (including, without limitation, any E&P studies, basis studies or similar determinations) that it does not maintain or prepare in the ordinary course of business.
ARTICLE IV
TAX-FREE STATUS OF THE TRANSACTIONS
Section 4.1 Representations and Warranties.
(a) Kellanova, on behalf of itself and all other members of the Kellanova Group, hereby represents and warrants that (i) it has examined the IRS Ruling, the IRS Ruling Request, the Tax Opinion, the Tax Certificates, the Internal Reorganization Step Plan, and any other materials delivered or deliverable in connection with the issuance of the IRS Ruling and the rendering of the Tax Opinion, in each case, as they exist as of the date hereof (collectively, the Tax Materials), and (ii) the facts presented and representations made therein, to the extent descriptive of or otherwise relating to Kellanova or any member of the Kellanova Group or the Kellanova Business, were or will be, at the time presented or represented and from such time until and including the Distribution Date, true, correct, and complete in all material respects. Kellanova, on behalf of itself and all other members of the Kellanova Group, hereby confirms and agrees to comply with any and all covenants and agreements in the Tax Materials applicable to Kellanova, any member of the Kellanova Group, or the Kellanova Business.
(b) WKKC, on behalf of itself and all other members of the WKKC Group, hereby represents and warrants that (i) it has examined the Tax Materials, and (ii) the facts presented and representations made therein, to the extent descriptive of or otherwise relating to WKKC or any member of the WKKC Group or the WKKC Business, were or will be, at the time presented or represented and from such time until and including the Distribution Date, true, correct, and complete in all material respects. WKKC, on behalf of itself and all other members of the WKKC Group, hereby confirms and agrees to comply with any and all covenants and agreements in the Tax Materials applicable to WKKC, any member of the WKKC Group, or the WKKC Business.
(c) Each of Kellanova, on behalf of itself and all other members of the Kellanova Group, and WKKC, on behalf of itself and all other members of the WKKC Group, represents and warrants that it knows of no fact or circumstance (after due inquiry) that may cause the Transactions to fail to qualify for the Tax-Free Status of the Transactions.
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(d) Each of Kellanova on behalf of itself and all other members of the Kellanova Group, and WKKC, on behalf of itself and all other members of the WKKC Group, represents and warrants that it has no plan or intention to take, fail to take, or cause or permit to be taken any action which is inconsistent with any of the statements or representations made or set forth in the Tax Materials.
Section 4.2 Certain Restrictions Relating to the Tax-Free Status of the Transactions.
(a) WKKC, on behalf of itself and all other members of the WKKC Group, hereby covenants and agrees that no member of the WKKC Group will take, fail to take, or cause or permit to be taken (i) any action where such action or failure to act would be inconsistent with or cause to be untrue any statement, information, covenant, or representation in the Tax Materials, or (ii) any action where such action or failure to act constitutes a WKKC Disqualifying Action.
(b) During the Restricted Period, WKKC:
(i) shall (1) maintain its status as a company engaged in the Active Trade or Business for purposes of Section 355(b)(2) of the Code, (2) not engage in any transaction that would cause WKKC to cease to be a company engaged in the Active Trade or Business for purposes of Section 355(b)(2) of the Code, (3) cause each Affiliate of WKKC whose Active Trade or Business is relied upon in the Tax Materials for purposes of qualifying a transaction as tax-free pursuant to Section 355 of the Code to maintain its status as a company engaged in such Active Trade or Business for purposes of Section 355(b)(2) of the Code, (4) not engage in any transaction, or cause or permit an Affiliate of WKKC to engage in any transaction, that would result in an Affiliate of WKKC described in clause (3) to cease to be a company engaged in the relevant Active Trade or Business for purposes of Section 355(b)(2) of the Code, taking into account Section 355(b)(3) of the Code for purposes of clauses (1) through (4), and (5) not dispose of, or cause or permit an Affiliate of WKKC to dispose of, directly or indirectly, any interest in an Affiliate of WKKC described in clause (3);
(ii) shall not voluntarily dissolve or liquidate itself, any Affiliate of WKKC described in Section 4.2(b)(i), or any Affiliate of WKKC that that was a party to an Internal Distribution (including any action that is a liquidation for U.S. federal income tax purposes);
(iii) shall not (1) enter into any Proposed Acquisition Transaction or, to the extent WKKC has the right to prohibit any Proposed Acquisition Transaction, permit any Proposed Acquisition Transaction to occur, (2) redeem or otherwise repurchase (directly or through an Affiliate) any WKKC stock, or rights to acquire WKKC stock, except to the extent such repurchases satisfy Section 4.05(1)(b) of Revenue Procedure 96-30 (as in effect prior to the amendment of such Revenue Procedure by Revenue Procedure 2003-48), (3) amend its certificate of incorporation (or other organizational documents), or take any other action, whether through a stockholder vote or otherwise, affecting the relative voting rights of WKKC Capital Stock (including through the conversion of any class of WKKC Capital Stock into another class of WKKC Capital Stock), (4) merge or consolidate with any other Person (or cause or permit any Affiliate of WKKC that was a party to an Internal
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Distribution to merge or consolidate with any other Person), or (5) take any other action or actions (including any action or transaction that would be reasonably likely to be inconsistent with any of the statements and representations made or set forth in the Tax Materials) which in the aggregate, when combined with any other direct or indirect changes in ownership of WKKC Capital Stock pertinent for purposes of Section 355(e) of the Code, would be reasonably likely to have the effect of causing or permitting one or more Persons (whether or not acting in concert) to acquire directly or indirectly stock representing a Fifty-Percent or Greater Interest in WKKC (or in any Affiliate of WKKC that was a party to an Internal Distribution) or otherwise jeopardize the Tax-Free Status of the Transactions; and
(iv) shall not, and shall not cause or permit any member of the WKKC Group to, sell, transfer, or otherwise dispose of or agree to, sell, transfer or otherwise dispose of (including in any transaction treated for U.S. federal income tax purposes as a sale, transfer, or disposition) assets (including any shares of capital stock of a Subsidiary) that, in the aggregate, constitute more than twenty percent (20%) of the consolidated gross assets of WKKC or the WKKC Group. The foregoing sentence shall not apply to (1) sales, transfers, or dispositions of assets in the ordinary course of business, (2) any cash paid to acquire assets from an unrelated Person in an arms-length transaction, (3) any assets transferred to a Person that is disregarded as an entity separate from the transferor for U.S. federal income tax purposes, or (4) any mandatory or optional repayment (or prepayment) of any indebtedness of WKKC or any member of the WKKC Group. The percentages of gross assets or consolidated gross assets of WKKC or the WKKC Group, as the case may be, sold, transferred, or otherwise disposed of, shall be based on the fair market value of the gross assets of WKKC and the members of the WKKC Group as of the Distribution Date. For purposes of this Section 4.2(b)(iv), a merger of WKKC or one of its Subsidiaries with and into any Person that is not a wholly-owned Subsidiary of WKKC shall constitute a disposition of all of the assets of WKKC or such Subsidiary.
(c) Notwithstanding the restrictions imposed by Section 4.2(b), WKKC or a member of the WKKC Group may take any of the actions or transactions described therein if WKKC either (i) obtains an Unqualified Tax Opinion in form and substance satisfactory to Kellanova in its sole and absolute discretion, or (ii) obtains the prior written consent of Kellanova waiving the requirement that WKKC obtain an Unqualified Tax Opinion, such waiver to be provided in Kellanovas sole and absolute discretion. Kellanovas evaluation of an Unqualified Tax Opinion may consider, among other factors, the appropriateness of any underlying assumptions, representations, and covenants made in connection with such opinion (and, for the avoidance of doubt, Kellanova may determine that no opinion would be acceptable to Kellanova). WKKC shall bear all costs and expenses of securing any such Unqualified Tax Opinion and shall reimburse Kellanova for all reasonable out-of-pocket expenses that Kellanova or any of its Affiliates may incur in good faith in seeking to obtain or evaluate any such Unqualified Tax Opinion. Neither the delivery of an Unqualified Tax Opinion nor Kellanovas waiver of WKKCs obligation to deliver an Unqualified Tax Opinion shall limit or modify WKKCs continuing indemnification obligation pursuant to Article V.
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ARTICLE V
INDEMNITY OBLIGATIONS
Section 5.1 Indemnity Obligations. Notwithstanding anything to the contrary in this Agreement:
(a) Kellanova shall indemnify and hold harmless WKKC from and against, and will reimburse WKKC for, (i) all liability for Taxes allocated to Kellanova pursuant to Article II, (ii) all Taxes and Tax-Related Losses arising out of, based upon, or relating or attributable to any breach of or inaccuracy in, or failure to perform, as applicable, any representation, covenant, or obligation of any member of the Kellanova Group pursuant to this Agreement, (iii) [[]% of] all Taxes or Tax-Related Losses resulting from the failure of the Transactions to qualify for the Tax-Free Status of the Transactions, other than those Taxes or Tax Related Losses for which WKKC is responsible pursuant to Section 5.1(b)(ii) or 5.1(b)(iv), and (iv) the amount of any Refund received by any member of the Kellanova Group that is allocated to WKKC pursuant to Section 2.4(a).
(b) Without regard to whether an Unqualified Tax Opinion may have been provided or whether any action is permitted or consented to hereunder and notwithstanding anything else to the contrary contained herein, WKKC shall indemnify and hold harmless Kellanova from and against, and will reimburse Kellanova for, (i) all liability for Taxes allocated to WKKC pursuant to Article II, (ii) all Taxes and Tax-Related Losses arising out of, based upon, or relating or attributable to any breach of or inaccuracy in, or failure to perform, as applicable, any representation, covenant, or obligation of any member of the WKKC Group pursuant to this Agreement, (iii) [[]% of] all Taxes or Tax-Related Losses resulting from the failure of the Transactions to qualify for the Tax-Free Status of the Transactions, other than those Taxes or Tax Related Losses for which Kellanova is responsible pursuant to Section 5.1(a)(ii) (iii) the amount of any Refund received by any member of the WKKC Group that is allocated to Kellanova pursuant to Section 2.4(a), and (iv) any Taxes and Tax-Related Losses attributable to a WKKC Disqualifying Action (regardless of whether the conditions set forth in Section 4.2(c) are satisfied).
(c) To the extent that any Tax or Tax-Related Loss is subject to indemnity pursuant to both Sections 5.1(a)(ii) (on the one hand) and 5.1(b)(ii) or (iv) (on the other hand), responsibility for such Tax or Tax-Related Loss shall be shared by Kellanova and WKKC according to relative fault as determined by Kellanova in its good faith discretion (for the avoidance of doubt, subject to the provisions of Section 9.1).
Section 5.2 Indemnification Payments.
(a) Except as otherwise provided in this Agreement, if either Party (the Indemnitee) is required to pay to a Taxing Authority a Tax or to another Person a payment in respect of a Tax that the other Party (the Indemnifying Party) is liable for under this Agreement, including as a result of a Final Determination, the Indemnitee shall notify the Indemnifying Party, in writing, of its obligation to pay such Tax and, in reasonably sufficient detail, its calculation of the amount due by such Indemnifying Party to the Indemnitee, including any Tax-Related Losses attributable thereto. The Indemnifying Party shall pay such amount, including any Tax-Related Losses attributable thereto, to the Indemnitee no later than the later of (i) five (5) Business Days prior to the date on which such payment is due to the applicable Taxing Authority, and (ii) fifteen (15) Business Days after the receipt of notice from the other Party.
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(b) If, as a result of any change or redetermination, any amount previously allocated to and borne by one Party pursuant to the provisions of Article II is thereafter allocated to the other Party, then, no later than five (5) Business Days after such change or redetermination, such other Party shall pay to the first Party the amount previously borne by such Party which is allocated to such other Party as a result of such change or redetermination.
Section 5.3 Payment Mechanics.
(a) All payments under this Agreement shall be made by Kellanova directly to WKKC and by WKKC directly to Kellanova; provided, however, that if the Parties mutually agree with respect to any such indemnification payment, any member of the Kellanova Group, on the one hand, may make such indemnification payment to any member of the WKKC Group, on the other hand, and vice versa. All indemnification payments shall be treated in the manner described in Section 5.4.
(b) In the case of any payment of Taxes made by a Responsible Party or Indemnitee pursuant to this Agreement for which such Responsible Party or Indemnitee, as the case may be, has received a payment from the other Party, such Responsible Party or Indemnitee shall provide to the other Party a copy of any official government receipt received with respect to the payment of such Taxes to the applicable Taxing Authority (or, if no such official governmental receipts are available, executed bank payment forms or other reasonable evidence of payment).
Section 5.4 Treatment of Payments. The Parties agree that any payment made between the Parties pursuant to this Agreement shall be treated for all U.S. federal income tax purposes, to the extent permitted by Law, as either (i) a non-taxable contribution by Kellanova to WKKC, or (ii) a distribution by WKKC to Kellanova, and, in the case of any payment made between the Parties pursuant to this Agreement after the Distribution, such payment shall be treated as having been made immediately prior to the Distribution. Notwithstanding the foregoing, Kellanova shall notify WKKC if it determines that any payment made pursuant to this Agreement is to be treated, for any Tax purposes, as a payment made by one Party acting as an agent of one of such Partys Subsidiaries to the other Party acting as an agent of one of such other Partys Subsidiaries, and the Parties agree to treat any such payment accordingly.
ARTICLE VI
TAX CONTESTS
Section 6.1 Notice. Each Party shall notify the other Party in writing within ten (10) days after receipt by such Party or any member of its Group of a written communication from any Taxing Authority with respect to any pending or threatened audit, examination, claim, dispute, suit, action, proposed assessment, or other proceeding (a Tax Contest) concerning any Taxes for which the other Party may be liable pursuant to this Agreement, and thereafter shall promptly forward or make available to such Party copies of notices and communications relating to such Tax Contest. A failure by an Indemnitee to give notice as provided in this Section 6.1 (or to promptly forward any such notices or communications) shall not relieve the Indemnifying Party of its indemnification obligation under this Agreement, except to the extent that the Indemnifying Party shall have been actually prejudiced by such failure.
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Section 6.2 Separate Returns. In the case of any Tax Contest with respect to any Separate Return (other than a WKKC Separate Return for which Kellanova is liable pursuant to Section 2.1(b)(i), the Party having the liability for the Tax pursuant to Article II shall have the sole responsibility and right to control the prosecution of such Tax Contest, including the exclusive right to communicate with agents of the applicable Taxing Authority and to control, resolve, settle, or agree to any deficiency, claim, or adjustment proposed, asserted, or assessed in connection with or as a result of such Tax Contest.
Section 6.3 Joint Returns. In the case of any Tax Contest with respect to any Joint Return, Kellanova shall have the sole responsibility and right to control the prosecution of such Tax Contest, including the exclusive right to communicate with agents of the applicable Taxing Authority and to control, resolve, settle, or agree to any deficiency, claim, or adjustment proposed, asserted, or assessed in connection with or as a result of such Tax Contest.
Section 6.4 Obligation of Continued Notice. During the pendency of any Tax Contest or threatened Tax Contest, each of the Parties shall provide prompt notice to the other Party of any written communication received by it or a member of its respective Group from a Taxing Authority regarding any Tax Contest for which it is indemnified by the other Party hereunder or for which it may be required to indemnify the other Party hereunder. Such notice shall attach copies of the pertinent portion of any written communication from a Taxing Authority and contain factual information (to the extent known) describing any asserted Tax liability in reasonable detail and shall be accompanied by copies of any notice and other documents received from any Taxing Authority in respect of any such matters. Such notice shall be provided in a reasonably timely fashion; provided, however, that in the event that timely notice is not provided, a Party shall be relieved of its obligation to indemnify the other Party only to the extent that such delay results in actual increased costs or actual prejudice to such other Party.
Section 6.5 Participation Rights. Unless waived by the Parties in writing, in connection with any potential adjustment in a Tax Contest as a result of which adjustment the Non-Controlling Party may reasonably be expected to become liable to make any indemnification payment to the Controlling Party under this Agreement (i) the Controlling Party shall keep the Non-Controlling Party informed in a timely manner of all actions taken or proposed to be taken by the Controlling Party with respect to such potential adjustment in such Tax Contest, (ii) the Controlling Party shall timely provide the Non-Controlling Party with copies of any correspondence or filings submitted to any Taxing Authority or judicial authority in connection with such potential adjustment in such Tax Contest, and (iii) the Controlling Party shall defend such Tax Contest diligently and in good faith. The failure of the Controlling Party to take any action specified in the preceding sentence with respect to the Non-Controlling Party shall not relieve the Non-Controlling Party of any liability or obligation which it may have to the Controlling Party under this Agreement, and in no event shall such failure relieve the Non-Controlling Party from any other liability or obligation which it may have to the Controlling Party, in each case except to the extent that the Non-Controlling Party is materially prejudiced by such failure.
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ARTICLE VII
COOPERATION
Section 7.1 General.
(a) Each Party shall fully cooperate, and shall cause all members of such Partys Group to fully cooperate, with all reasonable requests in writing from the other Party, or from an agent, representative, or advisor of such Party, in connection with the preparation and filing of any Tax Return, claims for Refunds, the conduct of any Tax Contest, and calculations of amounts required to be paid pursuant to this Agreement, in each case, related or attributable to or arising in connection with Taxes of either Party or any member of either Partys Group covered by this Agreement and the establishment of any reserve required in connection with any financial reporting (each a Tax Matter). Such cooperation shall include the provision of any information reasonably necessary or helpful in connection with a Tax Matter and shall include, without limitation, at each Partys own cost:
(i) the provision of any Tax Returns of either Party or any member of either Partys Group, books, records (including information regarding ownership and Tax basis of property), documentation, and other information relating to such Tax Returns, including accompanying schedules, related work papers, and documents relating to rulings or other determinations by Taxing Authorities;
(ii) the execution of any document (including any power of attorney) in connection with any Tax Contest of either Party or any member of either Partys Group, or the filing of a Tax Return or a Refund claim of either Party or any member of either Partys Group;
(iii) the use of the Partys commercially reasonable efforts to obtain any documentation in connection with a Tax Matter; and
(iv) the use of the Partys commercially reasonable efforts to obtain any Tax Returns (including accompanying schedules, related work papers, and documents), documents, books, records, or other information in connection with the filing of any Tax Returns of either Party or any member of either Partys Group.
(b) Except as provided in any other Ancillary Agreement, each Party shall make its employees and facilities available, without charge, on a mutually convenient basis to facilitate such cooperation.
Section 7.2 Consistent Treatment. Unless and until there has been a Final Determination to the contrary, each Party agrees not to take any position on any Tax Return, in connection with any Tax Contest, or otherwise that is inconsistent with (i) the treatment of payments between the Kellanova Group and the WKKC Group as set forth in Section 5.4, (ii) the Tax Materials, or (iii) the Tax-Free Status of the Transactions.
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ARTICLE VIII
RETENTION OF RECORDS; ACCESS
Section 8.1 Retention of Records. For so long as the contents thereof may become material in the administration of any matter under applicable Tax Law, but in any event until the later of (i) sixty (60) days after the expiration of any applicable statutes of limitation (including any waivers or extensions thereof), and (ii) seven (7) years after the Distribution Date, the Parties shall retain records, documents, accounting data, and other information (including computer data) necessary for the preparation and filing of all Tax Returns (collectively, Tax Records) in respect of Taxes of any member of either the Kellanova Group or the WKKC Group for any Pre-Distribution Period or Post-Distribution Period or for any Tax Contests relating to such Tax Returns. At any time after the Distribution Date when the Kellanova Group proposes to destroy any Tax Records, Kellanova shall first notify WKKC in writing, and the WKKC Group shall be entitled to receive such records or documents proposed to be destroyed. At any time after the Distribution Date when the WKKC Group proposes to destroy any Tax Records, WKKC shall first notify Kellanova in writing, and the Kellanova Group shall be entitled to receive such records or documents proposed to be destroyed. The Parties will notify each other in writing of any waivers or extensions of the applicable statute of limitations that may affect the period for which the foregoing records or other documents must be retained.
Section 8.2 Access to Tax Records. The Parties and their respective Affiliates shall make available to each other for inspection and copying, during normal business hours upon reasonable notice, all Tax Records (including, for the avoidance of doubt, any pertinent underlying data accessed or stored on any computer program or information technology system) in their possession. Each of the Parties shall permit the other Party and its Affiliates, authorized agents, and representatives and any representative of a Taxing Authority or other Tax auditor direct access, during normal business hours upon reasonable notice, to any computer program or information technology system used to access or store any Tax Records, in each case to the extent reasonably required by the other Party in connection with the preparation of Tax Returns or financial accounting statements, audits, litigation, or the resolution of items pursuant to this Agreement. The Party seeking access to the records of the other Party shall bear all costs and expenses associated with such access, including any professional fees.
ARTICLE IX
DISPUTE RESOLUTION
Section 9.1 Dispute Resolution. In the event of any dispute between the Parties as to any matter covered by this Agreement, the Parties shall following the dispute resolution procedures set forth in Sections 7.1(b), 7.2 and 7.3 of the Separation Agreement. In the event that such dispute has not been resolved within ten (10) days of the receipt of a CEO Negotiation Request (as defined in the Separation Agreement) in accordance with Section 7.3 of the Separation Agreement, or within such longer period as the Parties may agree to in writing, then the Parties shall appoint a nationally recognized independent public accounting firm (the Accounting Firm) to resolve such dispute. In this regard, the Accounting Firm shall make determinations with respect to the disputed items based solely on representations made by Kellanova, WKKC, and their respective representatives, and not by independent review, and shall function only as an expert and not as an arbitrator and shall be required to make a determination in favor of one Party only. The Parties
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shall require the Accounting Firm to resolve all disputes no later than thirty (30) days after the submission of such dispute to the Accounting Firm, but in no event later than the due date for the payment of Taxes or the filing of the applicable Tax Return, if applicable, and agree that all decisions by the Accounting Firm with respect thereto shall be final and conclusive and binding on the Parties. The Accounting Firm shall resolve all disputes in a manner consistent with this Agreement and, to the extent not inconsistent with this Agreement, in a manner consistent with the Past Practices of Kellanova and its Subsidiaries, except as otherwise required by applicable Law. The Parties shall require the Accounting Firm to render all determinations in writing and to set forth, in reasonable detail, the basis for such determination. The fees and expenses of the Accounting Firm shall be borne equally by the Parties.
ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.1 Conflicting Agreements. In the event and to the extent that there shall be a conflict between the provisions of this Agreement and the provisions of the Separation Agreement or any Ancillary Agreement, this Agreement shall control with respect to the subject matter thereof.
Section 10.2 Interest on Late Payments. With respect to any payment between the Parties pursuant to this Agreement not made by the due date set forth in this Agreement for such payment, the outstanding amount will accrue interest at a rate per annum equal to the rate in effect for underpayments under Section 6621 of the Code from such due date to and including the payment date.
Section 10.3 Successors. This Agreement shall be binding on and inure to the benefit of any successor by merger, acquisition of assets, or otherwise, to either of the Parties (including but not limited to any successor of Kellanova or WKKC succeeding to any Tax Attributes of either Party under Section 381 of the Code), to the same extent as if such successor had been an original party to this Agreement.
Section 10.4 Assignability. This Agreement shall be binding upon and inure to the benefit of the Parties, and their respective successors and permitted assigns; provided, however, that neither Party may assign its rights or delegate its obligations under this Agreement without the express prior written consent of the other Party.
Section 10.5 No Fiduciary Relationship. The duties and obligations of the Parties, and their respective successors and permitted assigns, contained herein are the extent of the duties and obligations contemplated by this Agreement; nothing in this Agreement is intended to create a fiduciary relationship between the Parties hereto, or any of their successors and permitted assigns, or create any relationship or obligations other than those explicitly described.
Section 10.6 Further Assurances. In addition to the actions specifically provided for elsewhere in this Agreement, but subject to the express limitations of this Agreement, each of the Parties shall use its reasonable best efforts, prior to, on and after the Effective Time, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement.
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Section 10.7 Survival. Notwithstanding any other provision of this Agreement to the contrary, all representations and warranties, covenants, and obligations contained in this Agreement, and Liability for breach of any obligations contained herein, shall survive the Separation and Distribution and shall remain in full force and effect.
Section 10.8 Notices. All notices and other communications to be given to any Party shall be sufficiently given for all purposes hereunder if in writing and delivered by hand, courier or overnight delivery service, or five (5) days after being mailed by certified or registered mail, return receipt requested, with appropriate postage prepaid, or when delivered via email (such email shall be deemed delivered on the date of dispatch by the sender thereof to the extent no bounce back or similar message indicating non-delivery is received with respect thereto) and shall be directed to the address set forth below (or at such other address or email address as such Party shall designate by like notice):
If to Kellanova, to:
[]
[]
[]
Attention: []
E-mail: []
If to WKKC, to:
[]
One Kellogg Square
Battle Creek, Michigan 49017
Attention: []
E-mail: []
Section 10.9 Distribution Date. This Agreement shall become effective only upon the Distribution Date.
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IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the day and year first above written.
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Preliminary Information Statement
SUBJECT TO COMPLETION, DATED JUNE 16, 2023
INFORMATION STATEMENT
WK Kellogg Co
One Kellogg Square
Battle Creek, Michigan 49016
Common Stock, Par Value $0.0001 Per Share
We are sending you this Information Statement in connection with Kellogg Companys spin-off of its wholly owned subsidiary, WK Kellogg Co. To effect the spin-off, Kellogg Company, or Kellogg ParentCo, will undergo an internal reorganization, after which it will distribute all of the shares of WK Kellogg Co common stock on a pro rata basis to the holders of Kellogg ParentCo common stock. We expect that the distribution of WK Kellogg Co common stock will be tax-free to Kellogg ParentCos U.S. shareholders for U.S. federal income tax purposes, except for cash that shareholders receive in lieu of fractional shares.
If you are a record holder of Kellogg ParentCo common stock as of the close of business on , 2023, which is the record date for the distribution, you will be entitled to receive shares of WK Kellogg Co common stock for every shares of Kellogg ParentCo common stock you hold on that date. Kellogg ParentCo will distribute the shares of WK Kellogg Co common stock in book-entry form, which means that we will not issue physical stock certificates. The distribution agent will not distribute any fractional shares of WK Kellogg Co common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to each holder (net of any required withholding for taxes applicable to each holder) who would otherwise have been entitled to receive a fractional share in the distribution.
The distribution will be effective as of , New York City time, on , 2023. Immediately after the distribution becomes effective, we will be an independent, publicly traded company.
Kellogg ParentCos shareholders are not required to vote on or take any other action in connection with the spin-off. We are not asking you for a proxy, and you are requested not to send us a proxy. Kellogg ParentCos shareholders will not be required to pay any consideration for the shares of WK Kellogg Co common stock they receive in the spin-off, surrender or exchange their shares of Kellogg ParentCo common stock or take any other action in connection with the spin-off.
Kellogg ParentCo currently owns all of the outstanding shares of WK Kellogg Co common stock. Accordingly, no trading market for WK Kellogg Co common stock currently exists. We expect, however, that a limited trading market for WK Kellogg Co common stock, commonly known as a when-issued trading market, will develop as early as two trading days prior to the record date for the distribution, and we expect regular-way trading of WK Kellogg Co common stock will begin on the first trading day after the distribution date. We intend to list WK Kellogg Co common stock on the New York Stock Exchange under the symbol .
In reviewing this Information Statement, you should carefully consider the matters described in the section entitled Risk Factors beginning on page 25 of this Information Statement.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.
This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.
The date of this Information Statement is , 2023.
Kellogg ParentCo first mailed a Notice of Internet Availability of Information Statement Materials containing instructions on how to access this Information Statement to its shareholders on or about , 2023.
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TRADEMARKS, TRADE NAMES AND SERVICE MARKS
We have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business. Solely for convenience, the trademarks, trade names and service marks referred to in this Information Statement are listed without the ® and symbols, but we will assert, to the fullest extent under applicable law, our right to use such trademarks, service marks and trade names.
INDUSTRY, RANKING AND MARKET DATA
This Information Statement contains various historical and projected information concerning our industry, the market in which we participate, and our position in this market. Some of this information is from industry publications and other third-party sources, and other information is from our own analysis of data received from these third-party sources, including from The Nielsen Company (US), LLC (Nielsen), Circana (Circana) and Numerator Omnipanel Mini America (Numerator), and our own internal data. All of this information involves a variety of assumptions, limitations, and methodologies and is inherently subject to uncertainties, and therefore you are cautioned not to give undue weight to these estimates.
The total Nielsen reported sales data included in this prospectus is derived exclusively from data reported by Nielsen for the point-of-sale of products for the purposes of illustrating the competitive position of such products relative to other products in the respective markets in which we compete. Nielsen reported sales data for the United States aggregates national cross-outlet sales from among the following channels: food/grocery, drug, mass merchandisers, club, dollar, military and convenience. Nielsen reported sales data for Canada excludes Newfoundland and aggregates sales from among the following channels: grocery banners, drug retailers and mass merchandisers. The total Nielsen reported sales data included in this prospectus is not derived from or based on our financial statements and does not represent our results of operations. Nielsen reported sales data reflects the sales price of our products, as sold by our distribution channel customers to consumers in the marketplace and excludes data for certain customers who do not disclose their data at all.
In addition, Nielsen reported sales data is available for periods that differ from, and are not directly comparable to, our financial statements.
In this Information Statement, unless the context otherwise requires:
| WK Kellogg Co, we, our and us refer to (i) prior to the Internal Reorganization and Distribution, the Cereal Business as reflected in the combined financial statements included elsewhere in this Information Statement; and (ii) WK Kellogg Co and its consolidated subsidiaries, after giving effect to the Internal Reorganization and the Distribution; |
| Cereal Business shall collectively mean the business and operations conducted by Kellogg ParentCo in North America prior to the Distribution relating to (i) the development, production, packaging, distribution, marketing, licensing or sale of ready-to-eat cereal, hot cereal, muesli, and granola (other than RXBAR-branded granola), cereal-based snacks and cookies (other than Rice Krispies-branded snacks and Special K-branded cookies) and other food and beverage products produced under certain cereal brands and (ii) the licensing of certain brands and related trademarks within North America to unaffiliated third parties for non-food and beverage applications; |
| North America refers to the United States, Canada and the Caribbean, which is comprised of Anguilla, Antigua, Aruba, the Bahamas, Barbados, Barbuda, Bermuda, Bonaire, British Virgin Islands (Tortola, Virgin Gorda, Anegada and Jost Van Dyke), Cayman Islands, Curacao, Cuba, Dominica, Dominican Republic, French Guyana, Grenada, The Grenadines, Guadeloupe, Guyana, Haiti, Jamaica, |
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Martinique, Montserrat, Puerto Rico, Saba, Saint Barthélemy (St. Barts), Saint Kitts and Nevis, St. Lucia, Saint Martin, Sint Maarten, St. Vincent, Suriname, Trinidad and Tobago, Turks and Caicos, US Virgin Islands (St. Thomas, St. Croix and St. John), Saint Barthelemy and Sint Eustatius; |
| Kellogg ParentCo refers to Kellogg Company and its combined subsidiaries, other than, for all periods following the Spin-Off, WK Kellogg Co; |
| Internal Reorganization, refers to the series of internal transactions described under Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoSeparation and Distribution Agreement that will result in the separation of the Cereal Business from the Kellogg ParentCo Business (as defined below); |
| Contribution refers to the contribution by Kellogg ParentCo of assets, liabilities and operations associated with the Cereal Business to us in exchange for the consideration described in the Separation and Distribution Agreement (as described under Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoSeparation and Distribution Agreement); |
| Distribution refers to Kellogg ParentCos distribution of the shares of our common stock to its shareholders; and |
| Spin-Off refers to the Internal Reorganization and the Distribution collectively. |
Prior to Kellogg ParentCos distribution of the shares of our common stock to its shareholders, Kellogg ParentCo will undertake a series of internal transactions, following which:
(i) | we will hold the Cereal Business, and |
(ii) | Kellogg ParentCo (other than WK Kellogg Co) will hold Kellogg ParentCos businesses other than the Cereal Business, which we refer to as the Kellogg ParentCo Business. |
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This summary highlights selected information from this Information Statement and provides an overview of our company, our separation from Kellogg ParentCo and Kellogg ParentCos distribution of our common stock to Kellogg ParentCos shareholders. For a more complete understanding of our business and the spin-off, you should read the entire Information Statement carefully, particularly the discussions set forth under Risk Factors, Cautionary Statement Concerning Forward-Looking Statements, Unaudited Pro Forma Condensed Combined Financial Statements, our audited combined financial statements and accompanying notes included elsewhere in this Information Statement, and our unaudited condensed combined financial statements and accompanying notes included elsewhere in this Information Statement.
Our Company
WK Kellogg Co is an iconic North American food company with a differentiated portfolio of brands that have delighted our consumers for over a century. As a leading manufacturer, marketer and distributor of branded ready-to-eat cereal, we endeavor to provide consumers with high-quality products while promoting consumer health and wellbeing. Our products are manufactured by us in the United States, Mexico, and Canada and marketed in the United States, Canada and the Caribbean.
Kellogg ParentCo, formally founded in 1906 as a mission-led and family-oriented company, sprang to life when W. K. Kellogg changed breakfast forever by creating Corn Flakes in Battle Creek, Michigan. We have since upheld W. K. Kelloggs passion and commitment to wellness by producing nutritious, high quality and delicious cereal, which reached about 60% of households in the United States during the 52 weeks ended April 1, 2023. According to Nielsen data, we are the second largest seller of ready-to-eat cereals in the United States with a 28% share of retail sales for the 52-week period ended April 1, 2023 and the leading player in Canadas cereal market, with 38% category share over that same period. According to data provided by Nielsen, for the year-to-date period ended March 23, 2023, we were the number one seller of ready-to-eat cereals in Puerto Rico with a 37% category share.
We believe our long-standing success is attributable to the strength of the brands used in connection with the Cereal Business, our category expertise and over a century of institutional knowledge, all of which have created a diverse portfolio of cereals that are intended to enhance the lives of our consumers. Our product offerings are well diversified across the cereal sub-categories of taste, wellness and balance, with strong consumer appeal across the spectrum of ages and demographics. Iconic brands used in our business include Frosted Flakes, Special K, Froot Loops, Raisin Bran, Frosted Mini-Wheats, Rice Krispies, Kashi, Corn Flakes and Apple Jacks, among many others. We believe these brands also derive a differentiated advantage from the beloved brand characters which have been developed over time, starting in the 1950s with the introduction of Tony the Tiger, Toucan Sam as well as Snap, Crackle and Pop, which have since been joined by many other brand characters.
The Cereal Business generated net sales of $2,695 million, $2,460 million and $2,867 million and net (loss) income of $(25) million, $162 million and $182 million during the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively. We believe our rich history coupled with our powerful brands serve as a base for strong cash flow generation. We aspire to prioritize operational excellence by investing in our business through initiatives like facility enhancement and distribution efficiencies.
Following the Spin-Off, we will become an independent, publicly traded company led by a highly experienced management team fully dedicated to leveraging our capabilities and driving our strategic initiatives. We will also have increased flexibility to deploy our free cash flow towards our operating and capital allocation priorities. We will trade under the ticker symbol on the New York Stock Exchange (the NYSE).
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Key Business Strengths
Diversified Cereal Portfolio of Iconic Brands and Beloved Characters
We believe the key to WK Kellogg Cos enduring and continued strength lies in its portfolio of diverse cereals and iconic brands. As of April 1, 2023, nine of the top 20 brands in the cereal category across the United States and Canada are Kellogg brands. In addition, our products span all product components of the cereal category and are supported by beloved brand characters and a commitment to environmental, social, and governance (ESG) endeavors.
We strive to deliver the most consumer-centric brand portfolio in the cereal category, offering a diverse set of products that reach a broad range of consumer occasions and demographics. We have a strong presence across all three of the cereal categorys major product components. In the taste component, where we have a 34% category share in the United States for the 52-week period ended April 1, 2023, we have an arsenal of leading Kellogg brands used in connection with the Cereal Business, including Frosted Flakes, Froot Loops and Apple Jacks. In the wellness component, where we have a 17% category share in the United States for the 52-week period ended April 1, 2023, we lead with nutrition-oriented Kellogg brands like Special K and natural Kellogg brands like Kashi and Bear Naked. In the balance component, which sits between taste and wellness, where we have a 36% category share in the United States for the 52-week period ended April 1, 2023, the Kellogg brands used in connection with the Cereal Business include Special K, Frosted Mini-Wheats, Raisin Bran and Corn Flakes.
Our brands have been supported by brand characters that are beloved by consumers. We believe our characters not only embody our company values, but also provide differentiated competitive positioning from others in the industry. For instance, Tony the Tiger reinforces the importance of physical activity, while Toucan Sam encourages curiosity, and Snap, Crackle and Pop promote creativity. Given the importance of our brands to our business, if we do not maintain the favorable perception of our brands, our results could be negatively impacted. See Risk FactorsRisks Related to Our BusinessOur results may be negatively impacted if consumers do not maintain their favorable perception of our brands or company.
Leading Market Position in Large and Stable Category
We believe the ready-to-eat cereal category that Mr. Kellogg helped to create has thrived for over a century. At roughly $10.4 billion in category retail sales in North America (according to data provided by Nielsen for the 52-week period ended April 1, 2023), cereal is the number one choice in breakfast foods for children and a top three breakfast choice for adults in the United States (Circana, National Eating Trends®, 12 months ending March 2023). The category drives nearly 49 million purchase decisions every week. According to data provided by Nielsen for the 52-week period ended April 1, 2023, cereal buying households in the United States purchased on average approximately 21 boxes of cereal a year while cereal buying households in Canada purchased on average approximately 16 boxes of cereal per year.
Driving this categorys enduring popularity is the fact that it provides taste, nutrition, convenience, affordability and versatility for consumers. The cereal category also provides exciting opportunities for WK Kellogg Co to address ongoing changes in eating trends, such as digestive health and out-of-breakfast consumption occasions.
This large category is important to retailers given its size and frequency of purchase. In fact, for the 52-week period ended April 1, 2023, cereal is among the largest center-of-store categories at retail in the United States, according to Numerator. The category also serves as an important everyday offering for away-from-home channels such as schools, travel and lodging, and restaurants. In addition, we believe this category has remained relatively stable in North America over the past decade, and it has held up well during economic downturns, as evidenced by its growth at an average rate of approximately 4% of retail sales in the U.S. and Canada, respectively, over the last three years.
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We are the second largest seller of ready-to-eat cereal in the United States. Following supply disruptions caused by a fire and strike in the second half of 2021, our current category share has regained stable footing and our cereals represent 28% of the U.S. market, for the 52-week period ended April 1, 2023. We are the leading manufacturer in Canada, with a category share of 38% over the same period. According to data provided by Nielsen, for the year-to-date period ended March 23, 2023, we were the number one seller of ready-to-eat cereals in Puerto Rico with a 37% category share.
Our cereals have been household staples among North American families since 1906 and generated net retail sales of over $2.7 billion in the United States and nearly $297 million in Canada according to Nielsen, for the 52-week period ended April 1, 2023. Our brands, measured by household penetration, reach approximately 60% of U.S. households every year, and a modestly higher percentage in Canada.
Given the importance of this category and our brands, as well as the length and depth of our experience and expertise, we have developed long-term and deep relationships with retailers. These relationships were evidenced by the speed with which we recovered category share after a fire and strike in the second half of 2021 severely disrupted our supply. We recovered 4 percentage points of lost share for the period from January 2022 to August 2022.
Proven Strength in Product and Marketing Innovation
We have a strong culture of innovation, both in terms of launching new or reformulated products, and in terms of marketing our products in effective and exciting ways.
We have a rich history of continuously innovating and renovating our product offerings. We have launched new flavors of existing brands and generally reduced sugar levels to respond to changing consumer tastes. One historical example is launching the first protein cereal with Special K in 1955. More recent acquisitions have bolstered our presence in natural cereals, including Kashi and Bear Naked, which we acquired in 2000 and 2007, respectively. Kashi is among one of the leading natural brands in the ready-to-eat cereal categorys wellness sub-category. With cereal consumption relating to snacking and other occasions outside breakfast now representing approximately 23% of cereal consumption in the United States (Circana, National Eating Trends®, 12 months ending March 2023), we also launched Jumbo Snax, a hand-held snacking cereal, in 2020.
With over a century of idea generation and category leadership, we believe we have a proven ability to build brands with authentic marketing campaigns that resonate with a broad consumer base. Brand investment has been a long-term tenet of our organization, ever since Mr. Kellogg made the bold choice to double Kellogg ParentCos advertising budget during the Great Depression. Kellogg ParentCo has strived to be at the vanguard of new media, from sponsoring a large-scale electric billboard in Times Square in 1912, to being an early adopter of commercials and sponsored programs on radio and television, to investing in digital and social media platforms today. We have also developed differentiated product marketing techniques, such as inserting prizes in our cereal boxes and turning our cereal boxes into a source of additional information and entertainment. We plan to continue this trajectory of marketing innovation going forward. As our business is largely concentrated in the traditional retail grocery trade and the U.S. retail environment continues to face further consolidation, we must continue to leverage our marketing expertise and product innovation to respond to our customers and provide high-service levels.
We have a long history of conveying and amplifying our brands and characters through social and environmental initiatives by connecting our brands to a number of important causes such as hunger and wellbeing. One example of connecting with our broader community in this way is the Mission Tiger program tied to our Frosted Flakes brand and Tony the Tiger. The purpose of Mission Tiger is to find inclusive, quality sports programs that schools can adopt, regardless of available funding. Since its inception in 2019, Mission Tiger has raised substantial funds
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for middle school sports programs. In our opinion, Mission Tiger has not only amplified our purpose-driven values, but also proved to be an effective marketing investment, with the brand experiencing significant retail growth since the programs inception.
We have complemented our brand building efforts with commercial arrangements with other third-parties, including Microsoft and Mojang Studios. These licenses and partnerships amplify our brand messaging, help create excitement in stores, and broaden our consumer audience.
Strong Financial Profile with Attractive Cash Flow Generation
We believe our operating cash flow will allow us financial flexibility as a standalone company. We plan to utilize such flexibility to drive an investment philosophy that balances capital investments in areas such as supply chain optimization, cost-saving projects and new capabilities, with the ability to further increase shareholder value through a combination of debt reduction, return of capital to our shareholders in the form of dividends or share repurchases as well as potential acquisitions. Initially, in connection with the Spin-Off, we may increase our indebtedness to fund important capital projects. Thereafter, however, we plan to reduce indebtedness as a way to bolster financial flexibility for enhancing shareholder value. In addition, we also expect to enter into certain financing arrangements prior to or concurrently with the Spin-Off.
Talented and Passionate Management Team with Deep Industry Experience
Our strategy is driven by our talented management team that has substantial consumer packaged foods experience and a track record of operational success, brand management and acquisitions. Our management team is dedicated to upholding our culture with principles rooted in wellness, an appreciation for curiosity, diversity of thought, and a commitment to serving our communities, all upheld by the founding principles invoked by W.K. Kellogg.
Gary Pilnick is our Chief Executive Officer and a 23-year Kellogg ParentCo veteran whose inspiring leadership style, deep knowledge of the business and central role in defining Kellogg ParentCos successful strategy made him the natural choice to lead WK Kellogg Co. Leading Kellogg ParentCos corporate development function for the past two decades, Mr. Pilnick has played an instrumental role in Kellogg ParentCos most successful strategic initiatives, including the acquisition of Pringles, its expansion into Africa, and the development of Kellogg ParentCos strategy.
WK Kellogg Cos leadership team has significant operating experience across marketing, innovation, sales, supply chain, business planning and finance. WK Kellogg Cos management team will have over 120 years of experience collectively, with our chief growth officer and chief customer officer having notable experience within the cereal category, specifically.
The management team of seasoned leaders brings significant depth and breadth of experience and extensive knowledge to WK Kellogg Co, all of which will assist the business in continuing to build momentum and capitalize on its compelling long-term opportunities for investment and profit growth, driven by its portfolio of iconic, world-class brands.
In addition, along with our Board of Directors, this management team also has the experience and is well-positioned to deliver on the ESG goals set for the organization.
Our Strategies
Invest in Modernizing and Optimizing our Supply Chain for Improved Efficiency and Profitability
As a standalone company, WK Kellogg Co will have an increased ability to build a fit-for-purpose supply chain focused on cereal. Our independent focus on cereal will allow us to redeploy capital to optimize the business,
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including manufacturing, packaging, and distribution in a differentiated way relative to being a division within Kellogg ParentCo.
As an independent company, our operating and sales planning process will be more devoted to cereal and holistically will cover all channels across the United States, Canada and the Caribbean. While we will be subject to additional risks associated with operating as an independent, publicly traded company, as discussed herein, we believe this devoted focus will drive more agile decision-making and more accurate supply planning, leading to improved efficiencies and service levels.
We believe our category focus will allow us to align our manufacturing network to meet business needs, drive production to our most advantaged platforms, and expand platforms and facilities to optimize in-network conversion costs. We envision one area of investment will be the modernization of our manufacturing plants, including modernizing equipment and increasing digitization and automation. For instance, we have plans in place to increase automation in our packaging lines, driving both efficiency and flexibility to meet customer and consumer needs while enabling commercial value creation levers.
Additionally, we plan to refocus our network of distribution centers, including initiatives such as relocating facilities to align more closely with our manufacturing plants and increasing direct plant shipments to drive more efficient transportation. With warehouse space and labor now dedicated to WK Kellogg Co products, we also expect to generate more efficiency in our distribution network.
While we have been impacted by industry-wide and company-specific supply chain disruptions, we expect that our combined efforts will lead to reduced costs, improved margins and the minimization of working capital requirements, which will enable us to be nimbler and more responsive to consumer and customer needs.
Expand Consumer Base Through Brand Building, Innovation and Broadened Distribution
Leveraging our long history of innovative marketing and product launches, we plan to invest in brand building more effectively to adapt to changes in consumer behavior, taste profiles and brand resonance. By fully integrating all our sales and marketing across all channels and across the United States, Canada and the Caribbean in a more efficient manner, we expect to benefit from more agile decision making and synchronization of idea generation and execution across our North American region, leading to enhanced return on investment on marketing spend.
We believe we will be able to dedicate resources more effectively towards driving data-led insights that are more directly applicable to our standalone business. Our differentiated customer database gives us a considerable advantage in terms of understanding consumer behavior and gaining scale. As a result, we believe we will have a significant opportunity to expand our omnichannel presence and growth by better targeting and customizing messaging for specific consumer cohorts.
Additionally, we see a significant opportunity to increase net sales and household penetration by targeting out-of-breakfast cereal consumption, which we have already begun to address with our Cereal for Dinner advertising campaign and the launch of a snacking-oriented Jumbo Snax product line. We envision increased investment in food enhancements, packaging advancements and commercial improvements which will help our portfolio to address evolving consumer trends, such as snacking and out-of-breakfast occasions, with greater agility.
We also plan to more fully tap into our longstanding commitment to social and environmental purposes, which we believe will continue to drive a competitive advantage in connecting with our stakeholders, including our consumers. We believe social and environmental concerns are becoming increasingly relevant to our consumers,
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and we believe our strong brand recognition and history of investing in ESG initiatives will position us well to capitalize on this shift in consumer preferences.
Deepen our Retail Relationships and Leverage Strong Execution Capabilities to be the Cereal Provider of Choice
As the second largest player in the cereal category, we believe WK Kellogg Co is an important partner to our retail customers in a large and strategically important category. Following the Spin-Off, we will have a scaled sales force that we believe will be even more effective because of its singular category focus.
We strive to be an even more effective provider of choice for our retail partners, as we leverage our strong retail execution capabilities, endeavor to deliver best-in-class service, provide valuable analysis and consumer insights, and delight their consumers with brand building, innovation, and in-store merchandising. We also believe an optimized portfolio, more efficient supply planning and a streamlined manufacturing and logistics network will lead to a more efficient and responsive supply chain, further improving our ability to meet the needs of our customers.
As a standalone company, we will be devoted to analyzing the cereal category. Aided by first-party consumer data and advanced analytics capabilities, we will aim to provide our retail partners with deeper insights than other manufacturers in this category. These combined efforts will enhance our ability to drive revenue growth management, further improving our relationship with our retail partners and creating further value in the category.
We envision that our strong innovation pipeline and effective brand building will continue to drive consumer demand. We plan to amplify our exciting product offerings with innovative merchandising programs and strong in-store sales execution to drive traffic and purchases for our retail partners. As another point of differentiation, we plan to leverage our legacy and commitment to ESG. We will partner with retailers in this important pursuit through programs like our Childhood Wellbeing Promise, which aims to improve access to affordable, nourishing and sustainable foods for children and families across North America.
Expand Into Adjacent Categories and Engage in Attractive Acquisition Opportunities
Our priorities in the near term are to expand profit margins and grow organically in the cereal category, but we also will explore other value-enhancing opportunities. Over time, we see potential for growth through expansion beyond the cereal category which will allow us to further broaden our consumer base as we use this strategy to tap into new taste profiles and occasions. In the long run, we believe attractive acquisition opportunities may present themselves in complementary categories that will leverage and enhance our scale, brands, marketing expertise, distribution reach and relationships with key retailers. When pursuing acquisition opportunities, our business may be faced with additional risks as described in Risk FactorsRisks Related to Our BusinessWhen pursuing strategic acquisitions, alliances, divestitures or joint ventures or seeking organic growth opportunities, we may not be able to successfully consummate favorable transactions, integrate acquired businesses or achieve the anticipated benefits of organic growth investments.
Create Value for Shareholders Through Improved Cash Flow Growth and Balanced Capital Allocation
We believe our near-term focus on increasing category share and optimizing supply chain will lead to balanced net sales and operating profit growth, while driving growth in operating cash flows. We envision that this cash flow will allow us to manage capital allocation priorities across investing in the business, returning cash to shareholders in the form of an attractive dividend and potential share repurchases, and executing potential acquisitions. We believe this balanced approach will enable us to deliver attractive long-term shareholder value.
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Confidential Treatment Requested by WK Kellogg Co
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Our Products
Our principal products are cereals that are split across taste, wellness and balance sub-categories, and serve a diverse set of occasions and demographics. These products are manufactured by us in the United States, Mexico and Canada and marketed in the United States, Canada and the Caribbean. They are sold to retailers through a mixture of a direct sales force, brokers, and distributors. The Kellogg leading taste brands used in connection with the Cereal Business include Frosted Flakes, Froot Loops, and Apple Jacks. The Kellogg wellness brands used in connection with the Cereal Business include Special K, Kashi, and Bear Naked. The Kellogg balance brands used in connection with the Cereal Business include Special K, Frosted Mini-Wheats, Raisin Bran, and Corn Flakes. Most of our products are also marketed under the Kelloggs name.
Competition
We have experienced, and expect to continue to experience, intense competition for sales of all of our products. Our products compete with advertised and branded products of a similar nature as well as unadvertised and private label products, which are typically distributed at lower prices, and generally with other food products. Principal methods and factors of competition include new product introductions, product quality, taste, convenience, nutritional value, price, advertising and promotion. We believe we compete favorably with our competitors on the basis of these factors due to our diversified portfolio of beloved iconic brands and characters, our leading market position with significant scale in the North American cereal industry, our heritage of innovation and breakthrough marketing and our investment in our brands. Although we believe our competitive strengths will contribute to the growth and success of our company, our business is subject to risks including, among others, risks related to the incurrence of indebtedness in connection with the Spin-Off and risks related to operating as an independent, publicly traded company. See Risk Factors for a further description of these risks.
Supply Chain Challenges
We have experienced supply chain disruptions including economy-wide bottlenecks and shortages of materials, labor and freight that have led to increasing prices of raw materials and labor as well as limitations on shipping capacity. We have worked to offset these challenges through productivity and revenue growth management initiatives. Additionally, we were adversely impacted by a fire at one of our facilities in late July 2021, followed by an unrelated strike of approximately 1,400 employees at our four U.S. plants, which began in early October 2021 and ended in late December of the same year. Both of these events resulted in operational and financial impacts that extended into the first quarter of 2022.
Inflationary Pressures
Events such as the COVID-19 pandemic have resulted in certain impacts to the global economy, including market disruptions, supply chain challenges and inflationary pressures. Like the rest of the industry and economy, the Company beginning in 2021 experienced a sharp increase in input costs, ranging from ingredients and packaging, to energy, freight and labor. The increase in input costs has persisted through our fiscal year 2022 and into our fiscal year 2023. The Company mostly offset the dollar impact of this accelerated input-cost inflation through the execution of productivity initiatives and the implementation of revenue growth management actions to realize price. In addition to input-cost inflation, the industry and economy also experienced widespread bottlenecks and shortages of supply, creating substantial inefficiencies and incremental costs. For the Company, these inefficiencies and costs had a significant impact on profit margins in the first half of 2021. In the second half of 2021, the bottlenecks and shortages were supplanted by a significant Company-specific interruption in production, first because of a fire that temporarily shut down one of our U.S. plants, and then by a three-month labor strike in all four of our U.S. plants. The fire and strike combined to create the negative impacts of depleted inventory, lost net sales, lost fixed-cost absorption, and incremental costs during the second half of 2021 and into the first quarter of 2022, though partially offset by curbed commercial investment and reduced overhead.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Summary Risk Factors
We are subject to a number of risks, including risks related to the Spin-Off, including the Internal Reorganization and the Distribution and other related transactions. The following list of risk factors is not exhaustive. Please read Risk Factors carefully for a more thorough description of these and other risks.
| Following the Spin-Off, we will be a smaller company than Kellogg ParentCo, and we will no longer operate as part of a globally diversified company. |
| A decline in demand for ready-to-eat cereals could adversely affect our financial performance. |
| Supply chain disruptions and increases in costs and/or shortages of raw materials, labor, fuels and utilities as a result of geopolitical, economic and market conditions could adversely impact our profitability. |
| We may not achieve our growth targets, including revenue and profit growth targets and cash targets, and we may not realize the benefits we expect from revenue growth management. |
| When pursuing strategic acquisitions, alliances, divestitures or joint ventures, we may not be able to successfully consummate favorable transactions or successfully integrate acquired businesses. |
| Pandemics, epidemics or disease outbreaks, such as the COVID-19 pandemic, may disrupt our business, including, among other things, our supply chain and production processes, each of which could materially affect our operations, liquidity, financial condition and results of operations. |
| Material disruptions at one of our facilities could have a material adverse effect on our business, operating results and financial condition. |
| We may not be able to attract, develop and retain the highly skilled people we need to support our business. |
| A shortage in the labor pool, failure to successfully negotiate collectively bargained agreements, or other general inflationary pressures or changes in applicable laws and regulations could increase labor cost, which could have a material adverse effect on our operating results or financial condition. |
| Our post-retirement benefit-related costs and funding requirements could increase as a result of volatility in the financial markets, changes in interest rates and actuarial assumptions. |
| Our inability to obtain sufficient capital would constrain our ability to grow our business and to increase our revenues. |
| Our results may be materially and adversely impacted as a result of increases in the price of raw materials. |
| Our results may be adversely affected by increases in transportation costs and reduced availability of or increases in the price of oil or other fuels. |
| We operate in the highly competitive food industry, including with respect to retail and shelf space. |
| The changing retail environment and the growing presence of alternative retail channels could negatively impact our sales and profits. |
| We face risks related to tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes. |
| If our food products become adulterated, misbranded or mislabeled, we might need to recall those items and may experience product liability if consumers are injured or damaged as a result. |
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| Evolving tax, advertising, environmental, licensing, labeling, trade, food quality and safety or other regulations or failure to comply with existing regulations and laws could have a material adverse effect on our financial condition. |
| Technology failures, cyber-attacks, privacy breaches or data breaches could disrupt our operations or reputation and negatively impact our business. |
| Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands. |
| Certain of our rights to intellectual property used in our business, including certain brands, will be limited to those of a licensee under the Intellectual Property Agreements. |
| The Spin-Off may not be completed on the terms or timeline currently contemplated, if at all. |
| If the Contribution and the Distribution were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, or for tax-deferred treatment for Canadian federal and provincial income tax purposes, then Kellogg ParentCo, we, our Canadian subsidiaries (as applicable) and our shareholders could be subject to significant tax liability. |
| We intend to agree to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating flexibility. |
| We may be unable to achieve the expected benefits from the Spin-Off. |
| We have no operating history as an independent, publicly traded company, and our historical and pro forma financial statements are not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of future results. |
| We expect to incur indebtedness in connection with the Spin-Off, and the degree to which we will be leveraged following completion of the Spin-Off may materially and adversely affect our business, financial condition and results of operations. |
| The obligations associated with being a public company will require significant resources and management attention. |
| If we fail to maintain effective internal controls, we may not be able to report our financial results accurately or timely or to prevent or detect fraud, which could have a material adverse effect on our business or the market price of our securities. |
| After the Spin-Off, certain of our directors and officers may have actual or potential conflicts of interest because of their Kellogg ParentCo equity ownership or their former Kellogg ParentCo positions. |
Corporate Information
WK Kellogg Co was incorporated in Delaware on November 23, 2022. After the Spin-Off, our principal executive offices will be located at One Kellogg Square, Battle Creek, Michigan 49016. Our Web site address is . Information contained on, or connected to, our Web site or Kellogg ParentCos Web site does not and will not constitute part of this Information Statement or the Registration Statement on Form 10 (the Registration Statement) of which this Information Statement is a part. Upon our separation from Kellogg ParentCo, we expect to trade under the symbol on the NYSE.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
The Spin-Off
Overview
On June 21, 2022, Kellogg ParentCo announced a plan to separate the Cereal Business via a tax-free Spin-Off, resulting in the creation of a new independent public company: WK Kellogg Co. To effect the Spin-Off, Kellogg ParentCo will first undertake the Internal Reorganization described under Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoSeparation and Distribution Agreement. Following the Internal Reorganization, WK Kellogg Co, a wholly owned subsidiary of Kellogg ParentCo, will hold the Cereal Business and Kellogg ParentCo (other than WK Kellogg Co) will hold the Kellogg ParentCo Business. Kellogg ParentCo will then effect the Distribution by distributing all of WK Kellogg Cos common stock to Kellogg ParentCos shareholders, and WK Kellogg Co will become an independent, publicly traded company.
Before the Spin-Off, we intend to enter into a Separation and Distribution Agreement (as described under Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoSeparation and Distribution Agreement) and several other ancillary agreements with Kellogg ParentCo related to the Spin-Off. These agreements will govern the relationship between Kellogg ParentCo and WK Kellogg Co up to and after completion of the Spin-Off and allocate various assets, liabilities and obligations, including with respect to employee benefits, intellectual property and taxes between Kellogg ParentCo and WK Kellogg Co. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo for more detail.
The Spin-Off described in this Information Statement is subject to the satisfaction or waiver of a number of conditions. In addition, Kellogg ParentCo has the right not to complete the Spin-Off if, at any time, Kellogg ParentCos board of directors, or the Kellogg ParentCo Board, determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kellogg ParentCo or its shareholders or is otherwise not advisable. See The Spin-OffConditions to the Spin-Off for more detail.
Questions and Answers about the Spin-Off
The following provides only a summary of the terms of the Spin-Off. You should read the section entitled The Spin-Off in this Information Statement for a more detailed description of the matters described below.
Q: | What is the Spin-Off? |
A: | The Spin-Off is the method by which WK Kellogg Co will separate from Kellogg ParentCo. In this tax-free Spin-Off, Kellogg ParentCo will distribute to its shareholders all of the shares of our common stock. Following the Spin-Off, we will be a separate company from Kellogg ParentCo, and Kellogg ParentCo will not retain any ownership interest in us. |
Q: | What are the reasons for the Spin-Off? |
A: | The Kellogg ParentCo Board believes that separating WK Kellogg Co into a separate, independent public company will better position Kellogg ParentCo and WK Kellogg Co to: |
| focus on their distinct strategic priorities, with financial targets that best fit their own markets and opportunities; |
| execute with increased agility and operational flexibility, enabling more focused allocation of capital and resources in a manner consistent with those strategic priorities; |
| realize improved outlooks for profitable growth; and |
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| shape distinctive corporate cultures, rooted in Kellogg ParentCos strong values, with rewarding career paths for employees of each company. |
Q: | Why is the separation of WK Kellogg Co structured as a spin-off? |
A: | Kellogg ParentCo believes that a distribution of our shares of common stock is the most efficient way to separate our business from Kellogg ParentCo in a manner that will achieve the above objectives. |
Q: | Will the number of Kellogg ParentCo shares I own change as a result of the Distribution? |
A: | No, the number of shares of Kellogg ParentCo common stock you own will not change as a result of the Distribution. |
Q: | What will I receive in the Spin-Off? |
A: | As a holder of Kellogg ParentCo common stock, you will receive shares of our common stock for every shares of Kellogg ParentCo common stock you hold on the Record Date (as defined below). The distribution agent will distribute only whole shares of our common stock in the Spin-Off. See How will fractional shares be treated in the Distribution? for more information on the treatment of the fractional shares you are entitled to receive in the Distribution. The number of shares of Kellogg ParentCo common stock you own will not change as a result of the Spin-Off. For a more detailed description, see The Spin-Off. |
Q: | What is being distributed in the Spin-Off? |
A: | Kellogg ParentCo will distribute approximately shares of our common stock in the Spin-Off, based on the approximately shares of Kellogg ParentCo common stock outstanding as of , 2023. The actual number of shares of our common stock that Kellogg ParentCo will distribute will depend on the number of shares of Kellogg ParentCo common stock outstanding on the Record Date (as defined below). The shares of our common stock that Kellogg ParentCo distributes will constitute all of the issued and outstanding shares of our common stock immediately prior to the Distribution. For more information on the shares being distributed in the Spin-Off, see Description of Our Capital StockCommon Stock. |
Q: | What is the record date for the Distribution? |
A: | Kellogg ParentCo will determine record ownership as of the close of business on , 2023, which we refer to as the Record Date. |
Q: | When will the Distribution occur? |
A: | The Distribution will be effective as of , New York City time, on , 2023, which we refer to as the Distribution Date. On or shortly after the Distribution Date, the whole shares of our common stock will be credited in book-entry accounts for shareholders entitled to receive the shares in the Distribution. We expect the distribution agent, acting on behalf of Kellogg ParentCo, to take about one week after the Distribution Date to fully distribute to Kellogg ParentCo shareholders any cash in lieu of the fractional shares they are entitled to receive. See How will Kellogg ParentCo distribute shares of our common stock? for more information on how to access your book-entry account or your bank, brokerage or other account holding the WK Kellogg Co common stock you receive in the Distribution. |
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Q: | What do I have to do to participate in the Distribution? |
A: | You are not required to take any action, but we urge you to read this document carefully. Shareholders of Kellogg ParentCo common stock on the Record Date will not need to pay any cash or deliver any other consideration, including any shares of Kellogg ParentCo common stock, in order to receive shares of our common stock in the Distribution. |
Q: | Is shareholder approval required for the Spin-Off? |
A: | No. Kellogg ParentCo is incorporated in Delaware. Delaware law does not require a shareholder vote to approve the Spin-Off because the Spin-Off does not constitute a sale, lease or exchange of all or substantially all of the assets of Kellogg ParentCo. |
Q: | If I sell my shares of Kellogg ParentCo common stock on or before the Distribution Date, will I still be entitled to receive shares of WK Kellogg Co common stock in the Distribution? |
A: | If you hold shares of Kellogg ParentCo common stock on the Record Date and decide to sell them on or before the Distribution Date, you may choose to sell your Kellogg ParentCo common stock with or without your entitlement to our common stock. You should discuss these alternatives with your bank, broker or other nominee. See The Spin-OffTrading Prior to the Distribution Date for more information. |
Q: | How will Kellogg ParentCo distribute shares of our common stock? |
A: | Registered shareholders: If you are a registered shareholder (meaning you hold physical Kellogg ParentCo stock certificates or you own your shares of Kellogg ParentCo common stock directly through an account with Kellogg ParentCos transfer agent, Broadridge Corporate Issuer Solutions, Inc. (Broadridge)), then the distribution agent will credit the whole shares of our common stock you receive in the Distribution to your Broadridge book-entry account on or shortly after the Distribution Date. Approximately one week after the Distribution Date, the distribution agent will mail you a book-entry account statement that reflects the number of whole shares of our common stock you will own, along with a check for any cash in lieu of fractional shares you are entitled to receive. You will be able to access information regarding your book-entry account holding the WK Kellogg Co shares at using the same credentials that you use to access your Kellogg ParentCo account or via our transfer agents interactive voice response system at . |
Street name or beneficial shareholders: If you own your shares of Kellogg ParentCo common stock beneficially through a bank, broker or other nominee, your bank, broker or other nominee will credit your account with the whole shares of our common stock you receive in the Distribution on or shortly after the Distribution Date. Please contact your bank, broker or other nominee for further information about your account.
We will not issue any physical stock certificates of our common stock to any shareholders, even if requested. See The Spin-OffWhen and How You Will Receive WK Kellogg Co Shares for a more detailed explanation.
Q: | How will fractional shares be treated in the Distribution? |
A: | The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Kellogg ParentCo shareholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds |
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of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the when-issued market, and when-issued trades will generally settle within two trading days following the Distribution Date. See How will WK Kellogg Co common stock trade? for additional information regarding when-issued trading and The Spin-OffTreatment of Fractional Shares for a more detailed explanation of the treatment of fractional shares. |
Q: | What are the U.S. federal income tax consequences of the Distribution to me? |
A: | The Distribution is conditioned on the receipt and continued validity of the private letter ruling that Kellogg ParentCo will request from the U.S. Internal Revenue Service, or the IRS, and the receipt and continued validity of an opinion of tax counsel, each to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants: the Contribution and Distribution will qualify for non-recognition of gain or loss to Kellogg ParentCo and Kellogg ParentCos shareholders pursuant to Section 355 and Section 368 of the Code, except to the extent of cash received in lieu of fractional shares. |
As described more fully in Material U.S. Federal Income Tax Consequences of the Spin-Off, a U.S. holder (as defined in that section) generally will not recognize any gain or loss, and will not include any amount in income, for U.S. federal income tax purposes, upon receiving our common stock in the Distribution, except for any gain or loss recognized with respect to cash the shareholder receives in lieu of fractional shares. In addition, each U.S. holders aggregate basis in its Kellogg ParentCo common stock and our common stock received in the Distribution, including any fractional shares to which the U.S. holder is entitled, will equal the aggregate basis the U.S. holder had in its Kellogg ParentCo common stock immediately prior to the Distribution, allocated in proportion to Kellogg ParentCos and our common stocks fair market value at the time of the Distribution. See Material U.S. Federal Income Tax Consequences of the Spin-Off for information regarding the determination of fair market value for purposes of allocating basis.
Tax matters are complicated. The tax consequences to you of the Distribution depend on your individual situation. You should consult your own tax advisor regarding those consequences, including the applicability and effect of any U.S. federal, state and local, as well as foreign, tax laws and of changes in applicable tax laws, which may result in the Distribution being taxable to you. See Risk FactorsOther Risks Related to the Spin-OffIf the Contribution and the Distribution were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then Kellogg ParentCo, we and our shareholders could be subject to significant tax liability, Risk FactorsOther Risks Related to the Spin-OffWe could have an indemnification obligation to Kellogg ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition and Material U.S. Federal Income Tax Consequences of the Spin-Off.
Q: | Does WK Kellogg Co intend to pay cash dividends? |
A: | Following the Spin-Off, we expect to pay cash dividends, although the timing, declaration, amount and payment of any future dividends to shareholders will fall within the discretion of our board of directors, which we refer to as our Board. See Risk FactorsRisks Related to Our Common StockWe cannot assure shareholders that our Board will declare dividends in the future and Dividend Policy for more information. |
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Q: | Will WK Kellogg Co incur any debt prior to or at the time of the Distribution? |
A: | Yes. WK Kellogg Co intends to enter into certain financing arrangements prior to or concurrently with the Spin-Off. A description of such financing arrangements will be included in an amendment to this Information Statement. See Description of Material Indebtedness and Risk FactorsOther Risks Related to the Spin-Off. |
Q: | How will WK Kellogg Co common stock trade? |
A: | Currently, there is no public market for our common stock. We intend to list our common stock on the NYSE under the symbol . |
We anticipate that trading in our common stock will begin on a when-issued basis as early as two trading days prior to the Record Date for the Distribution and will continue up to and including the Distribution Date. When-issued trading in the context of a spin-off refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. When-issued trades generally settle within two trading days after the Distribution Date. On the first trading day following the Distribution Date, any when-issued trading of our common stock will end and regular-way trading will begin. Regular-way trading refers to trading after the security has been distributed. See The Spin-OffTrading Prior to the Distribution Date for more information. We cannot predict the trading prices for our common stock before, on or after the Distribution Date.
Q: | Will the Spin-Off affect the trading price of my Kellogg ParentCo common stock? |
A: | The trading price of shares of Kellogg ParentCo common stock immediately following the Distribution may be lower than immediately prior to the Distribution as a result of the trading price no longer reflecting the value of the Cereal Business. Furthermore, until the market has fully analyzed the value of Kellogg ParentCo without the Cereal Business, the trading price of shares of Kellogg ParentCo common stock may fluctuate. There can be no assurance that, following the Distribution, the combined trading prices of Kellogg ParentCo common stock and WK Kellogg Co common stock will equal or exceed what the trading price of Kellogg ParentCo common stock would have been in the absence of the Spin-Off. |
It is possible that after the Spin-Off, the combined equity value of Kellogg ParentCo and WK Kellogg Co will be less than Kellogg ParentCos equity value before the Spin-Off.
Q: | Will my shares of Kellogg ParentCo common stock continue to trade following the Distribution? |
A: | Yes. Kellogg ParentCos common stock will continue to trade on the NYSE under the symbol K. |
Q: | Do I have appraisal rights in connection with the Spin-Off? |
A: | No. Holders of Kellogg ParentCo common stock are not entitled to appraisal rights in connection with the Spin-Off. |
Q: | Who is the transfer agent and registrar for WK Kellogg Co common stock? |
A: | Following the Spin-Off, will serve as the transfer agent and registrar for our common stock. |
| Broadridge currently serves and will continue to serve as Kellogg ParentCos transfer agent and registrar. |
| will serve as the distribution agent in the Distribution and will assist Kellogg ParentCo in the distribution of our common stock to Kellogg ParentCos shareholders. |
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Q: | Are there risks associated with owning shares of WK Kellogg Co common stock? |
A: | Yes. Our business faces both general and specific risks and uncertainties. Our business also faces risks relating to the Spin-Off. Following the Spin-Off, we will also face risks associated with being an independent, publicly traded company. Accordingly, you should read carefully the information set forth in the section entitled Risk Factors in this Information Statement. |
Q: | Where can I get more information? |
A: | If you have any questions relating to the mechanics of the Distribution, you should contact the distribution agent at: |
Phone:
Email:
Before the Spin-Off, if you have any questions relating to the Spin-Off, you should contact Kellogg ParentCo at:
Investor Relations
Kellogg Company
One Kellogg Square
Battle Creek, Michigan 49016
Phone: (269) 961-2800
Email: investor.relations@kellogg.com
After the Spin-Off, if you have any questions relating to WK Kellogg Co, you should contact us at:
Investor Relations
WK Kellogg Co
One Kellogg Square
Battle Creek, Michigan 49016
Phone:
Email:
After the Spin-Off, if you have any questions relating to Kellogg ParentCo, you should contact them at:
Investor Relations
Kellogg Company
One Kellogg Square
Battle Creek, Michigan 49016
Phone: (269) 961-2800
Email: investor.relations@kellogg.com
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Summary of the Spin-Off
Distributing Company |
Kellogg ParentCo, a Delaware corporation that holds all of our common stock issued and outstanding prior to the Distribution. After the Distribution, Kellogg ParentCo will not own any shares of our common stock. |
Distributed Company |
WK Kellogg Co, a Delaware corporation and a wholly owned subsidiary of Kellogg ParentCo. At the time of the Distribution, we will hold, directly or through our subsidiaries, the assets and liabilities of the Cereal Business. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo for more detail. After the Spin-Off, we will be an independent, publicly traded company. |
Distributed Securities |
All of the shares of our common stock owned by Kellogg ParentCo, which will be 100% of our common stock issued and outstanding immediately prior to the Distribution. Based on the approximately shares of Kellogg ParentCo common stock outstanding on , 2023, and applying the distribution ratio of shares of WK Kellogg Co common stock for every shares of Kellogg ParentCo common stock, approximately shares of WK Kellogg Co common stock will be distributed. |
Record Date |
The Record Date is the close of business on , 2023. |
Distribution Date |
The Distribution Date is , New York City time, on , 2023. |
Internal Reorganization |
Kellogg ParentCo currently, directly or through its wholly owned subsidiaries, holds both the Cereal Business and the Kellogg ParentCo Business. In connection with the Spin-Off, Kellogg ParentCo will undertake the Internal Reorganization, following which we will hold the Cereal Business and Kellogg ParentCo (other than WK Kellogg Co) will hold the Kellogg ParentCo Business. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoSeparation and Distribution Agreement for a description of the Internal Reorganization. |
Distribution Ratio |
Each holder of Kellogg ParentCo common stock will receive shares of our common stock for every shares of Kellogg ParentCo common stock it holds on the Record Date. The distribution agent will distribute only whole shares of our common stock in the Spin-Off. See The Spin-OffTreatment of Fractional Shares for more detail. Please note that if you sell your shares of Kellogg ParentCo common stock on or before the Distribution Date, the buyer of those shares may in some circumstances be entitled to receive the shares of our common stock issuable in respect of the Kellogg ParentCo shares that you sold. See The Spin-OffTrading Prior to the Distribution Date for more detail. |
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The Distribution |
On the Distribution Date, Kellogg ParentCo will release the shares of our common stock to the distribution agent to distribute to Kellogg ParentCo shareholders. The distribution agent will distribute our shares in book-entry form. We will not issue any physical stock certificates. The distribution agent, or your bank, broker or other nominee, will credit your shares of our common stock to your book-entry account, or your bank, brokerage or other account, on or shortly after the Distribution Date. You will not be required to make any payment, surrender or exchange your shares of Kellogg ParentCo common stock or take any other action to receive your shares of our common stock. |
Fractional Shares |
The distribution agent will not distribute any fractional shares of our common stock to Kellogg ParentCo shareholders. Instead, the distribution agent will first aggregate fractional shares into whole shares, then sell the whole shares in the open market at prevailing market prices on behalf of Kellogg ParentCo shareholders entitled to receive a fractional share, and finally distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). If you receive cash in lieu of fractional shares, you will not be entitled to any interest on the payments. Your receipt of cash in lieu of fractional shares generally will, for U.S. federal income tax purposes, be taxable as described under Material U.S. Federal Income Tax Consequences of the Spin-OffTreatment of Fractional Shares. |
Conditions to the Spin-Off |
The Spin-Off is subject to the satisfaction or waiver of the following conditions, as well as other conditions described in this Information Statement in The Separation and DistributionConditions to the Distribution: |
| the final approval of the Distribution by the Kellogg ParentCo Board, which approval may be given or withheld in the absolute and sole discretion of the Kellogg ParentCo Board; |
| the U.S. Securities and Exchange Commission, or the SEC, will have declared our Registration Statement, of which this Information Statement is a part, effective under the Securities Exchange Act of 1934, as amended, or the Exchange Act, no stop order suspending the effectiveness of the Registration Statement will be in effect, no proceedings for that purpose will be pending before or threatened by the SEC and notice of Internet availability of this Information Statement or this Information Statement will have been mailed to Kellogg ParentCos shareholders; |
| the NYSE or another national securities exchange approved by the Kellogg ParentCo Board will have accepted our common stock for listing, subject to official notice of distribution; |
| the Internal Reorganization will have been completed as contemplated by the Separation and Distribution Agreement; |
17 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
| the debt financing to be obtained in connection with the Spin-Off shall have been obtained; |
| Kellogg ParentCo will have received a private letter ruling from the IRS, in form and substance satisfactory to the Kellogg ParentCo Board in its sole and absolute discretion, to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, the Contribution and Distribution will qualify for non-recognition of gain or loss to Kellogg ParentCo and Kellogg ParentCos shareholders pursuant to Sections 368 and 355 of the Code, except to the extent of cash received in lieu of fractional shares, and that private letter ruling will remain in effect as of the Distribution Date; |
| Kellogg ParentCo will have received an opinion from its tax counsel, in form and substance satisfactory to the Kellogg ParentCo Board in its sole and absolute discretion, that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, the Contribution and the Distribution will qualify for non-recognition of gain or loss to Kellogg ParentCo and Kellogg ParentCos shareholders pursuant to Sections 368 and 355 of the Code, except to the extent of cash received in lieu of fractional shares; |
| Kellogg ParentCo will have obtained one or more opinions from an independent nationally recognized valuation advisory firm, in form and substance satisfactory to the Kellogg ParentCo Board in its sole and absolute discretion, to the effect that (i) following the Distribution, Kellogg ParentCo, on the one hand, and WK Kellogg Co, on the other hand, will be solvent and adequately capitalized, (ii) Kellogg ParentCo has adequate surplus to declare the dividend to record holders and (iii) WK Kellogg Co has adequate surplus to declare the cash dividend to Kellogg ParentCo as part of the Internal Reorganization; |
| all actions or filings necessary or appropriate under applicable U.S. federal, state or other securities or blue sky laws and the rules and regulations thereunder will have been taken and, where applicable, will have become effective or been accepted by the applicable governmental entity; |
| each of the ancillary agreements contemplated by the Separation and Distribution Agreement will have been executed; |
| no order, injunction or decree that would prevent the consummation of all or any portion of the Distribution will be threatened, pending or issued (and still in effect) by any governmental entity of competent jurisdiction, no other legal restraint or prohibition preventing the consummation of all or any portion of the Distribution will be in effect, and no other event will have occurred or failed to occur that prevents the consummation of all or any portion of the Distribution; and |
18 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
| no other events or developments will exist or will have occurred that, in the judgment of the Kellogg ParentCo Board, in its sole and absolute discretion, makes it inadvisable to effect the Internal Reorganization, the Distribution or the transactions contemplated by the Separation and Distribution Agreement or any ancillary agreement contemplated thereby. |
The fulfillment of the above conditions will not create any obligation on Kellogg ParentCos part to effect the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than the NYSEs approval for listing of our common stock and the SECs declaration of the effectiveness of the Registration Statement, in connection with the Distribution. Kellogg ParentCo has the right not to complete the Spin-Off if, at any time, the Kellogg ParentCo Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kellogg ParentCo or its shareholders or is otherwise not advisable. |
Trading Market and Symbol |
We intend to file an application to list our common stock on the NYSE under the symbol . We anticipate that, as early as two trading days prior to the Record Date, trading of shares of our common stock will begin on a when-issued basis and will continue up to and including the Distribution Date, and we expect that regular-way trading of our common stock will begin the first trading day after the Distribution Date. We also anticipate that, as early as two trading days prior to the Record Date, there will be two markets in Kellogg ParentCo common stock: (i) a regular-way market on which shares of Kellogg ParentCo common stock will trade with an entitlement for the purchaser of Kellogg ParentCo common stock to shares of our common stock to be distributed in the Distribution, and (ii) an ex-distribution market on which shares of Kellogg ParentCo common stock will trade without an entitlement for the purchaser of Kellogg ParentCo common stock to shares of our common stock to be distributed in the Distribution. See The Spin-OffTrading Prior to the Distribution Date. |
U.S. Federal Income Tax Consequences |
The Distribution is conditioned on the receipt and continued validity of the private letter ruling from the IRS, which Kellogg ParentCo will request, and the receipt and continued validity of an opinion of tax counsel, as described above under The Spin-OffConditions to the Spin-Off. As described more fully in Material U.S. Federal Income Tax Consequences of the Spin-Off, a U.S. holder (as defined in that section) generally will not recognize any gain or loss, and will not include any amount in income, for U.S. federal income tax purposes, upon receiving our common stock in the Distribution, except for any gain or loss recognized with respect to cash the shareholder receives in lieu of fractional shares. |
19 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Notwithstanding the receipt of the private letter ruling and the opinion of tax counsel, the IRS could determine that the Contribution and the Distribution should be treated as one or more taxable transactions if it determines that any of the representations, assumptions or covenants on which the private letter ruling is based are untrue or have been violated or if it disagrees with the tax opinion regarding matters not covered by the private letter ruling. See Risk FactorsOther Risks Related to the Spin-OffIf the Contribution and the Distribution were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then Kellogg ParentCo, we and our shareholders could be subject to significant tax liability and Risk FactorsOther Risks Related to the Spin-OffWe could have an indemnification obligation to Kellogg ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition. |
Tax matters are complicated. The tax consequences to you of the Distribution depend on your individual situation. You should consult your own tax advisor as to the specific tax consequences of the Distribution to you, including the effect of any U.S. federal, state, local or foreign tax laws and of changes in applicable tax laws. See Material U.S. Federal Income Tax Consequences of the Spin-Off. |
Relationship with Kellogg ParentCo |
We intend to enter into several agreements with Kellogg ParentCo related to the Internal Reorganization and Distribution, which will govern the relationship between Kellogg ParentCo and us up to and after completion of the Spin-Off and allocate between Kellogg ParentCo and us various assets, liabilities, rights and obligations. These agreements include: |
| a Separation and Distribution Agreement that will provide for the allocation of assets and liabilities between us and Kellogg ParentCo, set forth our agreements with Kellogg ParentCo regarding the principal actions to be taken in connection with the Spin-Off and other agreements that govern aspects of our relationship with Kellogg ParentCo following the Spin-Off; |
| a Transition Services Agreement (as described under Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoTransition Services Agreement), pursuant to which Kellogg ParentCo will provide us specified services on a transitional basis to help ensure an orderly transition following the Spin-Off and we will provide certain limited services to Kellogg ParentCo; |
| a Supply Agreement (as defined in Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo Supply Agreement) that will provide for manufacturing and supply arrangements; |
20 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
| an Employee Matters Agreement (as defined in Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoEmployee Matters Agreement) that will address employee matters; |
| a Tax Matters Agreement (as defined in Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoTax Matters Agreement) that will allocate responsibility for taxes incurred before and after the Spin-Off and include indemnification rights with respect to tax matters and restrictions to preserve the tax-free status of the Spin-Off; |
| one or more leases or subleases of real property owned or leased by us or Kellogg ParentCo or WK Kellogg Co; and |
| one or more Intellectual Property Agreements (as defined in Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoIntellectual Property Agreements) that will provide for ownership, use and selling rights to facilitate Kellogg ParentCos and our ongoing use of intellectual property. |
We describe these arrangements in greater detail under Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo, and describe some of the risks of these arrangements under Risk FactorsOther Risks Related to the Spin-Off. |
Dividend Policy |
Following the Spin-Off, we expect to pay cash dividends, although the timing, declaration, amount and payment of any future dividends to shareholders will fall within the discretion of our Board. See Risk FactorsRisks Related to Our Common StockWe cannot assure shareholders that our Board will declare dividends in the future and Dividend Policy. |
Transfer Agent |
will serve as transfer agent for our common stock. |
Risk Factors |
Our business faces both general and specific risks and uncertainties. Our business also faces risks relating to the Spin-Off. Following the Spin-Off, we will also face risks associated with being an independent, publicly traded company. Accordingly, you should read carefully the information set forth under Risk Factors. |
21 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Summary Historical Financial Data
The following summary historical financial data reflects the combined operations of WK Kellogg Co. WK Kellogg Cos combined financial statements are based on a 52 or 53 week fiscal year ending on the Saturday closest to December 31. Unless the context otherwise requires, references to years and quarters contained in this Information Statement pertain to WK Kellogg Cos fiscal years and fiscal quarters. We derived our combined operating and cash flow data for our 2022, 2021 and 2020 fiscal years and our combined balance sheet data as of December 31, 2022 and January 1, 2022, as set forth below, from the audited combined financial statements of WK Kellogg Co included elsewhere in this Information Statement. We derived our combined operating and cash flow data for the fiscal quarters ended April 1, 2023 and April 2, 2022, and our combined balance sheet data as of April 1, 2023, from our unaudited combined financial statements, which are included elsewhere in this Information Statement. Our combined financial statements for all periods presented were prepared based on underlying financial records, which were derived from the financial records of Kellogg ParentCo. All amounts are in millions unless otherwise indicated.
You should read the following summary historical financial data together with Capitalization, Managements Discussion and Analysis of Financial Condition and Results of Operations and the audited and unaudited combined financial statements and accompanying notes included elsewhere in this Information Statement. WK Kellogg Cos historical results do not necessarily indicate the results expected for any future period.
Fiscal Quarter Ended | ||||||||
April 1, 2023 |
April 2, 2022 |
|||||||
(in millions) | ||||||||
Operating Trends: |
||||||||
Net sales |
$ | 720 | $ | 623 | ||||
Gross margin (a) |
25.1 | % | 19.7 | % | ||||
Depreciation |
$ | 17 | $ | 14 | ||||
Net income |
$ | 26 | $ | 51 | ||||
Capital Structure Trends (at period end): |
||||||||
Total current assets |
$ | 616 | ||||||
Property, net |
$ | 645 | ||||||
Total assets |
$ | 1,382 | ||||||
Cash Flow Trends: |
||||||||
Net cash provided by operating activities |
$ | 67 | $ | 2 | ||||
Net cash used in investing activities |
$ | (31 | ) | $ | (10 | ) | ||
Net cash used in financing activities |
$ | (36 | ) | $ | 8 |
(a) | Gross Margin as a percentage of net sales. Gross margin is equal to net sales less cost of goods sold. |
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Fiscal Year Ended | ||||||||||||
December 31, 2022 |
January 1, 2022 |
January 2, 2021 |
||||||||||
(in millions) | ||||||||||||
Operating Trends: |
||||||||||||
Net sales |
$ | 2,695 | $ | 2,460 | $ | 2,867 | ||||||
Gross margin (a) |
23.4 | % | 23.4 | % | 29.1 | % | ||||||
Depreciation |
$ | 68 | $ | 68 | $ | 69 | ||||||
Net (loss) income |
$ | (25 | ) | $ | 162 | $ | 182 | |||||
Capital Structure Trends (at period end): |
||||||||||||
Total current assets |
$ | 670 | $ | 501 | ||||||||
Property, net |
$ | 645 | $ | 619 | ||||||||
Total assets |
$ | 1,436 | $ | 1,244 | ||||||||
Cash Flow Trends: |
||||||||||||
Net cash provided by operating activities |
$ | 53 | $ | 7 | $ | 303 | ||||||
Net cash used in investing activities |
$ | (71 | ) | $ | (75 | ) | $ | (87 | ) | |||
Net cash provided by (used in) financing activities |
$ | 18 | $ | 68 | $ | (216 | ) |
(a) | Gross Margin as a percentage of net sales. Gross margin is equal to net sales less cost of goods sold. |
Summary Unaudited Pro Forma Financial Data
The following summary unaudited pro forma combined financial data consists of an unaudited pro forma combined statement of operations data for the fiscal quarter ended April 1, 2023 and year ended December 31, 2022, and an unaudited pro forma combined balance sheet data as of April 1, 2023. The unaudited pro forma combined financial data reflects certain known impacts as a result of our separation from Kellogg ParentCo.
The unaudited pro forma combined financial data presented below have been derived from our historical unaudited combined financial statements for the fiscal quarter ended April 1, 2023 and our historical audited combined financial statements for the year ended December 31, 2022 included elsewhere in this Information Statement. The unaudited pro forma combined statement of operations data for the fiscal quarter ended April 1, 2023 and the year ended December 31, 2022 assumes that the Spin-Off described below occurred on January 2, 2022. The unaudited pro forma combined balance sheet data as of April 1, 2023 assumes that the Spin-Off described below occurred on that date.
The unaudited pro forma combined financial statements included elsewhere in this Information Statement have been prepared in accordance with Article 11 of Regulation S-X to include transaction accounting and autonomous entity adjustments to reflect the financial condition and results of operations of WK Kellogg Co as if it were a separate stand-alone entity. While our historical combined financial statements reflect the historical financial results of the Cereal Business, the unaudited pro forma combined financial statements give effect to the Spin-Off. Specifically, the unaudited pro forma combined financial statements give effect to the following:
| the separation of assets and liabilities related to the Cereal Business and the transfer of those assets and liabilities to WK Kellogg Co; |
| the distribution of 100% of our issued and outstanding common stock by Kellogg ParentCo in connection with the Distribution; |
| the effect of post-separation capital structure, including debt issuance and cash transactions; |
23 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
| the impact of, and transactions contemplated by, the Separation and Distribution Agreement, the Employee Matters Agreement, the Supply Agreement and the Tax Matters Agreement between us and Kellogg ParentCo and the provisions contained therein; and |
| the impact of the aforementioned adjustments on our income tax expense using statutory tax rates. |
The unaudited pro forma combined financial statements are for illustrative and informational purposes only. The pro forma adjustments are based on available information and assumptions we believe are reasonable; however, such adjustments are subject to change.
The summary unaudited pro forma combined financial data presented below should be read in conjunction with Unaudited Pro Forma Combined Financial Statements, Managements Discussion and Analysis of Financial Condition and Results of Operations, Capitalization and the historical combined financial statements and corresponding notes thereto included elsewhere in this Information Statement.
Fiscal Quarter Ended April 1, 2023 |
Year Ended December 31, 2022 |
|||||||
(unaudited, in millions) | ||||||||
Pro Forma Combined Statement of Operations Data |
||||||||
Net sales |
$ | 720 | $ | 2,695 | ||||
Cost of goods sold |
$ | 539 | $ | 2,064 | ||||
Other income (expense), net |
$ | 8 | $ | (101 | ) | |||
Income before income taxes |
$ | 34 | $ | (26 | ) | |||
Net income (loss) |
$ | 26 | $ | (25 | ) |
April 1, 2023 | ||||
Pro Forma Combined Balance Sheet Data (at period end) |
||||
Total current assets |
$ | 616 | ||
Property, net |
$ | 645 | ||
Total assets |
$ | 1,382 | ||
Total equity |
$ | 673 |
24 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
You should carefully consider all of the information in this Information Statement and each of the risks described below, which we believe are the principal risks that we face. Some of the risks relate to our business, others to the Spin-Off. Some risks relate principally to the securities markets and ownership of our common stock. Any of the following risks could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Information Statement. While we believe we have identified and discussed below the material risks affecting our business, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be material that may adversely affect our business, financial condition and results of operations in the future.
Risks Related to Our Business
Following the Spin-Off, we will be a smaller company than Kellogg ParentCo, and we will no longer operate as part of a globally diversified company.
Following the Spin-Off, we expect to have a significantly smaller employee base than that of Kellogg ParentCo. A smaller employee base inherently causes some loss of institutional knowledge, which could impact our results of operations. Similarly, our employees who were once used to the operating procedures of Kellogg ParentCo will need to adapt to our updated operating policies and procedures. As a smaller, independent company, our business will be less diversified than Kellogg ParentCos business prior to the Spin-Off, and our business will also experience a loss of scale and access to certain financial, managerial and professional resources as well as product and brand power influence and recognition with some customers from which we have benefited in the past.
In addition, as a globally diversified company, Kellogg ParentCo historically has been less impacted by adverse events and trends in any particular region. After separating from Kellogg ParentCo, however, we may be more susceptible to adverse regulations, economic climate, consumer trends, market fluctuations, including commodity price fluctuations or supply shortages for certain of our key ingredients, and other adverse events that are specific to the United States, Canada and Mexico. For example, because a majority of our operations and product sales are in the United States, we expect that regulatory changes or changes in consumer food preferences in the United States will have a more significant impact on us than these changes would have had when we were part of Kellogg ParentCo. The concentration of our operations in North America will present a challenge and may increase the likelihood that an adverse event in North America will materially and adversely affect our financial condition and results of operations.
Further, as a smaller, less diversified company, we could face challenges optimizing the distribution of our products. In particular, we may be unable to transport our products to retailers in a timely and cost-effective manner. As a global company with diversified product offerings, Kellogg ParentCo historically has been able to optimize shipments to retailers, including by consolidating purchase orders for a variety of products to fill trucks and other shipping modes. As a less diversified company, we could incur higher costs and longer lead times to distribute our products to retailers. Similarly, as a smaller company, any disruption at one of our facilities, or involving any of our equipment within such facilities, a shortage in labor supply or the presence of a labor dispute may also have a greater impact on our manufacturing capabilities, and may lead to increased manufacturing disruptions, which could have an adverse effect on our business, financial condition and results of operations.
A decline in demand for ready-to-eat cereals could adversely affect our financial performance.
We focus primarily on producing and selling ready-to-eat cereal products. We expect to continue this primary focus. Because of our product concentration, any decline in consumer demand or preferences, including diet-
25 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
driven changes, for ready-to-eat cereals or any other factor that adversely affects the ready-to-eat cereal market could have a material adverse effect on our business, financial condition or results of operations. We could also be adversely affected if consumers lose confidence in the healthfulness, safety, quality or taste of ready-to-eat cereals or ingredients. Adverse publicity about these types of concerns, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions. In addition, significant changes in consumer demand or the loss or disruption of manufacturing, distribution or supply capabilities with respect to one or more of our products could negatively impact our business or results of operations.
Supply chain disruptions and increases in costs and/or shortages of raw materials, labor, fuels and utilities as a result of geopolitical, economic and market conditions could adversely impact our profitability.
Raw materials, such as corn, wheat, rice, vegetable oils, sugar, cocoa, fruits and nuts, which are used in our products, are subject to price fluctuations. The cost of these inputs may fluctuate widely due to foreign and domestic government policies and regulations, inflation, weather conditions (including any potential effects of climate change), domestic and international demand, availability due to supply chain conditions, military conflict or other unforeseen circumstances. We have experienced supply chain disruptions including bottlenecks and shortages of materials, labor and freight that have led to increasing prices of raw materials, packaging and labor as well as limitations on shipping capacity. We expect these market disruptions and inflationary pressures to continue throughout 2023.
The global economy has been negatively impacted by the military conflict between Russia and Ukraine. The Russia-Ukraine conflict is fast-moving and uncertain. Global grain markets have exhibited increased volatility as sanctions have been imposed on Russia by the United States, the United Kingdom, the European Union and others in response to Russias invasion of Ukraine. Changes in global grain and commodity flows could impact the markets in which we operate, which may in turn negatively impact our business, results of operations, supply chain and financial condition. Any substantial change in the prices or availability of raw materials may have an adverse impact on our profitability. We may enter into forward purchase agreements and other derivative financial instruments from time to time to manage the impact of such volatility in raw materials prices; however, these strategies may not be adequate to overcome increases in market prices or availability or to fully cover supply and may significantly affect our earnings.
In addition, we are dependent upon natural gas or propane and electricity for operating our manufacturing facilities. The independent distributors and third-party transportation companies are dependent upon gasoline and diesel for their vehicles. The cost of these fuels may fluctuate widely due to economic and political conditions, government policy and regulation, war or other conflicts (including the current situation in Ukraine), or other unforeseen circumstances. Substantial future increases in prices for, or shortages of, these fuels could have a material adverse effect on our profitability, financial condition or results of operations. There can be no assurance that we can cover these potential cost increases through future pricing actions. Also, as a result of these pricing actions, consumers could purchase less or move from purchasing higher-margin products to purchasing lower-margin products.
Inflation has and may continue to adversely affect us by increasing our costs of production, materials and labor. In an inflationary environment, such as the current economic environment, depending on the market conditions of the food industry and the raising of interest rates by the U.S. Federal Reserve, we may be unable to raise the prices of our products enough to keep up with the rate of inflation, which would reduce our profit margins, and continued inflationary pressures could impact our business, financial condition and results of operations. Similarly, shortages of truck drivers and railroad workers have contributed to increased freight costs, which has had a material and adverse effect on our business, financial condition and results of operations.
26 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Our results may be negatively impacted if consumers do not maintain their favorable perception of our brands or company.
Brand value is primarily based on consumer perceptions. Successful promotion and brand value enhancement depends in large part on our ability and the ability of our suppliers and licensors (including Kellogg ParentCo) to provide high-quality products. Brand value could diminish significantly due to a number of factors, including consumer perception that we or Kellogg ParentCo, or any of our employees or agents, have acted in an irresponsible manner, adverse publicity about our labor relations (whether or not valid), our products or Kellogg ParentCos products (whether or not valid), our failure to maintain the quality of our products or the failure of our suppliers and licensors (including Kellogg ParentCo) to maintain the quality of their products, the failure of our products to deliver consistently positive consumer experiences, our products becoming unavailable to consumers, or the failure to meet the nutrition expectations of our products or particular ingredients in our products (whether or not valid), including the perception of healthfulness of our products or their ingredients. In addition, due to our varied and geographically diverse consumer base, we must be responsive to local consumers, including with respect to when and how consumers consume food products and their desire for premium or value offerings, and provide an array of products that satisfy the broad spectrum of consumer preferences. Accordingly, we might fail to anticipate consumer preferences with respect to dietary trends or purchasing behaviors, invest sufficiently in maintaining, extending and expanding our brand image or achieve the desired effects of our marketing efforts or use data-driven marketing and advertising to reach consumers at the right time with the right message. The growing use of social and digital media platforms by consumers, WK Kellogg Co and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about WK Kellogg Co, our brands, our products, or Kellogg ParentCo, their brands (including any that are Shared Use Trademarks (as defined below)), or their products (which may be sold under Shared Use Trademarks), our labor relations or any of our employees or agents on social or digital media platforms could seriously damage our brands, corporate reputation and brand loyalty, regardless of the informations accuracy. Placement of our advertisements in digital media may also result in damage to our brands if any such media experiences negative publicity. The harm may be immediate, and we may not be afforded an opportunity for redress or correction. Brand recognition and loyalty can also be impacted by the effectiveness of our advertising campaigns, marketing programs, influencers and sponsorships, as well as our use of social media. Further, our brand perception and customer loyalty could be adversely impacted by a suppliers or licensors (including Kellogg ParentCos) improper practices or failure to comply with our requirements for environmentally, socially or legally responsible practices, including human rights and materials sourcing. If we do not maintain the favorable perception of our brands, our results could be negatively impacted.
For a more detailed discussion of risks related to our Shared Use Trademarks, see Risks Related to Our Intellectual Property and TechnologyCertain of our rights to intellectual property used in our business will be limited to those of a licensee under the Intellectual Property Agreements.
Business disruptions have had and could in the future have an adverse effect on our business, financial condition and results of operations.
We manufacture products in the United States, Canada and Mexico, and we source products and materials globally. We have a complex network of suppliers, manufacturing locations, including contract manufacturer locations, warehousing and distribution networks and information systems that support our ability to provide our products to our customers consistently. Factors that are hard to predict or beyond our control, such as product or raw material scarcity, material disruptions at one of our facilities or involving any of our equipment within such facilities, the availability of replacement parts for the equipment we rely on for production, workforce disruptions, weather (including any potential effects of climate change), natural disasters, water availability and regulation, fires or explosions, terrorism, political unrest, government restrictions, mandates or shutdowns, tariffs and other trade restrictions, cybersecurity breaches, health pandemics, such as the COVID-19 pandemic, disruptions in logistics, loss or impairment of key manufacturing sites, supplier capacity constraints, or strikes, could damage or disrupt our operations or our suppliers, their suppliers or our contract manufacturers
27 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
operations. For instance, our fiscal year 2021 results were negatively impacted by the strike of approximately 1,400 union employees across our U.S. plants, which began in early October and ended in late December of 2021. Additionally, we were adversely impacted by a fire at one of our U.S. plants with operational and financial impacts extending beyond the end of 2021. Both the fire and the strike severely disrupted our supply and product availability in the second half of 2021 and into the first quarter of 2022 and, as a result of the strike, we had to suspend a number of capital projects, all of which had an adverse impact on our business, financial condition and results of operations.
If we do not effectively prepare for and respond to disruptions in our operations, for example, by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or cannot quickly repair damage to our information, technology, equipment, production or supply systems, we may be late in delivering or unable to deliver products to our customers. If that occurs, we may lose our customers confidence, and long-term consumer demand for our products could decline. In addition, insurance policies that may provide coverage with regard to such events may not cover any or all of the resulting financial losses. These events could adversely affect our business, financial condition and results of operations.
In addition, we may be unable to meet the demand for our products during certain business disruptions. For instance, we experienced increased demand for many of our products during the COVID-19 pandemic and were, at times, unable to fill all customer orders. Short term or sustained increases in consumer demand at our retail customers may exceed our production capacity or otherwise strain our supply chain. We may face additional production disruptions in the future, which may place constraints on our ability to produce products in a timely manner or may increase our costs. Our failure to meet the demand for our products could adversely affect our business and results of operations.
Further, while we have not had any material interruptions or breaches of our systems due to cyberattacks or cyber incidents, we have experienced computer virus and malware activity and have been the target of various other forms of cyberattacks, including social engineering attacks, unauthorized access attempts, password theft, physical breaches and phishing-attacks. For a more detailed discussion of our cybersecurity risks, see Technology failures, cyber-attacks, privacy breaches or data breaches could disrupt our operations or reputation and negatively impact our business.
We may not achieve our growth targets, including revenue and profit growth targets and cash targets, and we may not realize the benefits we expect from revenue growth management.
Our success depends upon our ability to drive our growth targets to increase revenue and profit. In order to achieve our targeted growth objectives, we utilize formal revenue growth management practices to help us realize price in a more effective way. This data-driven approach addresses price strategy, price-pack architecture, promotion strategy, mix management and trade strategies. Revenue growth management involves changes to the way we do business and may not always be accepted by our customers, consumers or third-party providers causing us not to realize the anticipated benefits. In addition, the complexity of the execution requires a substantial amount of management and operational resources. These and related demands on our resources may divert the organizations attention from other business issues and have adverse effects on existing business relationships with suppliers and customers. Any failure to execute revenue growth management in accordance with our plans, including as a result of our revenue growth management process, could adversely affect our business or financial condition.
We may not achieve our targeted cost savings and efficiencies from cost reduction initiatives.
Our success depends in part on our ability to be an efficient producer in a highly competitive industry. We have invested and will continue to invest a significant amount in capital expenditures to improve our operational facilities. Ongoing operational issues are likely to occur when carrying out major production, procurement, manufacturing or logistical changes and these, as well as any failure by us to achieve our planned cost savings
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
and efficiencies, could have a material adverse effect on our business and financial position and on the results of our operations and profitability.
Disruptions and uncertainties related to adverse macroeconomic conditions, including rising inflation and economic slowdowns or recessions, for a sustained period of time could result in delays or modifications to our strategic plans and other initiatives and hinder our ability to achieve our growth targets and cost savings and productivity initiatives on the same timelines. For a more detailed discussion, see Other Risks Related to the Spin-OffWe may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.
When pursuing strategic acquisitions, alliances, divestitures or joint ventures or seeking organic growth opportunities, we may not be able to successfully consummate favorable transactions, integrate acquired businesses or achieve the anticipated benefits of organic growth investments.
We believe attractive acquisition and organic growth opportunities may present themselves in complementary categories that will further enhance our scale and increase our presence at key retailers. Accordingly, from time to time, we may evaluate potential acquisitions, alliances, divestitures or joint ventures that would further our strategic objectives, or we may undertake efforts to grow organically through internal innovation across our product offerings. We may be unable to identify suitable strategic transactions in the future or may not be able to enter into such transactions at favorable prices or on terms that are favorable to us, or we may not be able to achieve the benefits anticipated from investments in our organic growth on the anticipated timeline or at all. In addition, our total leverage and the terms of the financing arrangements we enter into in connection with the Spin-Off may limit our ability to obtain additional financing in the future to pursue and consummate acquisitions and other strategic transactions or invest in organic growth opportunities.
With respect to acquisitions, we may not be able to identify suitable candidates, consummate a transaction on terms that are favorable to us, integrate the acquired business into our existing operations in a timely and cost-efficient manner, including implementation of enterprise-resource planning systems, or achieve expected returns, expected synergies and other benefits as a result of integration or other challenges, or may not achieve those objectives on a timely basis. Furthermore, we may be restricted from pursuing certain of these transactions under the terms of the Tax Matters Agreement. For a more detailed discussion, see Other Risks Related to the Spin-OffWe intend to agree to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating flexibility and Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoTax Matters Agreement. Future acquisitions of foreign companies or new foreign ventures would subject us to local laws and regulations and could potentially lead to risks related to, among other things, increased exposure to foreign exchange rate changes, government price control, repatriation of profits and liabilities relating to the U.S. Foreign Corrupt Practices Act.
Our corporate development activities also may present financial and operational risks, including diversion of management attention from existing core businesses, integrating or separating personnel and financial and other systems, and adverse effects on existing business relationships with suppliers and customers. Evaluating potential transactions requires additional expenditures (including legal, accounting and due diligence expenses, higher administrative costs to support any acquired entities and information technology, personnel and other integration expenses) and may divert the attention of our management from ordinary operating matters. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and amortization expenses related to certain intangible assets and increased operating expenses, which could adversely affect our results of operations and financial condition.
The successful integration of acquisitions and other strategic transactions, including through organic growth, depends upon our ability to manage the operations and personnel of the acquired businesses. Integrating operations is complex and requires significant efforts and expenses on the part of both us and the acquired
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businesses. Potential difficulties we may encounter as part of the integration process include, but are not limited to, the following:
| employees may voluntarily or involuntarily separate employment from us or the acquired businesses because of the acquisitions; |
| our management may have its attention diverted from core business activities while trying to integrate the acquired businesses; |
| we may encounter obstacles when incorporating the acquired businesses into our operations and management, including integrating or separating personnel, financial systems, operating procedures, regulatory compliance programs, technology, networks and other assets in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies; |
| differences in business backgrounds, corporate cultures and management philosophies; |
| integration may be more costly, time-consuming or complex or less effective than anticipated; |
| inability to maintain uniform standards, controls and procedures; and |
| we may discover previously undetected operational or other issues, such as fraud. |
Any of these factors could adversely affect our and the acquired businesses ability to maintain relationships with customers, suppliers, employees and other constituencies. In addition, the success of these acquired businesses will depend, in part, upon our ability to realize the anticipated growth opportunities and cost synergies through the successful integration of the businesses we acquire with our existing businesses. Even if we are successful in integrating acquired businesses, we cannot assure you that these integrations will result in the realization of the full benefit of any anticipated growth opportunities or cost synergies or that these benefits will be realized within the expected time frames. In addition, acquired businesses may have unanticipated liabilities or contingencies.
In the future, we also expect to seek organic growth opportunities. The availability and success of such organic growth opportunities depends upon a number of factors, including our ability to innovate and develop new product offerings, expand into adjacencies and respond timely to changing consumer demands and preferences. Additionally, if we fail to evaluate and execute new business opportunities properly, we may not achieve anticipated benefits and may incur increased costs. Continued organic growth, if achieved, may place a strain on our operational infrastructure, which could have a material adverse effect on our business, financial condition and results of operations.
Pandemics, epidemics or disease outbreaks, such as the COVID-19 pandemic, may disrupt our business, including, among other things, our supply chain and production processes, each of which could materially affect our operations, liquidity, financial condition and results of operations.
The actual or perceived effects of a disease outbreak, epidemic, pandemic or similar widespread public health concern, such as the COVID-19 pandemic, could negatively affect our business, financial condition and results of operations. The global spread and unprecedented impact of the COVID-19 pandemic created significant volatility, uncertainty and economic disruption. The COVID-19 pandemic led governments and other authorities around the world to implement significant measures intended to control the spread of the virus, including shelter-in-place orders, social distancing measures, business closures or restrictions on operations, quarantines, travel bans and restrictions and multi-step policies with the goal of re-opening these markets. While these restrictions have been lifted or eased in many jurisdictions as the rates of COVID-19 infections have decreased or stabilized, a resurgence of the pandemic or other widespread public health concerns in some markets could lead to re-implementation of restrictions and impact our ability to perform critical functions. A shutdown of one or more of our manufacturing, warehousing or distribution facilities as a result of illness, government restrictions or other workforce disruptions or absenteeism, or reductions in capacity utilization levels, could result in us incurring additional direct costs and experiencing lost revenue. Illness, travel restrictions or workforce
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disruptions could negatively affect our supply chain, manufacturing, distribution or other business. These disruptions or our failure to effectively respond to them, could increase product or distribution costs, or cause delays or inability to deliver products to our customers. We have experienced temporary disruptions to our supply chain in certain markets. These disruptions to our work force and supply chain could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The impact of the COVID-19 pandemic on our suppliers, manufacturers, distributors or transportation and logistics providers also negatively affected the price and availability of our raw materials and impacted our supply chain. A resurgence of the COVID-19 pandemic or other widespread public health concerns could materially impact our ability to meet the demands of our customers. The potential impact of COVID-19 or other widespread public health concerns on any of our production or logistics providers could include, but is not limited to, problems with their respective businesses, finances, labor matters (including illness or absenteeism in workforce or closure due to positive testing), ability to import and secure ingredients and packaging, product quality issues, costs, production, insurance and reputation. Any of the foregoing could negatively affect the price and availability of our products and impact our supply chain. If the disruptions caused by COVID-19 or other widespread public health concerns continue for an extended period of time, our ability to meet the demand for our products may be materially impacted.
The impact of widespread public health concerns, such as the COVID-19 pandemic, may also heighten other risks discussed in this Risk Factors section.
Risks Related to Our Operations
Material disruptions at one of our facilities could have a material adverse effect on our business, operating results and financial condition.
A material disruption at our corporate headquarters or one of our manufacturing facilities, or involving any of our equipment within such facilities, could prevent us from meeting customer demand, reduce our sales and increase our costs, which could have a material adverse effect on our business, financial condition and results of operations. Our manufacturing facilities, and our equipment within such facilities, have and may in the future cease operations unexpectedly due to a number of events, including:
| an equipment failure or damage to any of our equipment; |
| the inability to find replacement parts for any of our equipment; |
| food safety disruptions; |
| unscheduled maintenance outages; |
| fires, floods, earthquakes, hurricanes or other catastrophes; |
| the effect of a drought or reduced rainfall on its water supply; |
| the effect of severe weather conditions on equipment and facilities; |
| disruption in the supply of raw materials or other manufacturing inputs; |
| information system disruptions or failures due to any number of causes, including cyber-attacks; |
| changing laws and regulations applicable to our business; |
| prolonged power failures; |
| the release of pollutants or hazardous substances; |
| damage or disruptions caused by third parties operating on or adjacent to one of our manufacturing facilities; |
| disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels; |
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| a widespread outbreak of an illness or any other communicable disease, such as the COVID-19 pandemic or any other public health crisis; |
| failure of our third-party service providers to satisfactorily fulfill their commitments and responsibilities in a timely manner and in accordance with agreed upon terms; |
| labor difficulties and disruptions; and |
| other operational problems. |
In addition, capital expenditures for expansion or replacement of existing facilities or equipment or to comply with future changes in applicable laws and regulations may be substantial. We cannot guarantee that the key pieces of equipment in our various manufacturing facilities will not need to be repaired or replaced or that we will not incur significant additional costs associated with regulatory compliance. If we are unable to repair key pieces of equipment that are utilized in connection with producing our products, we may need to turn to new technology. We cannot assure you that such new technology will not impact the quality or taste of our products. The costs of repairing or replacing such equipment and the associated downtime of the affected production line could have a material adverse effect on our business, financial condition and results of operations. If for any reason we are unable to provide for our operating needs, capital expenditures, and other cash requirements on economically favorable terms, we could experience a material adverse effect on our business, financial condition and results of operations.
We may not be able to attract, develop and retain the highly skilled people we need to support our business.
We depend on the skills and continued service of key personnel, including our experienced management team. In addition, our ability to achieve our strategic and operating goals depends on our ability to identify, recruit, hire, train and retain qualified individuals, including, for example, individuals with e-commerce, digital marketing and data analytics capabilities and skilled labor in our manufacturing facilities. We compete with other companies both within and outside of our industry for talented personnel, and we may lose key personnel or fail to attract, recruit, train, develop and retain other talented personnel. Recruiting and retention of talent has become especially challenging in the current employment market, fueled in part by changes due to the COVID-19 pandemic. In addition, we may experience higher than expected employee turnover and difficulty attracting new employees as a result of uncertainty from the organizational and operational changes as a result of our separation from Kellogg ParentCo. Similarly, upon completion of the Spin-Off, we will be a smaller company than Kellogg ParentCo, and we will have a smaller employee base to assist in the day-to-day operation of our business. Any such loss, failure or negative perception with respect to these individuals may adversely affect our business or financial results. In addition, activities related to identifying, recruiting, hiring and integrating qualified individuals may require significant time and expense. We may not be able to locate suitable replacements for any key employees who terminate their employment, or offer employment to potential replacements on reasonable terms, each of which may adversely affect our business and financial results. Additionally, changes in regional preferences and immigration laws and policies could also make it more difficult for us to recruit or relocate skilled employees.
A shortage in the labor pool, failure to successfully negotiate collectively bargained agreements, or other general inflationary pressures or changes in applicable laws and regulations could increase labor cost, which could have a material adverse effect on our operating results or financial condition.
Our labor costs include the cost of providing benefits for employees. We will sponsor a number of benefit plans for employees in the United States, Canada, the Caribbean and Mexico, which may include pension, retiree health and welfare, active health care, severance and other post-employment benefits. Our major pension plans and U.S. collectively bargained retiree health and welfare plans will be funded with trust assets invested in a globally-diversified portfolio of equity securities with smaller holdings of bonds, real estate and other investments. The annual cost of benefits can vary significantly from year to year and is materially affected by
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such factors as changes in the assumed or actual rate of return on major plan assets, a change in the weighted-average discount rate used to measure obligations, the rate or trend of health care cost inflation, and the outcome of collectively bargained wage and benefit agreements. Many of our employees will be covered by collectively bargained agreements and other employees may seek to be covered by collectively bargained agreements. Strikes or work stoppages and interruptions have occurred and could occur in the future, which could adversely impact our operating results. The terms and conditions of such agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency. Furthermore, we rely on access to competitive, local labor supply, including skilled and unskilled positions, to operate our business consistently and reliably. We may encounter difficulty recruiting sufficient numbers of personnel at acceptable wage and benefit levels due to the competitive labor market. Our inability to attract, develop and retain the personnel necessary for the efficient operation of our business could result in higher costs and decreased productivity and efficiency, which may have a material adverse effect on our performance.
Our post-retirement benefit-related costs and funding requirements could increase as a result of volatility in the financial markets, changes in interest rates and actuarial assumptions.
Increases in the costs of post-retirement medical and pension benefits may continue and could negatively affect our business as a result of increased usage of medical benefits by retired employees and medical cost inflation, an increase in participants enrolled, the effect of potential declines in the stock and bond markets on the performance of our pension and post-retirement plan assets, potential reductions in the discount rate used to determine the present value of our benefit obligations, and changes to our investment strategy that may impact our expected return on pension and post-retirement plan assets assumptions. U.S. generally accepted accounting principles require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. WK Kellogg Cos accounting policy for defined benefit plans may subject earnings to volatility due to the recognition of actuarial gains and losses, particularly those due to the change in the fair value of pension and post-retirement plan assets and interest rates. In addition, funding requirements for our plans may become more significant. However, the ultimate amounts to be contributed are dependent upon, among other things, interest rates, underlying asset returns, and the impact of legislative or regulatory changes related to pension and post-retirement funding obligations.
Our inability to obtain sufficient capital would constrain our ability to grow our business and to increase our revenues.
Our business is capital intensive, and we have used and may continue to employ leverage to finance our operations. Accordingly, our ability to successfully execute our business strategy, including through organic growth, and maintain our operations depends on the availability and cost of debt and equity capital. Upon completion of the Spin-Off, we expect our indebtedness to have a non-investment grade rating. Such rating, and any potential downgrade in our ratings will likely make it more difficult or more expensive for us to obtain additional debt financing necessary to grow our business and to increase our revenues. We can give no assurance that the capital we need will be available to us on favorable terms, or at all. Our inability to obtain sufficient capital, or to renew or expand our credit facilities, could result in increased funding costs and would limit our ability to:
| meet the terms and maturities of our existing and future debt facilities; |
| purchase new assets or refinance existing assets; |
| fund our working capital needs and maintain adequate liquidity; and |
| finance other growth initiatives. |
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An impairment of the carrying value of goodwill or other acquired intangibles could negatively affect our operating results and net worth.
The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangibles represents the fair value of trademarks, trade names, and other acquired intangibles as of the acquisition date. Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized but must be evaluated by management at least annually for impairment. If carrying value exceeds current fair value, the intangible is considered impaired and is reduced to fair value via a charge to earnings. Factors which could result in an impairment include, but are not limited to: (i) reduced demand for our products; (ii) higher commodity prices; (iii) lower prices for our products or increased marketing as a result of increased competition; and (iv) significant disruptions to our operations as a result of both internal and external events. Should the value of one or more of the acquired intangibles become impaired, our financial condition and results of operations may be materially adversely affected. Furthermore, we continue to evaluate the potential impact of COVID-19 on the fair value of our goodwill and other intangibles. Any significant sustained adverse change in consumer purchasing behaviors, government restrictions, financial results or macroeconomic conditions could result in future impairment.
As of December 31, 2022, the carrying value of intangible assets totaled approximately $110 million, of which $53 million was goodwill and $57 million represented trademarks, tradenames, and other acquired intangibles compared to total assets of $1.4 billion and total WK Kellogg Co equity of $686 million.
Risks Related to Our Industry
Our results may be materially and adversely impacted as a result of increases in the price of raw materials, including agricultural commodities, packaging, fuel and labor.
Agricultural commodities, including corn, wheat, rice, vegetable oils, sugar, cocoa, fruits and nuts are the principal raw materials used in our products. Cartonboard, corrugated, and flexible packaging are the principal packaging materials used by us. The cost of such commodities may fluctuate widely due to government policy, regulation, and/or shutdown, import and export requirements (including tariffs), global geopolitical conditions (including war, such as the war in Ukraine), general economic conditions (including inflationary pressures), sanctions, drought and other weather conditions (including the potential effects of climate change), a pandemic illness (such as the COVID-19 outbreak), environmental or other sustainability regulation, or other unforeseen circumstances. Specifically, certain ingredients, packaging and other goods and services have been impacted by the COVID-19 pandemic and inflationary pressures, and although we are unable to predict the impact to our ability to source such materials and services in the future, we expect these supply pressures and market disruptions to continue throughout 2023. To the extent that any of the foregoing factors affect the prices of such commodities and we are unable to increase our prices or adequately hedge against such changes in prices in a manner that offsets such changes, the results of our operations could be materially and adversely affected. In addition, we will use derivatives to hedge price risk associated with forecasted purchases of raw materials. Our hedged price could exceed the spot price on the date of purchase, resulting in an unfavorable impact on both Gross Margin and net earnings. Also, sustained price increases may lead to declines in volume as competitors may not adjust their prices, or consumers may decide not to pay the higher prices or may forego some purchases altogether during an economic downturn, which could lead to sales declines and loss of market share. Food processing equipment at our facilities are regularly fueled by electricity, oil, natural gas or propane, which are obtained from local utilities or other local suppliers. Short-term stand-by propane and/or oil storage exists at several plants for use in case of interruption in natural gas supplies. In addition, considerable amounts of diesel fuel are used in connection with the distribution of our products. The cost of fuel may fluctuate widely due to economic and political conditions, government policy, regulation and/or shutdown, war, or other unforeseen circumstances, which could have a material adverse effect on our operating results or financial condition.
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Our results may be adversely affected by increases in transportation costs and reduced availability of or increases in the price of oil or other fuels.
We rely on trucking and railroad operators to deliver incoming ingredients to our manufacturing locations and to deliver finished products to our customers. Shortages of truck drivers and railroad workers have contributed to increased freight costs, which has had a material and adverse effect on our business, financial condition and results of operations. During 2021 and 2022, the cost of distribution generally increased due to an increase in transportation and logistics costs. Transportation costs are further increasing as a result of high levels of long-haul driver turnover and increased railroad traffic and service issues. Additionally, energy and fuel costs can fluctuate dramatically and, at times, have resulted in significant cost increases, particularly for the price of oil and gasoline.
We operate in the highly competitive food industry, including with respect to retail and shelf space.
We face competition from other companies that have varying abilities to withstand changes in market conditions. The principal aspects of our business where we face competition include brand recognition, taste, nutritional value, price, promotion, innovation, shelf space, navigating the growing e-commerce marketplace, convenient ordering and delivery to the consumer and customer service. Most of our competitors have substantial financial, marketing, sales and other resources, and some of our competitors may spend more aggressively on advertising and promotional activities than we do. Additionally, some of our competitors sell products that we will no longer offer after the Spin-Off, such as cereal bars. Our competition with other companies in our market could cause us to reduce prices, increase capital, marketing or other expenditures, or lose category share, any of which could have a material adverse effect on our business and financial results. Our ability to compete also depends upon our ability to predict, identify, and interpret the tastes and dietary habits of consumers and to offer products that appeal to those preferences, which is particularly important to us given our primary focus on producing and selling ready-to-eat cereal products. Because of our product concentration, any decline in consumer demand or change in preferences could have a material adverse effect on our business, financial condition or results of operations. There are inherent marketplace risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance. If we do not succeed in offering products that consumers want to buy, our sales and market share will decrease, resulting in reduced profitability. If we are unable to accurately predict which shifts in consumer preferences will be long-lasting, or are unable to introduce new and improved products to satisfy those preferences, our sales will decline. In addition, given the variety of backgrounds and identities of consumers in our consumer base, we must offer a sufficient array of products to satisfy the broad spectrum of consumer preferences.
In some cases, our competitors may be able to respond to changing business and economic conditions or consumer preferences more quickly than us. Category share and growth could also be adversely impacted if we are not successful in introducing new products, anticipating changes in consumer preferences with respect to dietary trends or purchasing behaviors or in effectively assessing, changing and setting proper pricing.
In addition, we compete against branded products as well as private label products. Our products must provide higher value and/or quality to our consumers than alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if relative differences in value and/or quality between our products and private label products change in favor of competitors products or if consumers perceive this type of change. If consumers prefer private label products, which are typically sold at lower prices, then we could lose category share or sales volumes or shift our product mix to lower margin offerings, which could have a material effect on our business and financial position and on the results of our operations and profitability.
Further, our ability to compete may be limited by an inability to secure new retailers or maintain or add shelf and/or retail space for our products. There can be no assurance that retailers will provide sufficient, or any, shelf space, nor that online retailers will provide online access to, or adequate product visibility on, their platform. Unattractive placement or pricing may put our products at a disadvantage compared to those of our competitors.
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Even if we obtain shelf space or preferable shelf placement, our new and existing products may fail to achieve the sales expectations set by our retailers, potentially causing these retailers to remove our products from their shelves.
The changing retail environment and the growing presence of alternative retail channels could negatively impact our sales and profits.
Our businesses are largely concentrated in the traditional retail grocery trade. Our largest customer,Wal-Mart Stores, Inc., accounted for approximately 28% of combined net sales during 2022, comprised principally of sales within the United States. No other customer accounted for more than 10% of combined net sales in 2022. During 2022, our top five customers, collectively, including Wal-Mart Stores, Inc., accounted for approximately 51% of our combined net sales. There can be no assurances that our largest customers will continue to purchase our products in the same mix or quantities or on the same terms as in the past. As the retail grocery trade continues to consolidate and retailers become larger, our large retail customers have sought, and may continue to seek in the future, to use their position to improve their profitability through improved efficiency, lower pricing, increased promotional programs funded by their suppliers and more favorable terms. Such consolidation can continue to adversely impact our smaller customers ability to compete effectively, resulting in an inability on their part to pay for our products or reduced or canceled orders of our products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own private label products. If we are unable to use our scale, marketing expertise, product innovation and leadership positions to respond, our profitability or volume growth could be negatively affected. As a result of the consolidated nature of the retail environment, which is also significant in Canada, the loss of any large customer or severe adverse impact on the business operations of any large customer for an extended length of time could negatively impact our sales and profits.
Additionally, alternative retail channels, such as e-commerce retailers (including as a result of the integration of traditional and digital operations at key retailers), subscription services, discount and dollar stores, direct-to-consumer brands, drug stores and club stores, have continued to grow. This trend away from traditional retail grocery, and towards such channels, is expected to continue in the future. If we are not successful in expanding sales in alternative retail channels, our business or financial results may be negatively impacted. In particular, substantial growth in e-commerce has encouraged the entry of new competitors and business models, intensifying competition by simplifying distribution and lowering barriers to entry. The expanding presence of e-commerce retailers has impacted, and may continue to impact, consumer preferences and market dynamics, which in turn may negatively affect our sales or profits. In addition, these alternative retail channels may create consumer price deflation, affecting our large retail and wholesale customer relationships and presenting additional challenges to increasing prices in response to commodity or other cost increases. Also, if these alternative retail channels, such as e-commerce retailers, were to take significant share away from traditional retailers that could have a flow over effect on our business and our financial results could be negatively impacted.
Our financial results and demand for our products are dependent on the successful development of new products and processes.
There are a number of trends in consumer preferences which may impact us and the industry as a whole. These include changing consumer dietary trends and the availability of substitute products. Our success is dependent on anticipating changes in consumer preferences and on successful new product and process development and product relaunches in response to such changes, which is particularly important to us given our primary focus on producing and selling ready-to-eat cereal products. Because of our product concentration, any decline in consumer demand or change in preferences could have a material adverse effect on our business, financial condition or results of operations. Trends within the food industry change often, and failure to identify and react to changes in these trends could lead to, among other things, reduced loyalty, reduced demand and price reductions for our brands and products. We aim to introduce products or new or improved production processes
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on a timely basis in order to counteract obsolescence and decreases in sales of existing products. While we devote significant focus to the development of new products and to the research, development and technology process functions of our business, we may not be successful in developing new products or our new products may not be commercially successful. In addition, if sales generated by new products cause a decline in sales of WK Kellogg Cos existing products, WK Kellogg Cos financial condition and results of operations could be materially adversely affected. Our future results and our ability to maintain or improve our competitive position will depend on our capacity to gauge the direction of our key markets and upon our ability to successfully identify, develop, manufacture, market and sell new or improved products in these changing markets, including through the expansion into complementary product categories.
Adverse changes in the global climate or extreme weather conditions could adversely affect our business or operations.
Climate change could adversely affect the long-term health and viability of the ingredients used in our products. As set forth in the Intergovernmental Panel on Climate Change Fifth Assessment Report, there is continuing scientific evidence, as well as concern from members of the general public, that emissions of greenhouse gases and contributing human activities have caused and will continue to cause significant changes in global temperatures and weather patterns and increase the frequency or severity of weather events, wildfires and flooding. As the pressures from climate change and global population growth lead to increased demand, the food system and global supply chain is becoming increasingly vulnerable to acute shocks, leading to increased prices and volatility, especially in the energy and commodity markets. Adverse changes such as these could (i) unfavorably impact the cost or availability of raw or packaging materials, especially if such events have a negative impact on agricultural productivity or on the supply of water, (ii) disrupt production schedules and our ability, or the ability of our suppliers or contract manufacturers, to manufacture or distribute our products, (iii) reduce crop size or quality, (iv) disrupt the retail operations of our customers, or (v) unfavorably impact the demand for, or the consumers ability to purchase, our products.
There is an increased focus by foreign, federal, state and local regulatory and legislative bodies regarding environmental policies relating to climate change, regulating greenhouse gas emissions, energy policies and sustainability, including single use plastics. This new or increased focus may result in new or increased laws and regulations that could cause significant increases in our costs of operation and delivery. In particular, increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products. Lastly, consumers and customers may put an increased priority on purchasing products that are sustainably grown and made, requiring us to incur increased costs for additional transparency, due diligence and reporting. As a result, climate change as well as actions taken to mitigate climate change could negatively affect our business and operations.
Risks Related to Regulations and Litigation
We face risks related to tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes.
WK Kellogg Co is subject to taxes in the United States and certain foreign jurisdictions where WK Kellogg Cos subsidiaries are organized. Due to economic and political conditions (including shifts in the geopolitical landscape), tax rates in the United States and various foreign jurisdictions have been and may be subject to significant change. The future effective tax rate could be affected by changes in mix of earnings in countries with differing statutory tax rates, changes in valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation which includes the Tax Cuts and Jobs Act and contemplated changes in other countries of long-standing tax principles if finalized and adopted could have a material impact on our income tax expense and deferred tax balances. We are also subject to regular reviews, examinations and audits by the IRS and other taxing authorities with respect to taxes inside and outside of the United States. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face
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additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position. We also need to comply with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, including value added tax, or other changes in the application of existing taxes, in markets in which we are currently active, or may be active in the future, or on specific products that we sell or with which our products compete, may have an adverse effect on our business or on our results of operations.
If our food products become adulterated, misbranded or mislabeled, we might need to recall those items and may experience product liability if consumers are injured or damaged as a result.
Selling food products involves a number of legal, regulatory and other risks, including product contamination, food borne illnesses, spoilage, product tampering, allergens, or other adulteration, which could result in product liability claims. We may need to recall some of our products if they become adulterated or misbranded. We may also be liable if the consumption of any of our products causes injury, illness or death. A widespread product recall or market withdrawal could result in significant losses due to their costs, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. We could also suffer losses from a significant product liability judgment against us. In addition, we could be the target of claims that our advertising is false or deceptive under U.S. federal and state laws as well as foreign laws, including consumer protection statutes of some states. Allegations of consumer fraud may result in fines, settlements and litigation expenses. A product recall, product liability or consumer fraud case involving our business or the businesses of Kellogg ParentCo (from whom we intend to license certain brands used in our business under certain Intellectual Property Agreements) could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our food products, which could have a material adverse effect on our business results and the value of the brands used in our business. Moreover, even if a product liability or consumer fraud claim is meritless, does not prevail or is not pursued, the negative publicity surrounding assertions against WK Kellogg Co or Kellogg ParentCo and our or their products or processes could adversely affect our reputation or brands. We could also be adversely affected if consumers lose confidence in the safety and quality of certain food products or ingredients, or the food safety system generally. If another company recalls or experiences negative publicity related to cereal products, consumers might reduce their overall consumption of such products. Adverse publicity about these types of concerns, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions.
Evolving tax, advertising, environmental, licensing, labeling, trade, food quality and safety or other regulations or failure to comply with existing regulations and laws could have a material adverse effect on our financial condition.
Our activities and products, including our operation of our manufacturing facilities, both in and outside of the United States, are subject to regulation by various federal, state, provincial and local laws, regulations and government agencies, including the U.S. Food and Drug Administration, U.S. Federal Trade Commission (the FTC), the U.S. Departments of Agriculture, Commerce and Labor, as well as similar and other authorities outside of the United States, International Accords and Treaties and others, including voluntary regulation by other bodies. Legal and regulatory systems can change quickly. In addition, legal and regulatory systems in emerging and developing markets may be less developed, and less certain. These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic, regulatory or social events. In addition, the enforcement of remedies in certain foreign jurisdictions may be less certain, resulting in varying abilities to enforce intellectual property and contractual rights.
The manufacturing, marketing and distribution of food products are subject to governmental regulations that impose additional regulatory requirements. Those regulations control such matters as food quality and safety (including the condition and operation of our manufacturing facilities where food is processed), ingredients, advertising, product or production requirements, labeling, sustainability of packaging (including plastics), import or export of our products or ingredients, relations with distributors and retailers, health and safety, the
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environment, and restrictions on the use of government programs, such as Supplemental Nutritional Assistance Program and the Special Supplemental Nutrition Program for Women, Infants and Children, to purchase certain of our products.
The marketing of food products has come under increased regulatory scrutiny in recent years, and the food industry has been subject to an increasing number of proceedings and claims relating to alleged false or deceptive labeling and marketing under federal, state and foreign laws or regulations. For example, in 2009, Kellogg ParentCo reached a consent agreement with the FTC to resolve an investigation relating to marketing and advertising claims regarding Frosted Mini-Wheats products and its effects on kids attentiveness. The consent agreement requires, among other things, that Kellogg ParentCo and we refrain from making misleading advertising statements regarding the Frosted Mini-Wheats products and its effects on childrens attentiveness, and refrain from representing in any manner that Frosted Mini-Wheats or any other morning food or snack food have benefits, improve performance or increase the efficacy of cognitive function, cognitive processes, or other cognitive health, among other things. Kellogg ParentCo has remedied the matter that led to the FTC order and implemented controls designed to prevent similar issues in the future, and Kellogg ParentCo has not received any additional inquiries from the FTC to date regarding matters covered by the order. However, we may be subject to future investigations and legal proceedings by the FTC or other regulators. It is possible that a regulatory inquiry might result in changes to our advertising methods, policies or business practices. Violation of existing or future regulatory orders or consent decrees could subject us to substantial monetary fines and other penalties that could negatively affect our financial condition and operating results. In addition, it is possible that future orders issued by, or enforcement actions initiated by, regulatory authorities could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business, including damage to our reputation and the value of the brands used in our business.
We are also regulated with respect to matters such as licensing requirements, trade and pricing practices, tax, anti-corruption standards, advertising and claims, and environmental matters. The need to comply with new, evolving or revised tax, environmental, food quality and safety, labeling or other laws or regulations, or new, evolving or changed interpretations or enforcement of existing laws or regulations, may have a material adverse effect on our business and results of operations. Governmental and administrative bodies within the United States are considering a variety of trade and other regulatory reforms. Changes in legal or regulatory requirements (such as new food safety requirements and revised nutrition facts labeling, including front of pack labeling, and serving size regulations), or evolving interpretations of existing legal or regulatory requirements, may result in increased compliance costs, capital expenditures and other financial obligations that could adversely affect our business or financial results. If we are found to be out of compliance with applicable laws and regulations in these areas, we could be subject to civil remedies, including fines, injunctions, termination of necessary licenses or permits, or recalls, as well as potential criminal sanctions, any of which could have a material adverse effect on our business. Even if regulatory review does not result in these types of determinations, it could potentially create negative publicity or perceptions, which could harm our business or reputation.
Modifications to international trade policy, including the ratification of the United States-Mexico-Canada Agreement, the trade agreement between the named parties entered into force on July 1, 2020, or the imposition of increased or new tariffs, quotas or trade barriers on key commodities with other countries could have a negative impact on us or the industries we serve, including as a result of related uncertainty, and could materially and adversely impact our business, financial condition, results of operations and cash flows. Higher duties on existing tariffs or additional tariffs imposed by the United States on a broader range of imports, or further retaliatory trade measures taken by China or other countries in response, could result in an increase in supply chain costs that we are not able to offset.
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Risks Related to Our Intellectual Property and Technology
Technology failures, cyber-attacks, privacy breaches or data breaches could disrupt our operations or reputation and negatively impact our business.
We increasingly rely on information technology systems and third-party service providers, including through the internet, to process, transmit, and store electronic information. For example, our production and distribution facilities and inventory management utilize information technology to increase efficiencies and limit costs. Information technology systems are also integral to the reporting of our results of operations. Furthermore, a significant portion of the communications between, and storage of personal data of, our personnel, customers, consumers and suppliers depends on information technology. Our information technology systems, and the systems of the parties we communicate and collaborate with, may be vulnerable to a variety of interruptions, as a result of many of our employees working remotely, updating our enterprise platform or due to events beyond our or their control, including, but not limited to, network or hardware failures, malicious or disruptive software, unintentional or malicious actions of employees or contractors, cyber-attacks by common hackers, criminal groups or nation-state organizations or social-activist (hacktivist) organizations, geopolitical events, natural disasters, a pandemic illness (such as COVID-19), failures or impairments of telecommunications networks, or other catastrophic events.
Moreover, our computer systems have been, and will likely continue to be, subjected to computer viruses, malware, malicious codes, social engineering attacks, unauthorized access attempts, password theft, physical breaches, employee or inside error, malfeasance and cyber- or phishing-attacks. Cyber threats are constantly evolving, are becoming more sophisticated and are being made by groups and individuals with a wide range of expertise and motives, and this increases the difficulty of detecting and successfully defending against them. We may also face increased risk of state-sponsored or geopolitical-related cybersecurity incidents due to geopolitical tensions or incidents, such as the Russian invasion of Ukraine. These events could compromise our confidential information, impede or interrupt our business operations, and may result in other negative consequences, including remediation costs, loss of revenue, litigation and reputational damage. Furthermore, if a breach or other breakdown results in disclosure of confidential or personal information, we may suffer reputational, competitive and/or business harm. In connection with the Spin-Off, we intend to implement a new fully integrated enterprise resource planning (ERP) system before the conclusion of the Transition Services Agreement. We may not be able to successfully implement the ERP system without experiencing delays, increased costs and other difficulties. If we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to design and implement effective internal control over financial reporting could be delayed. We may be more susceptible to cyber-attacks while we work to implement such enterprise resource planning system. To date, we have not experienced a material breach of cybersecurity. As a standalone company, we will implement physical, administrative and technical controls and take other preventive actions, such as the maintenance of an information security program that will include updating our technology and security policies, insurance, employee training, and monitoring and routinely testing our information technology systems to reduce the risk of cyber incidents and protect our information technology; however, these measures may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems.
WK Kellogg Co will offer promotions, rebates and other programs through which it may receive personal information, and it or its vendors could experience cyber-attacks, privacy breaches, data breaches or other incidents that result in unauthorized disclosure of consumer, customer, employee or other WK Kellogg Co information. WK Kellogg Co must also successfully integrate the technology systems of acquired companies into WK Kellogg Cos existing and future technology systems. In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal information in the United States and other jurisdictions, including Canada, regarding privacy, data protection and data security, including those related to the collection, storage, handling, use, disclosure, transfer and security of personal information. There is significant uncertainty with respect to compliance with such privacy and data protection laws and regulations, including with respect to the California Consumer Privacy Act of 2018 (the CCPA), which went
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into effect on January 1, 2020 (which imposes additional obligations on companies regarding the handling of personal information and provides certain individual privacy rights to persons whose information is collected), because they are continuously evolving and developing and may be interpreted and applied differently from jurisdiction to jurisdiction and may create inconsistent or conflicting requirements. In addition, regulations to implement portions of the CCPA have not been finalized and could significantly impact CCPA compliance measures. For example, the California Privacy Rights Act (the CPRA), which was approved by California voters as a ballot initiative in November 2020, modified the CCPA significantly and the resulting new regulations became effective on January 1, 2023. Several other states and foreign jurisdictions have introduced or passed similar legislation to the CCPA and CPRA, which may impose varying standards and requirements on our data collection, use and processing activities. Our efforts to comply with privacy and data protection laws in the United States, including the CCPA and CPRA, and other foreign jurisdictions may impose significant costs and challenges that are likely to increase over time.
If WK Kellogg Co suffers a loss as a result of a breach or other breakdown in its technology, including such cyber-attacks, privacy breaches, data breaches, issues with or errors in system maintenance or security, migration of applications to the cloud, power outages, hardware or software failures, denial of service, telecommunication or other incident involving one of WK Kellogg Cos vendors, that result in unauthorized disclosure or significant unavailability of business, financial, personal or stakeholder information, WK Kellogg Co may suffer reputational, competitive and/or business harm and may be exposed to legal liability and government investigations, which may adversely affect WK Kellogg Cos results of operations and/or financial condition. The misuse, leakage or falsification of information could result in violations of data privacy laws and WK Kellogg Co may become subject to legal action and increased regulatory oversight. WK Kellogg Co could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems. In addition, if WK Kellogg Cos suppliers or customers experience such a breach or unauthorized disclosure or system failure, their businesses could be disrupted or otherwise negatively affected, which may result in a disruption in WK Kellogg Cos supply chain or reduced customer orders, which would adversely affect WK Kellogg Cos business operations. We have also outsourced several information technology support services and administrative functions to third-party service providers, including cloud-based service providers, and may outsource other functions in the future to achieve cost savings and efficiencies. In addition, we will rely on Kellogg ParentCo to perform numerous information technology services, including information systems security, under the terms of the Transition Services Agreement. For a more detailed discussion, see Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoTransition Services Agreement. If these service providers and Kellogg ParentCo, do not perform effectively due to breach or system failure, we may not be able to achieve the expected benefits and our business may be disrupted.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
Our intellectual property rights are a significant and valuable aspect of our business and include trademarks, patents, trade secrets, and copyrights to be owned or licensed under certain licensing agreements. Our failure to obtain or adequately protect our intellectual property rights may diminish our competitiveness and could materially harm our business. Similarly, changes in applicable laws or other changes that serve to lessen or remove the current legal protections of our intellectual property may also diminish our competitiveness and could materially harm our business. We may be unaware of intellectual property rights of others that may cover some of our technology, brands or products or operations. In addition, if, in the course of developing new products or improving the quality of existing products, we are found to have infringed the intellectual property rights of others (including any intellectual property licensed from Kellogg ParentCo under the Intellectual Property Agreements), directly or indirectly, such finding could have an adverse impact on our business, financial condition or results of operations and may limit our ability to introduce new products or improve the quality of existing products. Any litigation regarding intellectual property rights could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Third party claims
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of intellectual property infringement might also require us to enter into costly license agreements. We also may be subject to significant damages or injunctions against development and sale of certain products.
Certain of our rights to intellectual property used in our business will be limited to those of a licensee under the Intellectual Property Agreements.
In connection with the Spin-Off, we will enter into one or more Intellectual Property Agreements with Kellogg ParentCo that will provide for ownership, use and selling rights to facilitate both Kellogg ParentCos and WK Kellogg Cos ongoing use of certain intellectual property rights. Such Intellectual Property Agreements will contain limitations on how we are able to leverage the brands and other non-brand related intellectual property that are used in connection with our business.
We expect the Intellectual Property Agreements to provide for ownership, use and selling rights with respect to certain trademarks and other non-brand related intellectual property currently owned by Kellogg ParentCo. Since we will not own all brands and other intellectual property used in our business, our success will depend, in part, on (i) the maintenance of our ongoing relationship with Kellogg ParentCo, (ii) our performance of our obligations under such agreements, and (iii) Kellogg ParentCos performance of its obligations under such agreements, including Kellogg ParentCos maintenance of the quality of products and services it sells under trademarks we will use co-extensively with Kellogg ParentCo (such trademarks, Shared Use Trademarks), and Kellogg ParentCos adequate maintenance of any Shared Use Trademarks and other intellectual property that we license from Kellogg ParentCo. Improper maintenance of the quality of products or services that Kellogg ParentCo sells under any Shared Use Trademarks or general inadequate maintenance of any Shared Use Trademarks or other intellectual property of Kellogg ParentCo could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our food products, which could have a material adverse effect on our business results and the value of the brands used in our business.
If we (i) fail to comply with our obligations under any of these agreements, (ii) use the licensed intellectual property in an unauthorized manner, (iii) are subject to bankruptcy-related proceedings or (iv) otherwise materially breach any of these agreements, the terms of the license granted from Kellogg ParentCo to us may be materially modified, such as by rendering any exclusive licenses non-exclusive. Generally, the loss or termination of our rights under the Intellectual Property Agreements, or any other licenses we may acquire in the future, may materially and adversely affect our profitability and our revenues could decrease.
For a more detailed discussion, see Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo.
Other Risks Related to the Spin-Off
The Spin-Off may not be completed on the terms or timeline currently contemplated, if at all.
While we are actively engaged in planning for the Spin-Off, unanticipated developments could delay or negatively affect the Spin-Off, including those related to the filing and effectiveness of appropriate filings with the SEC and the listing of our common stock on a trading market. We cannot assure you that all of the conditions will be satisfied or waived. In addition, until the Distribution has occurred, we will continue to be a wholly owned subsidiary of Kellogg ParentCo. Accordingly, the Kellogg ParentCo Board has the discretion to determine not to proceed with the Spin-Off, even if all of the conditions are satisfied, or to change the terms of the Spin-Off. If the Distribution is completed and the Kellogg ParentCo Board of Directors waives any such condition, such waiver could have a material adverse effect on Kellogg ParentCos and WK Kellogg Cos respective business, financial condition or results of operations, the trading price of WK Kellogg Co common stock, or the ability of shareholders to sell their shares after the Distribution, including, without limitation, as a result of illiquid trading due to the failure of WK Kellogg Co common stock to be accepted for listing or litigation relating to any preliminary or permanent injunctions sought to prevent the consummation of the Distribution. Therefore, the Spin-Off may not be completed on the terms or timeline currently contemplated, if at all, and any change in the terms of the Spin-Off could be unfavorable to us.
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If the Contribution and the Distribution were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then Kellogg ParentCo, we and our shareholders could be subject to significant tax liability.
The Distribution is conditioned on the receipt and continued validity of the private letter ruling from the IRS that Kellogg ParentCo will request and the receipt and continued validity of an opinion of tax counsel (the Tax Opinion), each to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants and the adherence by Kellogg ParentCo and us to certain restrictions on our future actions contained in the Tax Matters Agreement, the Contribution and the Distribution will qualify for non-recognition of gain or loss to Kellogg ParentCo and Kellogg ParentCos shareholders pursuant to Sections 368 and 355 of the Code, except to the extent of cash received in lieu of fractional shares.
Notwithstanding the receipt of the private letter ruling and the Tax Opinion, the IRS could determine that the Contribution and the Distribution should be treated as one or more taxable transactions if it determines that any of the representations, assumptions or covenants on which the private letter ruling is based are untrue or have been violated. Furthermore, as part of the IRSs policy, the IRS will not determine whether the Contribution and the Distribution satisfies certain conditions that are necessary to qualify for non-recognition treatment. Rather, the private letter ruling will be based on representations by Kellogg ParentCo and us that these conditions have been satisfied. The Tax Opinion will address the satisfaction of these conditions.
The Tax Opinion is not binding on the IRS or the courts, and there is no assurance that the IRS or a court will not take a contrary position. In addition, the Tax Opinion will rely on certain representations and covenants to be delivered by Kellogg ParentCo and us.
If the IRS ultimately determines that the Contribution and the Distribution is taxable, the Distribution could be treated as a taxable dividend or capital gain to you for U.S. federal income tax purposes, and you could incur significant U.S. federal income tax liabilities. In addition, if the IRS ultimately determines that the Contribution and the Distribution are taxable, Kellogg ParentCo and we could incur significant U.S. federal income tax liabilities, and we could have an indemnification obligation to Kellogg ParentCo. For a more detailed discussion, see We could have an indemnification obligation to Kellogg ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition and Material U.S. Federal Income Tax Consequences of the Spin-Off.
If the Canadian aspects of the Internal Reorganization were to fail to qualify for tax-deferred treatment for Canadian federal and provincial income tax purposes, then Kellogg ParentCos and/or our Canadian subsidiaries could be subject to significant tax liability.
The Internal Reorganization includes steps to separate the assets and liabilities in Canada held in connection with the Kellogg ParentCo Business from the assets and liabilities in Canada held in connection with the Cereal Business.
Kellogg ParentCos Canadian subsidiary has applied for an advance income tax ruling from the Canada Revenue Agency (CRA), to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants and based on the current provisions of the Canadian Tax Act, the Internal Reorganization will be treated for purposes of the Canadian Tax Act as resulting in a butterfly reorganization transaction with no material Canadian federal income tax payable by Kellogg ParentCos Canadian subsidiary, our Canadian subsidiary or their respective shareholders.
Notwithstanding the receipt of the advance income tax ruling, the CRA could determine that the Internal Reorganization should be treated as a taxable transaction if it determines that any of the representations, assumptions or covenants on which the advance income tax ruling is based are untrue or have been violated. If the CRA ultimately determines that the Internal Reorganization is taxable, Kellogg ParentCos and/or our
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Confidential Treatment Requested by WK Kellogg Co
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Canadian subsidiaries could incur significant Canadian federal and provincial income tax liabilities. For a more detailed discussion, see We could have an indemnification obligation to Kellogg ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition.
We could have an indemnification obligation to Kellogg ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition.
Generally, taxes resulting from the failure of the Spin-Off to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on Kellogg ParentCo or Kellogg ParentCos shareholders and, under the Tax Matters Agreement, Kellogg ParentCo will generally be obligated to indemnify us against such taxes. However, under the Tax Matters Agreement, we could be required, under certain circumstances, to indemnify Kellogg ParentCo and its affiliates against all tax-related liabilities caused by those failures, to the extent those liabilities result from an action we or our affiliates take or from any breach of our or our affiliates representations, covenants or obligations under the Tax Matters Agreement or any other agreement we enter into in connection with the Spin-Off. Events triggering an indemnification obligation under the agreement include events occurring after the Distribution that cause Kellogg ParentCo to recognize a gain under Section 355(e) of the Code. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoTax Matters Agreement.
Generally, taxes resulting from the failure of the Canadian steps of the Internal Reorganization to qualify for tax-deferred treatment for Canadian federal and provincial income tax purposes could be imposed on Kellogg ParentCos Canadian subsidiary, our Canadian subsidiary or both. The Tax Matters Agreement will provide for an allocation of the responsibility for these liabilities. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoTax Matters Agreement.
We intend to agree to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating flexibility.
The U.S. federal income tax laws that apply to Spin-Offs generally create a presumption that the Distribution would be taxable to Kellogg ParentCo (but not to Kellogg ParentCo shareholders) if we engage in, or enter into an agreement to engage in, a transaction that would result in a 50% or greater change by vote or by value in our stock ownership during the four-year period beginning on the date that begins two years before the Distribution Date, unless it is established that the transaction is not pursuant to a plan or series or transactions related to the Distribution. U.S. Treasury regulations currently in effect generally provide that whether an acquisition transaction and a Distribution are part of a plan is determined based on all of the facts and circumstances, including specific factors listed in the U.S. Treasury regulations. In addition, these U.S. Treasury regulations provide several safe harbors for acquisition transactions that are not considered to be part of a plan that includes a Distribution.
There are other restrictions imposed on us under current U.S. federal income tax laws with which we will need to comply in order for the Spin-Off to qualify as a transaction that is tax-free under Sections 355 and 368(a)(1)(D) of the Code. For example, we will generally be required to continue to own and manage the Cereal Business, and there will be limitations on issuances, redemptions and sales of our stock for cash or other property following the Distribution, except in connection with certain stock-for-stock acquisitions and other permitted transactions. If these restrictions are not followed, the Distribution could be taxable to Kellogg ParentCo and Kellogg ParentCo shareholders.
We will enter into a Tax Matters Agreement with Kellogg ParentCo under which we will allocate, between Kellogg ParentCo and ourselves, responsibility for U.S. federal, state and local and non-U.S. income and other taxes relating to taxable periods before and after the Spin-Off and provide for computing and apportioning tax
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Pursuant to 17 C.F.R. Section 200.83
liabilities and tax benefits between the parties. In the Tax Matters Agreement, we will agree that, among other things, we may not take, or fail to take, any action following the Distribution if such action, or failure to act: would be inconsistent with or prohibit the Spin-Off and certain restructuring transactions related to the Spin-Off from qualifying as a tax-free transaction under Sections 355 and 368(a)(1)(D) and related provisions of the Code to Kellogg ParentCo and the Kellogg ParentCo shareholders (except with respect to the receipt of cash in lieu of fractional shares of our stock); or would be inconsistent with, or cause to be untrue, any representation, statement, information or covenant made in connection with the IRS ruling, the Tax Opinion or the Tax Matters Agreement relating to the qualification of the Spin-Off as a tax-free transaction under Sections 355 and Section 368(a)(1)(D) and related provisions of the Code. We will agree to indemnify Kellogg ParentCo for certain tax liabilities resulting from any such action.
In addition, we will agree that we may not, among other things, during the two-year period following the Spin-Off, except under certain specified circumstances (including certain open market repurchases of our stock to the extent permitted under the Tax Matters Agreement), issue, sell or redeem our stock or other securities (or those of certain of our subsidiaries); liquidate, merge or consolidate with another person; sell or dispose of assets outside the ordinary course of business or materially change the manner of operating our business; or enter into any agreement, understanding or arrangement, or engage in any substantial negotiations with respect to any transaction or series of transactions which would cause us to undergo a 35% or greater change in our stock ownership by value or voting power. These restrictions could limit our strategic and operational flexibility, including our ability to finance our operations by issuing equity securities, make acquisitions using equity securities, repurchase our equity securities (as described above), raise money by selling assets or enter into business combination transactions. We will also agree to indemnify Kellogg ParentCo for certain tax liabilities resulting from any such transactions. Further, as it relates to Section 355(e) and/or other requirements for a tax-free Distribution under the Code, our shareholders may consider these covenants and indemnity obligations unfavorable as they might discourage, delay or prevent a change of control.
We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.
We believe that, as an independent, publicly traded company, we will be able to, among other matters, better focus our financial and operational resources on our specific business, growth profile and strategic priorities, design and implement corporate strategies and policies targeted to our operational focus and strategic priorities, streamline our processes and infrastructure to focus on our core strengths and implement and maintain a capital structure designed to meet our specific needs and more effectively respond to industry dynamics. However, we may be unable to achieve some or all of these benefits. For example, in order to position ourselves for the Spin-Off, we are undertaking a series of strategic, structural and process realignment and restructuring actions within our operations, including cost-reduction initiatives. These actions may not provide the cost benefits we currently expect, and could lead to disruption of our operations, loss of, or inability to recruit, key personnel needed to operate and grow our businesses following the Spin-Off, weakening of our internal standards, controls or procedures and impairment of our key customer and supplier relationships. In addition, completion of the proposed Spin-Off will require significant amounts of managements time and effort, which may divert managements attention from operating and growing our businesses. Further, our business will be less diversified than Kellogg ParentCos business prior to the Spin-Off, and our business will also experience a loss of scale and access to certain financial, managerial and professional resources as well as product and brand power influence and recognition with some customers from which we have benefited in the past. We may also experience reduced access to capital and strategic flexibility because, for instance, we will no longer be able to use cash flow from Kellogg ParentCo to fund investments and operations. Additionally, we may be more susceptible to market fluctuations and other adverse events than we would have been were we still a part of Kellogg ParentCo. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business, financial condition and results of operations could be materially and adversely affected.
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We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company.
We have historically operated as part of Kellogg ParentCos corporate organization, and Kellogg ParentCo has assisted us by providing various corporate functions. Following the Spin-Off, Kellogg ParentCo will have no obligation to provide us with assistance other than the transition services described under Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo. These services may not include every service we have received from Kellogg ParentCo in the past, and Kellogg ParentCo is only obligated to provide these services for limited periods from the date of the Spin-Off. Accordingly, once the Spin-Off occurs and the Transition Services Agreement expires, we will need to provide internally or obtain from unaffiliated third parties the services we currently receive from Kellogg ParentCo. These services will likely include information technology, procurement, contract manufacturing, distribution, logistics and order to delivery, engineering, research and development, accounting, finance, compliance and administrative activities, the effective and appropriate performance of which is critical to our operations. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from Kellogg ParentCo. In particular, Kellogg ParentCos information technology networks and systems are complex, and duplicating these networks and systems will be challenging. We may face information technology disruptions as certain data, software, information technology hardware and other information technology assets and systems are transitioned or re-allocated between us and Kellogg ParentCo, or as we implement new systems or upgrades in connection with such transition. In addition, the efforts related to the separation of the information technology environment will require significant resources that could impact our ability to keep pace with ongoing advancement of information technology needs of the business.
Our ability to effectively manage and operate our business depends significantly on information technology systems, and any failure, disruption, interruption, malfunction or other issue with respect to such systems could have a material adverse effect on our business and results of operations. Because our business previously operated as part of the wider Kellogg ParentCo organization, we may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or we may incur additional costs that could adversely affect our business. Kellogg ParentCo may not successfully perform its obligations during the transition period or we may have to expend significant efforts or costs materially in excess of those estimated under the Transition Services Agreement. If we fail to obtain the quality of administrative services necessary to operate effectively or incur greater costs in obtaining these services, our profitability, financial condition and results of operations may be materially and adversely affected. Further, one-time costs relating to the separation may be material and may adversely affect our profitability. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoTransition Services Agreement. Performing our obligations under the Transition Services Agreement may require significant time and resources and may divert managements attention from the operation of WK Kellogg Co. Kellogg ParentCo may not successfully perform its obligations during the transition period, or we may have to expend significant efforts or costs materially in excess of those estimated under the Transition Services Agreement. Any interruption in these services could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In connection with the Spin-Off, we intend to implement a new fully integrated enterprise resource planning system before the conclusion of the Transition Services Agreement. This implementation could result in a major disruption to our business controls and procedures, and any disruption could have a negative effect on our business, operating results, financial condition and ability to timely and accurately report our financial results. In addition, implementing a new enterprise resource planning system may require significant resources and refinement to fully realize the expected benefits of the system.
We have no operating history as an independent, publicly traded company, and our historical and pro forma financial statements are not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of future results.
We derived the historical and pro forma financial statements included in this Information Statement from Kellogg ParentCos combined financial statements and this information does not necessarily reflect the results of
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Pursuant to 17 C.F.R. Section 200.83
operations, financial position and cash flows we would have achieved as an independent, publicly traded company during the periods presented, or those that we will achieve in the future. This is primarily because of the following factors:
| Prior to the Spin-Off, we operated as part of Kellogg ParentCos broader corporate organization, rather than as an independent company. Kellogg ParentCo performed various corporate functions for us, including information technology, research and development, finance, legal, internal audit, insurance, compliance and human resources activities. Our historical and pro forma financial statements reflect allocations of corporate expenses from Kellogg ParentCo for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent company. |
| We will enter into transactions with Kellogg ParentCo that did not exist prior to the Spin-Off. See Certain Relationships and Related Party Transactions for information regarding these transactions. |
| Our working capital requirements and capital expenditures historically have been satisfied as part of Kellogg ParentCos corporate-wide cash management and centralized funding programs, and our cost of debt and other capital may significantly differ from that which is reflected in our historical combined financial statements. |
| Our historical financial statements do not reflect changes that we expect to experience in the future as a result of our separation from Kellogg ParentCo, including changes in our cost structure, personnel needs, tax structure, financing and business operations. As part of Kellogg ParentCo, we enjoyed certain benefits from Kellogg ParentCos operating diversity, size, purchasing power and available capital for investments, and we will lose some or all of these benefits after the Spin-Off. After the Spin-Off, as an independent and smaller entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, on terms as favorable to us as those we obtained as part of Kellogg ParentCo prior to the Spin-Off. In addition, our cost of debt and other capital may significantly differ from that which is reflected in our historical financial statements. |
Following the Spin-Off, we will also be responsible for the additional costs associated with being an independent, publicly traded company, including costs related to corporate governance, investor and public relations and public reporting. Therefore, our pre-Spin Off financial statements may not be indicative of our future performance as an independent company. While we have been profitable as part of Kellogg ParentCo, we cannot assure you that our profits will continue at a similar level when we are a stand-alone company. For additional information about our past financial performance and the basis of presentation of our financial statements, see Summary Unaudited Pro Forma Financial Data, Unaudited Pro Forma Combined Financial Statements, Managements Discussion and Analysis of Financial Condition and Results of Operations and our historical combined financial statements and accompanying notes included elsewhere in this Information Statement.
The unaudited pro forma combined financial statements are subject to the assumptions and adjustments described in the accompanying notes. While we believe that these assumptions and adjustments are reasonable under the circumstances and given the information available at this time, these assumptions and adjustments are subject to change as Kellogg ParentCo and we finalize the terms of the Spin-Off and our agreements related to the Spin-Off.
While Kellogg ParentCo has no plan or intention to engage in, or own and operate, a business that competes with the Cereal Business, Kellogg ParentCo has a significant understanding of our business and, notwithstanding the non-competition agreement with Kellogg ParentCo, there may be opportunities for Kellogg ParentCo to compete against us following the Spin-Off.
Prior to the Spin-Off, we have operated as part of Kellogg ParentCo, and many of its officers, directors and employees have participated in the development and execution of our corporate strategy and the management of
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Pursuant to 17 C.F.R. Section 200.83
our day-to-day operations. Following the Spin-Off, Kellogg ParentCo will have significant knowledge of our products, operations, strengths, weaknesses and strategies, and will be a licensor of trademarks and other intellectual property rights used in the Cereal Business. Based on Kellogg ParentCos knowledge of our corporate strategy and the management of our day-to-day operations, it will also be positioned to develop cereal-based products and snacks throughout the world, some of which may compete against our products in the United States, Canada and the Caribbean. Although following the Spin-Off and in connection with the Intellectual Property Agreements, Kellogg ParentCo generally will not have rights to use trademarks used in the Cereal Business or other existing intellectual property used in the Cereal Business (such as processing know-how and formulations) to sell cereal in the United States, Canada and the Caribbean, it will not be restricted, beyond a brief and limited non-competition period, from developing new brands, new products using new technology and formulations in the same product categories as the Cereal Business and marketing such products under trademarks other than the trademarks of the Cereal Business in the United States, Canada and the Caribbean. Because of Kellogg ParentCos competitive insight into our operations, competition from Kellogg ParentCo may materially and adversely affect our product sales, financial condition and results of operations.
We expect to incur indebtedness in connection with the Spin-Off, and the degree to which we will be leveraged following completion of the Spin-Off may materially and adversely affect our business, financial condition and results of operations.
We have historically relied upon Kellogg ParentCo for working capital requirements on a short-term basis and for other financial support functions. After the Spin-Off, we will not be able to rely on Kellogg ParentCos earnings, assets or cash flow, and we will be responsible for servicing our own debt, obtaining and maintaining sufficient working capital and paying dividends. Immediately following the Spin-Off, we expect to have total indebtedness of approximately $ . Such indebtedness could have important consequences, including (i) impairing the ability to access global capital markets to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes, particularly if the ratings assigned to our debt securities by rating organizations were revised downward or if a rating organization announces that our ratings are under review for a potential downgrade, (ii) restricting our flexibility in responding to changing market conditions or making us more vulnerable in the event of a general downturn in economic conditions or our business, (iii) requiring a substantial portion of the cash flow from operations to be dedicated to the payment of principal and interest on our debt, reducing the funds available to us for other purposes such as expansion through acquisitions, paying dividends, repurchasing shares, marketing and other spending and expansion of our product offerings and (iv) and causing us to be more leveraged than some of our competitors, which may place us at a competitive disadvantage. In addition, upon completion of the Spin-Off, we expect our indebtedness to have a non-investment grade rating, which will likely make it more difficult or more expensive for us to obtain additional debt financing.
Our ability to make payments on and to refinance our indebtedness, including the debt expected to be retained or incurred pursuant to the Spin-Off as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In particular, in a rising interest rate environment, debt financing will become more expensive and may have higher transactional and servicing costs. The potential inability to obtain adequate funding from debt sources in the future as a result of high interest rates could force us to self-fund strategic initiatives or forego certain opportunities, which in turn could materially adversely affect our financial condition and results of operations. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take disadvantageous actions, including reducing spending on marketing, retail trade incentives, advertising and new product innovation, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in the food industry could be impaired. Future financing arrangements, including any potential credit facilities, may contain restrictions, covenants and events of
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Pursuant to 17 C.F.R. Section 200.83
default that, among other things, could limit our ability to respond to market conditions, provide for capital investment needs or take advantage of business opportunities by restricting our ability to incur or guarantee additional indebtedness or requiring us to offer to repurchase such indebtedness in the event of a change of control or a change of control triggering event; pay dividends or make distributions; make investments or acquisitions; sell, transfer or otherwise dispose of certain assets; create liens; consolidate or merge; enter into transactions with affiliates; and prepay and repurchase or redeem certain indebtedness. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt.
In addition, our leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our substantial leverage could also impede our ability to withstand downturns in our industry or the economy in general as well as our ability to expand into complementary categories.
We may increase our debt or raise additional capital in the future, which could affect our financial health and may decrease our profitability.
We may increase our debt or raise additional capital in the future, subject to restrictions in our debt agreements. In addition, our Board may issue shares of preferred stock without further action by holders of our common stock. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity financing may not be available to us on terms we find acceptable, if at all. If we incur additional debt or raise equity through the issuance of our preferred stock, the terms of the debt or our preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. If we raise funds through the issuance of additional equity, your ownership in us would be diluted. Also, regardless of the terms of our debt or equity financing, our agreements and obligations under the Tax Matters Agreement may limit our ability to issue stock. For a more detailed discussion, see We intend to agree to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating flexibility. If we are unable to raise additional capital when needed, our financial condition, and thus your investment in us, could be materially and adversely affected.
The obligations associated with being a public company will require significant resources and management attention.
Currently, we are not directly subject to the reporting and other requirements of the Exchange Act. Following the effectiveness of the Registration Statement of which this Information Statement forms a part, we will be directly subject to such reporting and other obligations under the Exchange Act and the rules of the NYSE. As an independent public company, we will be required to, among other things:
| prepare and distribute periodic reports, proxy statements and other shareholder communications in compliance with the federal securities laws and rules; |
| have our own board of directors and committees thereof, which comply with federal securities laws and rules; |
| maintain an internal audit function; |
| institute our own financial reporting and disclosure compliance functions, including the full implementation of a new enterprise risk management system; |
| establish an investor relations function; |
| establish internal policies, including those relating to trading in our securities and disclosure controls and procedures; and |
| comply with the Sarbanes-Oxley Act and the Dodd-Frank Act, and the rules and regulations implemented by the SEC, the Public Company Accounting Oversight Board and the NYSE. |
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These reporting and other obligations will place significant demands on our management and our administrative and operational resources, including accounting resources, and we expect to face increased legal, accounting, administrative and other costs and expenses relating to these demands that we had not incurred as a part of Kellogg ParentCo. Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of managements time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
If we fail to maintain effective internal controls, we may not be able to report our financial results accurately or timely or to prevent or detect fraud, which could have a material adverse effect on our business or the market price of our securities.
In accordance with Section 404 of the Sarbanes-Oxley Act, our management will be required to conduct an annual assessment of the effectiveness of our internal control over financial reporting and include a report on these internal controls in the annual reports we will file with the SEC on Form 10-K. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the year following the first annual report required to be filed with the SEC. When required, this process will require significant documentation of policies, procedures and systems, review of that documentation by our internal auditing and accounting staff and our outside independent registered public accounting firm, and testing of our internal controls over financial reporting by our internal auditing and accounting staff and our outside independent registered public accounting firm. This process will involve considerable time and attention, may strain our internal resources, and will increase our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter. If management or our independent registered public accounting firm determines that our internal control over financial reporting is not effective, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be negatively affected, and we could become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources. In addition, if our controls are not effective, our ability to accurately and timely report our financial position could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our financial statements, a decline in our stock price, or suspension or delisting of our common stock from the NYSE, and could have a material adverse effect on our business, financial condition and results of operations.
After the Spin-Off, certain of our directors and officers may have actual or potential conflicts of interest because of their Kellogg ParentCo equity ownership or their former Kellogg ParentCo positions.
Certain of the persons we expect to become our executive officers and directors have been, and will be until the Spin-Off, Kellogg ParentCo officers, directors or employees and thus have professional relationships with Kellogg ParentCos executive officers, directors or employees. In addition, because of their former Kellogg ParentCo positions, following the Spin-Off, certain of our directors and executive officers may own Kellogg ParentCo common stock or options to acquire shares of Kellogg ParentCo common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. These relationships and financial interests may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for Kellogg ParentCo and us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between Kellogg ParentCo and us regarding the terms of the agreements governing the Spin-Off and the relationship thereafter between the companies.
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Pursuant to 17 C.F.R. Section 200.83
There can be no assurance that we will be able to obtain insurance coverage following the Spin-Off on terms that justify its purchase, and any such insurance may not be adequate to offset costs associated with certain events.
We will have to obtain our own insurance policies after the Spin-Off is complete. Although we expect to have insurance policies in place as of the Distribution Date that cover certain, but not all, hazards that could arise from our operations, we can provide no assurance that we will be able to obtain such coverage, that the costs of such coverage will be similar to those incurred by Kellogg ParentCo or that such coverage will be adequate to protect us from costs incurred with certain events. The occurrence of an event that is not insured or not fully insured could have a material adverse effect on our results of operations, financial condition and cash flows in the future.
Transfer or assignment to us of some contracts and other assets will require the consent of a third party. If such consent is not given, we may not be entitled to the benefit of such contracts, investments and other assets in the future.
Transfer or assignment of some of the contracts and other assets in connection with the Spin-Off will require the consent of a third party to the transfer or assignment. Similarly, in some circumstances, we are joint beneficiaries of contracts, and we will need to enter into a new agreement with the third party to replicate the existing contract or assign the portion of the existing contract related to the Cereal Business. While we anticipate that most of these contract assignments and new agreements will be obtained prior to the Spin-Off, we may not be able to obtain all required consents or enter into all such new agreements, as applicable, until after the Distribution Date. Some parties may use the requirement of a consent to seek more favorable contractual terms from us, which could include our having to obtain letters of credit or other forms of credit support. If we are unable to obtain such consents or such credit support on commercially reasonable and satisfactory terms, we may be unable to obtain some of the benefits, assets and contractual commitments that are intended to be allocated to us as part of the Spin-Off. In addition, where we do not intend to obtain consent from third-party counterparties based on our belief that no consent is required, the third-party counterparties may challenge the transaction on the basis that the terms of the applicable commercial arrangements require their consent. We may incur substantial litigation and other costs in connection with any such claims and, if we do not prevail, our ability to use these assets could be adversely impacted.
We cannot provide assurance that all such required third-party consents and new agreements will be procured or put in place, as applicable, prior to the Distribution Date. Consequently, we may not realize certain of the benefits that are intended to be allocated to us as part of the Spin-Off.
We may have received better terms from unaffiliated third parties than the terms we received in our agreements with Kellogg ParentCo entered into in connection with the Spin-Off.
The agreements related to the Spin-Off from Kellogg ParentCo were negotiated in the context of the Spin-Off from Kellogg ParentCo while we were still part of Kellogg ParentCo. Although these agreements are intended to be on an arms-length basis, they may not reflect terms that would have resulted from arms-length negotiations among unaffiliated third parties. The terms of the agreements being negotiated in the context of the separation are related to, among other things, allocations of assets and liabilities, rights and indemnification and other obligations between us and Kellogg ParentCo. To the extent that certain terms of those agreements provide for rights and obligations that could have been procured from third parties, we may have received better terms from third parties because third parties may have competed with each other to win our business. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo.
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Pursuant to 17 C.F.R. Section 200.83
Risks Related to Our Common Stock
Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile and you may not be able to resell your shares at or above the initial market price of our common stock following the Spin-Off.
Prior to the Spin-Off, there will have been no trading market for shares of our common stock. An active trading market may not develop or be sustained for our common stock after the Spin-Off, and we cannot predict the prices at which our common stock will trade after the Spin-Off. In addition, because no vote of Kellogg ParentCo shareholders is required in connection with the Distribution, if Kellogg ParentCo shareholders disagree with the Spin-Off, their only recourse will be selling their WK Kellogg Co shares after the Spin-Off, which could impact the market price of our common stock. The market price of our common stock could fluctuate significantly due to a number of factors, many of which are beyond our control, including:
| fluctuations in our quarterly or annual earnings results or those of other companies in our industry; |
| failures of our operating results to meet the estimates of securities analysts or the expectations of our shareholders, or changes by securities analysts in their estimates of our future earnings; |
| announcements by us or our customers, suppliers or competitors; |
| changes in market valuations or earnings of other companies in our industry; |
| changes in laws or regulations which adversely affect our industry or us; |
| general economic, industry and stock market conditions; |
| future significant sales of our common stock by our shareholders or the perception in the market of such sales; |
| future issuances of our common stock by us; and |
| the other factors described in these Risk Factors and elsewhere in this Information Statement. |
These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.
The trading market for our common stock may also be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.
A large number of our shares are or will be eligible for future sale, which may cause the market price of our common stock to decline.
Upon completion of the Spin-Off, we estimate that we will have outstanding an aggregate of approximately shares of our common stock (based on shares of Kellogg ParentCo common stock outstanding on , 2023). All of those shares (other than those held by our affiliates) will be freely tradable without restriction or registration under the Securities Act of 1933, as amended (the Securities Act). Shares held by our affiliates, which include our directors and executive officers, can be sold subject to volume, manner of sale and notice provisions of Rule 144 under the Securities Act. We estimate that our directors and
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Pursuant to 17 C.F.R. Section 200.83
executive officers, who may be considered affiliates for purposes of Rule 144, will beneficially own approximately shares of our common stock immediately following the Spin-Off. We are unable to predict whether large amounts of our common stock will be sold in the open market following the Spin-Off. We are also unable to predict whether a sufficient number of buyers will be in the market at that time. In addition, other Kellogg ParentCo shareholders may sell the shares of our common stock they receive in the Spin-Off for various reasons. For example, such shareholders may not believe our business profile or level of market capitalization as an independent company fits their investment objectives.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and certain provisions of Delaware law could delay or prevent a change in control of WK Kellogg Co.
The existence of certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law could discourage, delay or prevent a change in control of WK Kellogg Co that a shareholder may consider favorable. These include provisions:
| providing the right to our Board to issue one or more classes or series of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without shareholder approval; |
| authorizing a large number of shares of stock that are not yet issued, which would allow our Board to issue shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us; |
| permitting the Board to amend our amended and restated bylaws, which may allow the Board to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt; |
| prohibiting shareholders from taking action by written consent; and |
| establishing advance notice and other requirements for nominations of candidates for election to our Board or for proposing matters that can be acted on by shareholders at the annual shareholder meetings. |
We believe these provisions will protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board and by providing our Board with the time to assess any acquisition proposal. These provisions are not intended to prevent or discourage takeovers. However, these provisions apply even if a takeover offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our Board determines is not in our and our shareholders best interests. These provisions could also have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our business in a tender offer or similar transaction.
Our Board will be classified for the first three annual meetings of shareholders following the Spin-Off. With our classified Board, at least two annual meetings of shareholders will generally be required in order to effect a change in a majority of our directors. Our classified Board can discourage proxy contests for the election of directors and purchases of substantial blocks of our shares by making it more difficult for a potential acquirer to gain control of our board of directors in a relatively short period of time. See Description of Our Capital Stock.
Our amended and restated certificate of incorporation will designate Delaware as the exclusive forum for certain litigation that may be initiated by our shareholders, which could limit our shareholders ability to obtain a preferred judicial forum for disputes with us and limit the market price of our common stock.
Pursuant to our amended and restated certificate of incorporation, as will be in effect upon the completion of the Spin-Off, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim for or based on a breach of a fiduciary duty owed by any of our directors or officers or other employees to us or to our shareholders; (iii) any action asserting a claim against us or any of our directors or officers arising pursuant to any provision of the Delaware General Corporation Law (the DGCL) or our amended and restated certificate of incorporation or amended and restated bylaws; or (iv) any other action asserting a claim against us or any of our directors or officers that is governed by the internal affairs doctrine. These exclusive forum provisions will apply to all covered actions, including any covered action in which the plaintiff chooses to assert a claim or claims under federal law in addition to a claim or claims under Delaware law. These exclusive forum provisions, however, will not apply to actions asserting only federal law claims under the Securities Act or the Exchange Act, regardless of whether the Court of Chancery of the State of Delaware has jurisdiction over those claims. The forum selection clause in our amended and restated certificate of incorporation may limit our shareholders ability to obtain a preferred judicial forum for disputes with us and limit the market price of our common stock. Our amended and restated certificate of incorporation will also provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolutions of any complaint asserting a cause of action arising under the Securities Act.
The choice of forum provision may result in increased costs for investors to bring a claim. Further, the choice of forum provision may limit a shareholders ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, other employees, or shareholders, which may discourage such lawsuits against us and our directors, officers, other employees, or shareholders. However, there is uncertainty as to whether a court would enforce a choice of forum provision, and the enforceability of similar forum provisions in other companies organizational documents has been challenged in legal proceedings. If a court were to find the exclusive choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and financial condition. Furthermore, investors cannot waive compliance with the federal securities laws and regulations thereunder.
Shareholders percentage ownership in WK Kellogg Co may be diluted in the future.
In the future, shareholders percentage ownership in WK Kellogg Co may be diluted because of equity issuances for acquisitions, strategic investments, capital market transactions or otherwise, including equity awards that we may grant to our directors, officers, and employees. Our Compensation and Talent Management Committee expects to grant additional equity awards to our employees after the Spin-Off. These awards would have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we may issue additional equity awards to our employees under our employee compensation and benefit plans.
In addition, our amended and restated certificate of incorporation will authorize us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designations, powers, preferences and relative, participating, optional and other rights, and such qualifications, limitations or restrictions as our Board generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or dividend, distribution or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock. See Description of Our Capital StockPreferred Stock.
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Our common stock is and will be subordinate to all of our future indebtedness and any preferred stock, and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries.
Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any class or series of preferred stock that our Board may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries liquidation or reorganization is subject to the prior claims of that subsidiarys creditors and preferred shareholders.
We cannot assure shareholders that our Board will declare dividends in the future.
The declaration and amount of any dividends to holders of our common stock will be at the discretion of our Board and will depend upon many factors, including our financial condition, earnings, cash flows, capital requirements of our business, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors the Board deems relevant. We may incur expenses or liabilities or be subject to other circumstances in the future that reduce or eliminate the amount of cash that we have available for distribution as dividends, including as a result of the risks described herein.
General Risk Factors
We are subject to risks generally associated with companies that operate in certain international markets.
We manufacture our products in United States, Canada and Mexico and have operations in the United States, Canada, Mexico and the Caribbean. Accordingly, we are subject to risks inherent in multinational operations. Those risks include (i) compliance with U.S. laws affecting operations outside of the United States, (ii) compliance with anti-corruption laws, (iii) compliance with antitrust and competition laws, data privacy laws, and a variety of other local, national and multi-national regulations and laws in multiple regimes, (iv) changes in tax laws, interpretation of tax laws and tax audit outcomes, (v) fluctuations or devaluations in currency values, especially in emerging markets, (vi) changes in capital controls, including currency exchange controls, or other limits on our ability to import raw materials or finished product, (vii) changes in local regulations and laws, the lack of well-established, reliable and/or impartial legal systems in certain countries in which we operate and the uncertainty of enforcement of remedies in such jurisdictions, (viii) laws relating to information security, privacy, cashless payments, and consumer protection, (ix) discriminatory or conflicting fiscal policies, (x) challenges associated with cross-border product distribution, (xi) increased sovereign risk, (xii) varying abilities to enforce intellectual property, contractual, and other legal rights, (xiii) loss of ability to manage our operations in certain markets which could result in the deconsolidation of such businesses, (xiv) design and implementation of effective control environment processes across our diverse operations and employee base, (xv) imposition of more or new tariffs, quotas, trade barriers, price controls, and similar restrictions in the countries in which we or our suppliers or manufacturers operate or regulations, taxes or policies that might negatively affect our sales, and (xvi) changes in trade policies and trade relations.
In addition, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest and government shutdowns, civil strife, acts of war, public corruption, expropriation and other economic or political or social uncertainties could interrupt and negatively affect our business operations or customer demand. The slowdown in economic growth or high unemployment in some emerging markets could constrain consumer spending, and declining consumer purchasing power could adversely impact our profitability. Continued instability in the dynamics associated with the federal and state debt and budget challenges in the United States could adversely affect us. All of these factors could result in increased costs or decreased revenues, and could materially and adversely affect our product sales, financial condition and results of operations.
There may be uncertainty as a result of key global events during 2022 that are expected to continue throughout 2023. For example, rising interest rates and inflation, recessionary pressures, geopolitical uncertainty, including
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wars (such as the conflict in Ukraine), fiscal and monetary policy uncertainty, the continuing uncertainty related to the COVID-19 pandemic, international trade disputes, as well as ongoing terrorist activity, may adversely impact global stock markets (including the NYSE, on which our common shares will be traded) and general global economic conditions. All of these factors are outside of our control but may nonetheless cause us to adjust our strategy in order to compete effectively in certain international markets.
Our performance is affected by general economic, political and social conditions and taxation policies.
Customer and consumer demand for our products may be impacted by the negative impacts caused by pandemics and public health crises (including the COVID-19 pandemic), recession, financial and credit market disruptions, government shutdowns or other economic downturns in the United States or other nations. Our results in the past have been, and in the future may continue to be, materially affected by changes in general economic, political and social conditions in the United States and other countries, including the interest rate environment in which we conduct business, the financial markets through which we access capital and currency, trade policy, political and social unrest and terrorist acts in the United States or other countries in which we carry on business.
Deteriorating economic conditions, such as inflation, economic slowdowns or recessions, increased unemployment, decreases in disposable income or declines in consumer confidence, including as a result of COVID-19, could result in reductions in sales of our products, reduced acceptance of innovations, and increased price competition. Such deterioration in any of the countries in which we do business could also cause slower collections on accounts receivable which may adversely impact our liquidity and financial condition. In addition, significant COVID-19 related changes in the political conditions in markets in which we manufacture, sell or distribute our products (including quarantines, import/export restrictions, price controls, governmental or regulatory actions, closures, or other restrictions that limit or close our operating and manufacturing facilities, restrict our employees ability to travel or perform necessary business functions or otherwise prevent our third-party suppliers or customers from sufficiently staffing operations, including operations necessary for the production, distribution, sale, and support of our products) could adversely impact our operations and results.
Financial institutions may be negatively impacted by economic conditions, including rising inflation and interest rates, and may consolidate or cease to do business which could result in a tightening in the credit markets, a low level of liquidity in many financial markets, and increased volatility in fixed income, credit, currency and equity markets. Adverse macroeconomic conditions have increased volatility and pricing in the capital markets and as a result, we may not have access to preferred sources of liquidity when needed or on terms we find acceptable, causing our borrowing costs to increase. An economic or credit crisis could impair credit availability and our ability to raise capital when needed. A disruption in the financial markets may have a negative effect on our derivative counterparties and could impair our banking or other business partners, on whom we rely for access to capital and as counterparties to our derivative contracts. Any of these events would likely harm our business, results of operations and financial condition.
Potential liabilities and costs from litigation could adversely affect our business.
There is no guarantee that we will be successful in defending WK Kellogg Co in civil, criminal or regulatory actions (inclusive of class action lawsuits and foreign litigation), including under general, commercial, employment, environmental, data privacy or security, intellectual property, food quality and safety, anti-trust and trade, and advertising claims, and environmental laws and regulations, or in asserting our rights under various laws. For example, our marketing or claims could face allegations of false or deceptive advertising or other criticisms which could end up in litigation and result in potential liabilities or costs. Furthermore, actions we have taken or may take, or decisions we have made or may make, as a consequence of the COVID-19 pandemic, may result in investigations, legal claims or litigation against us. As a result, we could incur substantial costs and fees in defending ourselves, in asserting our rights in these actions or in meeting new legal requirements. The costs and other effects of potential and pending litigation and administrative actions against us, and new legal requirements, cannot be determined with certainty and may differ from expectations. In addition, we may be
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impacted by litigation trends, including class action lawsuits involving consumers, employees, and shareholders, which could have a material adverse effect on our reputation, the market price of our common stock, results of operations and financial condition.
Our operations face foreign currency exchange rate exposure, which could negatively impact our operating results.
We hold assets and incur liabilities, earn revenue and pay expenses in a variety of currencies other than the U.S. dollar, including the Canadian dollar and the Mexican peso. Because our financial statements are presented in U.S. dollars, we must translate our assets, liabilities, revenue and expenses into U.S. dollars at then-applicable exchange rates and face exposure to adverse movements in foreign currency exchange rates. Consequently, changes in the value of the U.S. dollar may unpredictably and negatively affect the value of these items in our financial statements, even if their value has not changed in their original currency.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Information Statement contains a number of forward-looking statements. Words such as anticipates, estimates, expects, projects, forecasts, intends, plans, continues, believes, may, will, goals and variations of such words and similar expressions are intended to identify our forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding the consummation of the Spin-Off and our business strategies, market potential, future financial performance, dividends, the impact of new accounting standards, costs to be incurred in connection with the Spin-Off, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our funding sources, expected pension contributions, capital expenditures and funding, our financial covenants, repayments of debt, off-balance sheet arrangements and contractual obligations, our accounting policies, general views about future operating results and other events or developments that we expect or anticipate will occur in the future. These forward-looking statements are subject to a number of important factors, including those factors discussed in detail under Risk Factors in this Information Statement, which could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:
| our inability to complete the Spin-Off on the terms or timeline currently contemplated, if at all; |
| failure of the Contribution and the Distribution to qualify for non-recognition treatment for U.S. federal income tax purposes; |
| failure of the Canadian aspects of the Internal Reorganization to qualify for tax-deferred treatment for Canadian federal and provincial income tax purposes; |
| our indemnification obligations to Kellogg ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment; |
| reduction of our strategic and operating flexibility as we agree to numerous restrictions to preserve the non-recognition treatment of the transactions; |
| our inability to achieve some or all of the benefits that we expect to achieve from the Spin-Off; |
| our inability to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company; |
| our lack of an operating history as an independent, publicly traded company; |
| Kellogg ParentCos significant understanding of our business and positioning to compete against us following the Spin-Off; |
| risks associated with our indebtedness and ability to raise capital; |
| risks associated with being a public company; |
| our inability to maintain effective internal controls or report our financial results timely or accurately; |
| potential conflicts of interest of certain of our directors or officers; |
| failure of third parties to consent to transferring or assigning to us certain contracts or assets; |
| risks associated with being a smaller company than Kellogg ParentCo and no longer operating as part of a globally diversified company; |
| a decline in the demand for ready-to-eat cereals; |
| supply chain disruptions and increases in costs and/or shortages of raw materials, labor, fuels and utilities as a result of geopolitical, economic and market conditions; |
| our inability to maintain consumers favorable perception of our brands; |
| unanticipated business disruptions; |
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| our inability to realize the benefits we expect from revenue growth management; |
| our inability to achieve our targeted cost savings and efficiencies from cost reduction initiatives; |
| our inability to successfully consummate favorable strategic acquisitions, alliances, divestitures or joint ventures or to successfully integrate acquired businesses; |
| the impact on our operations and financial condition from the effects of pandemics, epidemics or disease outbreaks, including the COVID-19 pandemic; |
| material disruptions at our manufacturing facilities; |
| increased labor costs as a result of shortage in the labor pool, failure to successfully negotiate collectively bargained agreements, or other general inflationary pressures or changes in applicable laws and regulations; |
| increasing post-retirement benefit-related costs and funding requirements; |
| our inability to obtain sufficient capital to grow our business and increase our revenues; |
| risks associated with an impairment of the carrying value of goodwill or other acquired intangibles; |
| our inability to attract, develop and retain the highly skilled people we need to support our business; |
| increases in the price of raw materials, including agricultural commodities, packaging, fuel and labor; |
| increases in transportation costs and reduced availability of or increases in the price of oil or other fuels; |
| our inability to compete in the highly competitive food industry, including with respect to retail and shelf space; |
| the changing retail environment and the growing presence of alternative retail channels; |
| our inability to successfully develop new products and processes; |
| adverse changes in the global climate or extreme weather conditions; |
| risks associated with tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes; |
| risks associated with our products becoming adulterated, misbranded or mislabeled; |
| evolving tax, environmental, food quality and safety or other regulations or failure to comply with existing licensing, labeling, trade, food quality and safety and other regulations and laws; |
| technology failures, cyber-attacks, privacy breaches or data breaches; |
| our inability to protect our intellectual property rights; |
| risks associated with licensing intellectual property; and |
| other factors disclosed in the section entitled Risk Factors and elsewhere in this Information Statement. |
We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations in this Information Statement. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as by other cautionary statements that
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are made from time to time in this Information Statement and future SEC filings and public communications. You should evaluate all forward-looking statements made in this Information Statement in the context of these risks and uncertainties.
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Information Statement are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
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Background
On June 21, 2022, Kellogg ParentCo announced a plan to separate its Cereal Business, via a tax-free Spin-Off, resulting in the creation of a new independent public company, WK Kellogg Co. To effect the separation, Kellogg ParentCo will undertake the Internal Reorganization described under Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoSeparation and Distribution Agreement, following which Kellogg ParentCo (other than the WK Kellogg Co) will hold the Kellogg ParentCo Business and WK Kellogg Co, Kellogg ParentCos wholly owned subsidiary, will hold the Cereal Business.
Following the Internal Reorganization, Kellogg ParentCo will distribute all of its equity interests in WK Kellogg Co, consisting of all of the outstanding shares of our common stock, to Kellogg ParentCos shareholders on a pro rata basis. Following the Spin-Off, Kellogg ParentCo will not own any equity interest in us, and we will operate independently from Kellogg ParentCo. No approval of Kellogg ParentCos shareholders is required in connection with the Spin-Off, and Kellogg ParentCos shareholders will not have any dissenters or appraisal rights in connection with the Spin-Off.
The Spin-Off described in this Information Statement is subject to the satisfaction, or Kellogg ParentCos waiver, of a number of conditions. In addition, Kellogg ParentCo has the right not to complete the Spin-Off if, at any time, the Kellogg ParentCo Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kellogg ParentCo or its shareholders or is otherwise not advisable. For a more detailed description, see Conditions to the Spin-Off.
Reasons for the Spin-Off
The Kellogg ParentCo Board has regularly reviewed Kellogg ParentCos businesses to ensure that Kellogg ParentCos resources are utilized in a manner that is in the best interests of Kellogg ParentCo and its shareholders. In this review process, the Kellogg ParentCo Board, with input and advice from Kellogg ParentCos management and independent experts, has evaluated different alternatives, including potential opportunities for dispositions, acquisitions, business combinations and separations, with the goal of enhancing shareholder value. Because of the differences in the operations, geographical scope and strategic focus of the two businesses, a separation of the Cereal Business from the Kellogg ParentCo Business was one of the alternatives that the Kellogg ParentCo Board evaluated. As part of this evaluation of a possible separation, the Kellogg ParentCo Board considered a number of factors, including the strategic focus of and flexibility for the Cereal Business and the Kellogg ParentCo Business, the ability of the Cereal Business and the Kellogg ParentCo Business to compete and operate efficiently and effectively as separate public companies, the financial profile of the Cereal Business and the Kellogg ParentCo Business, the potential reaction of investors and the probability of successful execution of the various structural alternatives and the risks associated with those alternatives.
In 2021 and 2022, the Kellogg ParentCo Board again reviewed potential strategic alternatives, including a separation of the Cereal Business and the Kellogg ParentCo Business. As a result of this evaluation, after considering various factors in light of Kellogg ParentCos businesses at that time and input from Goldman, Sachs & Co. and Morgan Stanley, Kellogg ParentCos financial advisors, the Kellogg ParentCo Board determined that proceeding with the Spin-Off of the Cereal Business at this time would be in the best interests of Kellogg ParentCo and its shareholders. The Kellogg ParentCo Board believes that the separation of the Cereal Business from the Kellogg ParentCo Business via the Spin-Off will better position each company to:
| focus on their distinct strategic priorities, with financial targets that best fit their own markets and opportunities; |
| execute with increased agility and operational flexibility, enabling more focused allocation of capital and resources in a manner consistent with those strategic priorities; |
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| realize improved outlooks for profitable growth; and |
| shape distinctive corporate cultures, rooted in Kellogg ParentCos strong values, and rewarding career paths for employees of each company. |
In determining whether to effect the Spin-Off, the Kellogg ParentCo Board considered the costs and risks associated with the transaction, including the costs associated with preparing WK Kellogg Co to become an independent, publicly traded company, the risk of volatility in the Kellogg ParentCo and WK Kellogg Co stock prices immediately following the Spin-Off due to sales by Kellogg ParentCos shareholders whose investment objectives may not be met by our common stock, the time it may take for WK Kellogg Co to attract its optimal shareholder base, any potential negative impact on Kellogg ParentCos credit ratings as a result of the divestiture of our assets, the possibility of disruptions in our business as a result of the Spin-Off, the risk that the combined trading prices of our common stock and Kellogg ParentCos common stock after the Spin-Off may drop below the trading price of Kellogg ParentCos common stock before the Spin-Off and the loss of synergies and scale from operating as one company. Notwithstanding these costs and risks, taking into account the factors discussed above, the Kellogg ParentCo Board determined that the Spin-Off was the best alternative to achieve the above objectives and enhance shareholder value.
When and How You Will Receive WK Kellogg Co Shares
Kellogg ParentCo will distribute to its shareholders, pro rata, shares of our common stock for every shares of Kellogg ParentCo common stock outstanding as of , 2023, the Record Date of the Distribution.
Prior to the Spin-Off, Kellogg ParentCo will deliver all of the issued and outstanding shares of our common stock to the distribution agent. will serve as distribution agent in connection with the distribution of our common stock and as transfer agent and registrar for our common stock.
If you own Kellogg ParentCo common stock as of the close of business on , 2023, the shares of our common stock that you are entitled to receive in the Distribution will be issued to your account as follows:
| Registered shareholders. If you own your shares of Kellogg ParentCo common stock directly, either through an account with Kellogg ParentCos transfer agent or if you hold physical stock certificates, you are a registered shareholder. In this case, the distribution agent will credit the whole shares of our common stock you receive in the Distribution by way of direct registration in book-entry form to your Broadridge account on or shortly after the Distribution Date. Registration in book-entry form refers to a method of recording share ownership where no physical stock certificates are issued to shareholders, as is the case in the Distribution. You will be able to access information regarding your book-entry account holding the WK Kellogg Co shares at using the same credentials that you use to access your Kellogg ParentCo account or via our transfer agents interactive voice response system at . |
| About one week after the Distribution Date, the distribution agent will mail to you an account statement and a check for any cash in lieu of fractional shares you are entitled to receive. See Treatment of Fractional Shares. The account statement will indicate the number of whole shares of our common stock that have been registered in book-entry form in your name. |
| Street name or beneficial shareholders. Most Kellogg ParentCo shareholders own their shares of Kellogg ParentCo common stock beneficially through a bank, broker or other nominee. In these cases, the bank, broker or other nominee holds the shares in street name and records your ownership on its books. If you own your shares of Kellogg ParentCo common stock through a bank, broker or other nominee, your bank, broker or other nominee will credit your account with the whole shares of our common stock that you receive in the Distribution on or shortly after the Distribution Date. We encourage you to contact your bank, broker or other nominee if you have any questions concerning the mechanics of having shares held in street name. |
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If you sell any of your shares of Kellogg ParentCo common stock on or before the Distribution Date, the buyer of those shares, and not you, may in some circumstances be entitled to receive the shares of our common stock issuable in respect of the shares sold. See Trading Prior to the Distribution Date for more information.
We are not asking Kellogg ParentCo shareholders to take any action in connection with the Spin-Off. No shareholder approval of the Spin-Off is required. We are not asking you for a proxy and request that you not send us a proxy. We are also not asking you to surrender any of your shares of Kellogg ParentCo common stock for shares of our common stock. The number of outstanding shares of Kellogg ParentCo common stock will not change as a result of the Spin-Off.
Number of Shares You Will Receive
On the Distribution Date, you will receive shares of our common stock for every one share of Kellogg ParentCo common stock you owned as of the Record Date.
Treatment of Fractional Shares
The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Kellogg ParentCo shareholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the when-issued market, and when-issued trades will generally settle within two trading days following the Distribution Date. See Trading Prior to the Distribution Date for additional information regarding when-issued trading. The distribution agent will, in its sole discretion, without any influence by Kellogg ParentCo or us, determine when, how, through which broker-dealer and at what price to sell the whole shares. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Kellogg ParentCo or us.
The distribution agent will send to each registered holder of Kellogg ParentCo common stock entitled to a fractional share a check in the cash amount deliverable in lieu of that holders fractional share as soon as practicable following the Distribution Date. We expect the distribution agent to take about one week after the Distribution Date to complete the distribution of cash in lieu of fractional shares to Kellogg ParentCo shareholders. If you hold your shares through a bank, broker or other nominee, your bank, broker or nominee will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales. No interest will be paid on any cash you receive in lieu of fractional shares. The cash you receive in lieu of fractional shares will generally be taxable to you. See Material U.S. Federal Income Tax Consequences of the Spin-Off included in this Information Statement for more information.
Results of the Spin-Off
After the Spin-Off, we will be an independent, publicly traded company. Immediately following the Spin-Off, we expect to have approximately record holders of shares of our common stock and approximately shares of our common stock outstanding, based on the number of Kellogg ParentCo shareholders and shares of Kellogg ParentCo common stock outstanding on , 2023. The actual number of shares of our common stock Kellogg ParentCo will distribute in the Spin-Off will depend on the actual number of shares of Kellogg ParentCo common stock outstanding on the Record Date and will reflect any issuance of new shares or exercises of outstanding options pursuant to Kellogg ParentCos equity plans on or prior to the Record Date. The Spin-Off will not affect the number of outstanding shares of Kellogg ParentCo common stock or any rights of Kellogg ParentCo shareholders, although we expect the trading price of shares of Kellogg ParentCo common stock immediately following the Distribution to be lower than immediately prior to the Distribution because
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Kellogg ParentCos trading price will no longer reflect the value of the Cereal Business. Furthermore, until the market has fully analyzed the value of Kellogg ParentCo without the Cereal Business, the price of shares of Kellogg ParentCo common stock may fluctuate.
Before our separation from Kellogg ParentCo, we intend to enter into a Separation and Distribution Agreement and several other agreements with Kellogg ParentCo related to the Spin-Off. These agreements will govern the relationship between Kellogg ParentCo and us up to and after completion of the Spin-Off and allocate between Kellogg ParentCo and us various assets, liabilities, rights and obligations, including with respect to employee benefits, intellectual property and taxes. We describe these arrangements in greater detail under Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo.
Listing and Trading of our Common Stock
As of the date of this Information Statement, we are a wholly owned subsidiary of Kellogg ParentCo. Accordingly, no public market for our common stock currently exists, although a when-issued market in our common stock may develop prior to the Distribution. See Trading Prior to the Distribution Date below for an explanation of a when-issued market. We intend to list our shares of common stock on the NYSE under the symbol . Following the Spin-Off, Kellogg ParentCo common stock will continue to trade on the NYSE under the symbol K.
Neither we nor Kellogg ParentCo can assure you as to the trading price of Kellogg ParentCo common stock or our common stock after the Spin-Off, or as to whether the combined trading prices of Kellogg ParentCo common stock and our common stock after the Spin-Off will be less than, equal to or greater than the trading prices of Kellogg ParentCo common stock prior to the Spin-Off. The trading price of our common stock may fluctuate significantly following the Spin-Off. See Risk FactorsRisks Relating to Our Common Stock for more detail.
The shares of our common stock distributed to Kellogg ParentCo shareholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the Spin-Off include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for federal securities law purposes. These individuals may include some or all of our directors and executive officers. Individuals who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as those afforded by Section 4(1) of the Securities Act or Rule 144 thereunder.
Trading Prior to the Distribution Date
We expect a when-issued market in our common stock to develop as early as two trading days prior to the Record Date for the Distribution and to continue up to and including the Distribution Date. When-issued trading refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. If you own shares of Kellogg ParentCo common stock on the Record Date, you will be entitled to receive shares of our common stock in the Distribution. You may trade this entitlement to receive shares of our common stock, without the shares of Kellogg ParentCo common stock you own, on the when-issued market. We expect when-issued trades of our common stock to settle within two trading days after the Distribution Date. On the first trading day following the Distribution Date, we expect that when-issued trading of our common stock will end and regular-way trading will begin.
We also anticipate that, as early as two trading days prior to the Record Date and continuing up to and including the Distribution Date, there will be two markets in Kellogg ParentCo common stock: a regular-way market and an ex-distribution market. Shares of Kellogg ParentCo common stock that trade on the regular-way market will trade with an entitlement to receive shares of our common stock in the Distribution. Shares that trade on the ex-distribution market will trade without an entitlement to receive shares of our common stock in the
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Distribution. Therefore, if you sell shares of Kellogg ParentCo common stock in the regular-way market up to and including the Distribution Date, you will be selling your right to receive shares of our common stock in the Distribution. However, if you own shares of Kellogg ParentCo common stock on the Record Date and sell those shares in the ex-distribution market up to and including the Distribution Date, you will still receive the shares of our common stock that you would otherwise be entitled to receive in the Distribution.
Following the Distribution Date, we expect shares of our common stock to be listed on the NYSE under the trading symbol . If when-issued trading occurs, the listing for our common stock is expected to be under a trading symbol different from our regular-way trading symbol. We will announce our when-issued trading symbol when and if it becomes available. If the Spin-Off does not occur, all when-issued trading will be null and void.
Conditions to the Spin-Off
We expect that the Spin-Off will be completed on the Distribution Date, provided that the following conditions have been satisfied or the Kellogg ParentCo Board has waived the conditions:
| the final approval of the Distribution by the Kellogg ParentCo Board, which approval may be given or withheld in the absolute and sole discretion of the Kellogg ParentCo Board, shall have been obtained; |
| the SEC will have declared our Registration Statement, of which this Information Statement is a part, effective under the Exchange Act, no stop order suspending the effectiveness of the Registration Statement will be in effect, no proceedings for that purpose will be pending before or threatened by the SEC and notice of Internet availability of this Information Statement or this Information Statement will have been mailed to Kellogg ParentCos shareholders; |
| the NYSE or another national securities exchange approved by the Kellogg ParentCo Board will have accepted our common stock for listing, subject to official notice of distribution; |
| the Internal Reorganization will have been completed as contemplated by the Separation and Distribution Agreement; |
| the debt financing to be obtained in connection with the Spin-Off shall have been obtained; |
| Kellogg ParentCo will have received a private letter ruling from the IRS, in form and substance satisfactory to the Kellogg ParentCo Board in its sole and absolute discretion, to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, the Contribution and the Distribution will qualify for non-recognition of gain or loss to Kellogg ParentCo and Kellogg ParentCos shareholders pursuant to Sections 368 and 355 of the Code, except to the extent of cash received in lieu of fractional shares, and that private letter ruling will remain in effect as of the Distribution Date; |
| Kellogg ParentCo will have received an opinion from its tax counsel, in form and substance satisfactory to the Kellogg ParentCo Board in its sole and absolute discretion, that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, the Contribution and the Distribution will qualify for non-recognition of gain or loss to Kellogg ParentCo and Kellogg ParentCos shareholders pursuant to Sections 368 and 355 of the Code, except to the extent of cash received in lieu of fractional shares; |
| Kellogg ParentCo will have obtained one or more opinions from an independent nationally recognized valuation advisory firm, in form and substance satisfactory to the Kellogg ParentCo Board in its sole and absolute discretion, to the effect that (i) following the Distribution, Kellogg ParentCo, on the one hand, and WK Kellogg Co, on the other hand, will be solvent and adequately capitalized, (ii) Kellogg ParentCo has adequate surplus to declare the dividend to record holders and (iii) WK Kellogg Co has adequate surplus to declare the cash dividend to Kellogg ParentCo as part of the Internal Reorganization; |
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| all actions or filings necessary or appropriate under applicable U.S. federal, state or other securities or blue sky laws and the rules and regulations thereunder will have been taken and, where applicable, will have become effective or been accepted by the applicable governmental entity; |
| each of the ancillary agreements contemplated by the Separation and Distribution Agreement will have been executed; |
| no order, injunction or decree that would prevent the consummation of all or any portion of the Distribution will be threatened, pending or issued (and still in effect) by any governmental entity of competent jurisdiction, no other legal restraint or prohibition preventing the consummation of all or any portion of the Distribution will be in effect, and no other event will have occurred or failed to occur that prevents the consummation of all or any portion of the Distribution; and |
| no other events or developments will exist or will have occurred that, in the judgment of the Kellogg ParentCo Board, in its sole and absolute discretion, makes it inadvisable to effect the Internal Reorganization, the Distribution or the transactions contemplated by the Separation and Distribution Agreement or any ancillary agreement contemplated thereby. |
The fulfillment of the above conditions will not create any obligation on Kellogg ParentCos part to effect the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than the NYSEs approval for listing of our common stock and the SECs declaration of the effectiveness of the Registration Statement, in connection with the Distribution. Kellogg ParentCo has the right not to complete the Spin-Off if, at any time, the Kellogg ParentCo Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kellogg ParentCo or its shareholders or is otherwise not advisable.
We cannot assure you that all of the conditions will be satisfied or waived. In addition, if the Distribution is completed and the Kellogg ParentCo Board of Directors waives any such condition, such waiver could have a material adverse effect on Kellogg ParentCos and WK Kellogg Cos respective business, financial condition or results of operations, the trading price of WK Kellogg Co common stock, or the ability of shareholders to sell their shares after the Distribution, including, without limitation, as a result of illiquid trading due to the failure of WK Kellogg Co common stock to be accepted for listing or litigation relating to any preliminary or permanent injunctions sought to prevent the consummation of the Distribution. See Material U.S. Federal Income Tax Consequences of the Spin-Off below for a discussion of the U.S. federal income tax consequences for Kellogg ParentCo and its shareholders that may arise if Kellogg ParentCo waives the condition to obtain a Tax Opinion and the Distribution is treated as a taxable transaction for U.S. federal income tax purposes.
Reasons for Furnishing this Information Statement
We are furnishing this Information Statement solely to provide information to Kellogg ParentCos shareholders who will receive shares of our common stock in the Distribution. You should not construe this Information Statement as an inducement or encouragement to buy, hold or sell any of our securities or any securities of Kellogg ParentCo. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither Kellogg ParentCo nor we undertake any obligation to update the information except in the normal course of Kellogg ParentCos and our public disclosure obligations and practices.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF
The following is a summary of the material U.S. federal income tax consequences of the Contribution and the Distribution to the holders of Kellogg ParentCo common stock. This discussion is based on the Code, the U.S. Treasury regulations promulgated under the Code and judicial and administrative interpretations of these laws, in each case as in effect and available as of the date of this Information Statement, all of which are subject to change at any time, possibly with retroactive effect. Any change of this nature could affect the tax consequences described below.
The Distribution is conditioned on (i) the continued validity of the private letter ruling that Kellogg ParentCo received from the IRS with regard to certain aspects of the Contribution and Distribution and (ii) the receipt and continued validity of the Tax Opinion to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, the Contribution and Distribution will qualify for non-recognition of gain or loss to Kellogg ParentCo and Kellogg ParentCos shareholders pursuant to Sections 368 and 355 of the Code, except to the extent of cash received in lieu of fractional shares.
Although a private letter ruling is generally binding on the IRS, the continued validity of a ruling is subject to the accuracy of and compliance with the representations, assumptions and covenants made by Kellogg ParentCo and WK Kellogg Co in the ruling request. If the representations or assumptions made in the private letter ruling request are untrue or incomplete in any material respect, then Kellogg ParentCo will not be able to rely on this ruling. Furthermore, as part of IRS policy, the IRS did not determine whether the Contribution and the Distribution satisfies certain conditions that are necessary to qualify for non-recognition treatment under the Code, including the requirements that the distributions have a valid corporate-level business purpose and that the distributions not be used principally as a device for the distribution of earnings and profits. Rather, the private letter ruling is based on representations by Kellogg ParentCo and us that these conditions have been satisfied. Any inaccuracy in these representations could invalidate the private letter ruling. The Tax Opinion will address the satisfaction of these conditions.
The Tax Opinion will rely on the private letter ruling as to matters covered by the ruling. The Tax Opinion will assume that the Contribution and the Distribution will be completed according to the terms of the Separation and Distribution Agreement and that the parties will report the transactions in a manner consistent with the Tax Opinion. The Tax Opinion will rely on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement and ancillary agreements, this Information Statement and a number of other documents. In rendering the Tax Opinion, Kirkland will require and rely on representations and covenants from Kellogg ParentCo and us to be delivered at the time of closing (and will assume that any such representation that is qualified by belief, knowledge or materiality is true, correct and complete without such qualification). If any of the representations or assumptions were untrue or incomplete in any material respect, any covenants were not complied with, or the facts on which the Tax Opinion is based were materially different from the facts at the time of the transactions, the conclusions in the Tax Opinion may not be correct. Kirkland will have no obligation to advise us or our shareholders of changes in its Tax Opinion after the Distribution Date due to any subsequent changes in the matters stated, represented or assumed in the Tax Opinion or any subsequent changes in the applicable law. Opinions of Kirkland are not binding on the IRS. As a result, the IRS could challenge the conclusions expressed in the Tax Opinion, and if the IRS prevails in its challenge, the tax consequences to you could be materially less favorable than those described below.
The Tax Opinion will be based on statutory, regulatory and judicial authority existing as of the date of the Tax Opinion, any of which may be changed at any time with retroactive effect. Neither the Tax Opinion nor the ruling will address any state, local or foreign tax consequences of the Contribution and the Distribution. The Contribution and the Distribution may be taxable to you under state, local or foreign tax laws.
67 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Tax Consequences of the Distribution for U.S. holders
This discussion is limited to holders of Kellogg ParentCo common stock that are U.S. holders, as defined immediately below, that hold their Kellogg ParentCo common stock as a capital asset. A U.S. holder is a beneficial owner of Kellogg ParentCo common stock that is, for U.S. federal income tax purposes:
| an individual who is a citizen or a resident of the United States; |
| a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia; |
| an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
| a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) it was treated as a domestic trust under the law in effect before 1997 and a valid election is in place under applicable U.S. Treasury regulations. |
This discussion does not address all tax considerations that may be relevant to U.S. holders in light of their particular circumstances, nor does it address the consequences to U.S. holders subject to special treatment under the U.S. federal income tax laws, including but not limited to:
| broker dealers; |
| dealers or traders in securities or currencies; |
| tax-exempt entities; |
| persons subject to the applicable financial statement accounting rules under Section 451(b) of the Code; |
| U.S. holders whose functional currency is not the U.S. dollar; |
| governments or instrumentalities thereof; |
| regulated investment companies or real estate investment trusts; |
| S-corporations, partnerships or other pass-through entities for U.S. federal income tax purposes; |
| tax-exempt entities; |
| banks, financial institutions or insurance companies; |
| real estate investment trusts, regulated investment companies or grantor trusts; |
| persons who acquired Kellogg ParentCo common stock pursuant to the exercise of employee stock options or otherwise as compensation; |
| holders who own, or are deemed to own, at least 10% or more, by voting power or value, of Kellogg ParentCo equity; |
| holders who own Kellogg ParentCo common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. federal income tax purposes; |
| former citizens or long-term residents of the United States; |
| holders who are subject to the alternative minimum tax; or |
| persons that own Kellogg ParentCo common stock through partnerships or other pass-through entities. |
This discussion does not address any state, local or foreign tax consequences or any estate, gift or other non-income tax consequences.
68 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
If a partnership, or any other entity treated as a partnership for U.S. federal income tax purposes, holds Kellogg ParentCo common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its own tax advisor as to its tax consequences.
THIS SUMMARY IS FOR GENERAL INFORMATION PURPOSES ONLY, AND IT IS NOT INTENDED TO BE, AND IT SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR SHAREHOLDER.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL, AS WELL AS FOREIGN, INCOME AND OTHER TAX CONSEQUENCES OF THE DISTRIBUTION.
Assuming the receipt and continued validity of the private letter ruling and subject to qualifications and limitations described in this Information Statement (including the discussion below relating to the receipt of cash in lieu of fractional shares) and the Tax Opinion, Kirkland, Kellogg ParentCos tax counsel, is of the opinion that for U.S. federal income tax purposes the consequences of the Distribution will be as described below:
| a U.S. holder will not recognize any gain or loss, and will not include any amount in income, upon receiving our common stock in the Distribution; |
| each U.S. holders aggregate basis in its Kellogg ParentCo common stock and our common stock received in the Distribution (including any fractional shares to which the U.S. holder would be entitled) will equal the aggregate basis the U.S. holder had in the Kellogg ParentCo common stock immediately prior to the Distribution, allocated in proportion to the fair market value of each; and |
| each U.S. holders holding period in our common stock received in the Distribution will include the U.S. holders holding period in its Kellogg ParentCo common stock on which the Distribution was made. |
U.S. holders that have acquired different blocks of Kellogg ParentCo common stock at different times or at different prices should consult their tax advisors regarding the allocation of their aggregate adjusted basis among, and their holding period of, shares of our common stock distributed with respect to such blocks of Kellogg ParentCo common stock. Fair market value generally is the price at which a willing buyer and a willing seller, neither of whom is under any compulsion to buy or to sell and both having reasonable knowledge of the facts, would exchange property. U.S. federal income tax law does not specifically prescribe how U.S. holders should determine the fair market values of Kellogg ParentCo common stock and our common stock for purposes of allocating basis. You should consult your tax advisor to determine what measure of fair market value is appropriate. For purposes of reporting to the IRS, Kellogg ParentCo and we will calculate the fair market value of our respective common stock based on the mean of the highest and lowest trading prices of the stock on the first full trading day after the Distribution.
Cash in Lieu of Fractional Shares
If a U.S. holder receives cash in lieu of a fractional share of common stock in the Distribution, the U.S. holder will be treated as though it first received a distribution of the fractional share in the Distribution and then sold it for the amount of cash it actually receives. The U.S. holder will generally recognize capital gain or loss measured by the difference between the cash received for the fractional share and the tax basis in that fractional share, determined as described above. The capital gain or loss will be a long-term capital gain or loss if the U.S. holders holding period for the Kellogg ParentCo common stock, with respect to which the U.S. holder received the fractional share, is more than one year on the Distribution Date.
69 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Tax Consequences for U.S. Holders if the Distribution Fails to Qualify for Non-recognition Treatment
If the Distribution does not qualify for non-recognition treatment, each U.S. holder who receives our common stock in the Distribution would generally be treated as receiving a distribution in an amount equal to the fair market value of our common stock it receives (including any fractional shares received), which would generally result in:
| a taxable dividend to the extent of the U.S. holders ratable share of Kellogg ParentCos current and accumulated earnings and profits, as increased to reflect any gain recognized by Kellogg ParentCo on a taxable distribution; |
| a reduction in the U.S. holders basis (but not below zero) in Kellogg ParentCo common stock to the extent the amount received exceeds the U.S. holders share of Kellogg ParentCos earnings and profits; and |
| a taxable gain from the exchange of Kellogg ParentCo common stock to the extent the amount it receives exceeds both the U.S. holders share of Kellogg ParentCos earnings and profits and the basis in the U.S. holders Kellogg ParentCo common stock. |
Information Reporting and Backup Withholding
Payments of cash in lieu of a fractional share of our common stock may, under certain circumstances, be subject to backup withholding, unless a holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations and non-U.S. holders will generally be exempt from backup withholding but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding does not constitute an additional tax but is merely an advance payment that may be refunded or credited against a holders U.S. federal income tax liability if the required information is supplied to the IRS.
U.S. Treasury regulations require each U.S. holder that immediately before the Distribution owned 5% or more (by vote or value) of the total outstanding stock of Kellogg ParentCo to attach to its U.S. federal income tax return for the year in which our common stock is received a statement setting forth certain information related to the Distribution.
70 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Following the Spin-Off, WK Kellogg Co expects to pay cash dividends. The timing, declaration, amount and payment of any future dividends to shareholders will fall within the discretion of our Board. Our Boards decisions regarding the payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our existing debt or debt that we may incur in the future may limit or prohibit the payment of dividends. See Risk FactorsRisks Related to Our Common StockWe cannot assure shareholders that our Board will declare dividends in the future.
71 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
The following table sets forth our cash and cash equivalents and capitalization as of April 1, 2023, on a historical basis and on a pro forma basis to give effect to the Spin-Off and the transactions related to the Spin-Off, as if they occurred on April 1, 2023. An explanation of the pro forma adjustments made to our historical unaudited condensed combined balance sheet as of April 1, 2023 are discussed in the section of this Information Statement entitled Unaudited Pro Forma Condensed Combined Financial Statements.
The pro forma adjustments are based on the best information available as of the date of this Information Statement and assumptions that management believes are reasonable given the information available as of the date of this Information Statement. You should review the following table in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, our historical combined financial statements and the accompanying notes thereto and our unaudited pro forma combined financial statements and the accompanying notes thereto included elsewhere in this Information Statement. See Unaudited Pro Forma Combined Financial Statements.
We are providing the capitalization table for information purposes only. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operating as an independent, publicly traded company on April 1, 2023 and is not necessarily indicative of our future capitalization or financial condition.
As of April 1, 2023 | ||||||||
Actual | Pro Forma (Unaudited) |
|||||||
(in millions) | ||||||||
Cash and cash equivalents |
$ | | $ | |||||
|
|
|
|
|||||
Indebtedness: |
||||||||
Total indebtedness |
$ | | $ | |||||
|
|
|
|
|||||
Equity: |
||||||||
Common stock, par value $0.0001 per share; shares authorized, shares issued and outstanding, pro forma |
| |||||||
Paid-in capital |
| |||||||
Accumulated other comprehensive income (loss) |
(36 | ) | ||||||
Net investment by Kellogg ParentCo |
709 | |||||||
|
|
|
|
|||||
Total equity |
$ | 673 | $ | |||||
|
|
|
|
|||||
Total capitalization |
$ | 673 | $ | |||||
|
|
|
|
72 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements should be read in conjunction with the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations, our audited combined financial statements and accompanying notes included elsewhere in this Information Statement and our unaudited combined financial statements and accompanying notes included elsewhere in this Information Statement.
The following unaudited pro forma combined financial information consists of an unaudited pro forma combined statement of operations for the fiscal quarter ended April 1, 2023 and year ended December 31, 2022, and an unaudited pro forma combined balance sheet as of April 1, 2023. The unaudited pro forma combined financial statements reflect certain known impacts as a result of our separation from Kellogg ParentCo.
The unaudited pro forma combined financial statements presented below have been derived from our historical unaudited combined financial statements for the fiscal quarter ended April 1, 2023 and our historical audited combined financial statements for the year ended December 31, 2022 included in this Information Statement. The unaudited pro forma combined statement of operations for the fiscal quarter ended April 1, 2023 and the year ended December 31, 2022 assumes that the separation and related transactions described below occurred on January 2, 2022. The unaudited pro forma combined balance sheet as of April 1, 2023 assumes that the Spin-Off and the related transactions described below occurred on that date.
The unaudited pro forma combined financial statements have been prepared to include transaction accounting and autonomous entity adjustments to reflect the financial condition and results of operations of WK Kellogg Co as if it were a separate stand-alone entity. While the historical combined financial statements reflect the historical financial results of the Cereal Business, these unaudited pro forma combined financial statements give effect to the separation of that business into an independent, publicly traded company. The unaudited pro forma combined financial statements give effect to the Spin-Off and related transactions in accordance with Article 11 of the SECs Regulation S-X.
The unaudited pro forma combined financial statements give effect to the following:
| the separation of assets and liabilities related to the Cereal Business and the transfer of those assets and liabilities to WK Kellogg Co; |
| the distribution of 100% of our issued and outstanding common stock by Kellogg ParentCo in connection with the Distribution; |
| the effect of post-separation capital structure, including debt issuance and cash transactions; |
| the impact of, and transactions contemplated by, the Separation and Distribution Agreement, the Employee Matters Agreement, the Supply Agreement and the Tax Matters Agreement between us and Kellogg ParentCo and the provisions contained therein; and |
| the impact of the aforementioned adjustments on our income tax expense using statutory tax rates. |
In connection with the separation, WK Kellogg Co will enter into a Transition Services Agreement with Kellogg ParentCo whereby Kellogg ParentCo will continue to provide WK Kellogg Co support functional services at a cost to WK Kellogg Co, including finance, information technology and infrastructure. Discussions regarding the Transition Services Agreement are ongoing and will be completed prior to the Spin-Off. The adjustment for the Transition Services Agreement is not expected to have a material impact on pro forma net (loss) income for the year ended December 31, 2022 and the fiscal quarter ended April 1, 2023 as the historical combined statement of operations for those periods already reflect allocations of costs for these services that are not expected to be materially different under the Transition Services Agreement. The estimate that these adjustments will not have a material impact is based upon the terms of the latest draft agreements and are subject to change. Any changes to the final terms are not expected to be significant.
73 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
The unaudited pro forma combined financial statements are for illustrative and informational purposes only and are not intended to represent or be indicative of what our financial condition or results of operations would have been had we operated historically as a company independent of Kellogg ParentCo or if the Spin-Off had occurred on the dates indicated. The historical combined financial statements of WK Kellogg Co have been derived from Kellogg ParentCos historical accounting records and reflect certain allocation of expenses from Kellogg ParentCo. All the allocations and estimates in such financial statements are based on assumptions that management believes are reasonable; however, these costs may not be representative of the costs we will incur in the future as an independent, publicly traded company. Accordingly, the historical combined financial statements do not necessarily represent the financial position or results of operations of WK Kellogg Co had it been operated as a standalone company during the periods or at the dates presented. Transaction accounting and autonomous entity adjustments have been reflected in the unaudited pro forma combined financial statements. The unaudited pro forma combined financial statements have been prepared using certain assumptions, as described in the accompanying notes, which management believes are reasonable based on the information currently available. The unaudited pro forma combined financial statements should not be considered representative of our future combined financial condition or combined results of operations.
74 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Unaudited pro forma combined statement of operations fiscal quarter ended April 1, 2023
(millions, except per share data) | Historical | Transaction Accounting Adjustments |
Note 1 | Autonomous Entity Adjustments |
Note 2 | Pro Forma |
||||||||||||||||||
Net sales |
$ | 720 | $ | | $ | (8 | ) | (m) | $ | 712 | ||||||||||||||
Cost of goods sold |
539 | (d | ) | (11 | ) | (m), (n) | 528 | |||||||||||||||||
Selling, general and administrative expense |
155 | | | 155 | ||||||||||||||||||||
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Operating profit |
$ | 26 | $ | | $ | 3 | $ | 29 | ||||||||||||||||
Interest expense |
| (b | ) | | | |||||||||||||||||||
Other income (expense), net |
8 | | (d | ) | | 8 | ||||||||||||||||||
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|
|
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Income before income taxes |
$ | 34 | $ | $ | 3 | $ | 37 | |||||||||||||||||
Income taxes |
8 | (h | ) | 1 | (o) | 9 | ||||||||||||||||||
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|
|
|
|
|
|
|
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Net income |
$ | 26 | $ | $ | 2 | $ | 28 | |||||||||||||||||
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|
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|
|
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|
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Per share amounts: |
||||||||||||||||||||||||
Basic earnings |
(j | ) | $ | |||||||||||||||||||||
Diluted earnings |
(j | ) | ||||||||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||||||||||
Basic |
(j | ) | ||||||||||||||||||||||
Diluted |
(j | ) |
See accompanying notes to unaudited pro forma combined financial statements
75 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Unaudited pro forma combined statement of operations year ended December 31, 2022
(millions, except per share data) | Historical | Transaction Accounting Adjustments |
Note 1 | Autonomous Entity Adjustments |
Note 2 | Pro Forma |
||||||||||||||||||
Net sales |
$ | 2,695 | $ | | $ | (30 | ) | (m) | $ | 2,665 | ||||||||||||||
Cost of goods sold |
2,064 | 3 | (c), (k), | $ | (39 | ) | (m), (n) | 2,028 | ||||||||||||||||
Selling, general and administrative expense |
556 | 2 | (k) | | 558 | |||||||||||||||||||
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|
|
|
|
|
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Operating profit |
$ | 75 | $ | (5 | ) | $ | 9 | $ | 79 | |||||||||||||||
Interest expense |
| (b) | | | ||||||||||||||||||||
Other income (expense), net |
(101 | ) | (8 | ) | (c), (d) | | (109 | ) | ||||||||||||||||
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|
|
|
|
|
|
|
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(Loss) Income before income taxes |
$ | (26 | ) | $ | (13 | ) | $ | 9 | $ | (30 | ) | |||||||||||||
Income tax expense (benefit) |
(1 | ) | (3 | ) | (h) | 2 | (o) | (2 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Net (loss) income |
$ | (25 | ) | $ | (10 | ) | $ | 7 | $ | (28 | ) | |||||||||||||
|
|
|
|
|
|
|
|
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Per share amounts: |
||||||||||||||||||||||||
Basic loss |
(j) | $ | ||||||||||||||||||||||
Diluted loss |
(j) | |||||||||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||||||||||
Basic |
(j) | |||||||||||||||||||||||
Diluted |
(j) |
See accompanying notes to unaudited pro forma combined financial statements
76 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Unaudited pro forma combined balance sheet as of April 1, 2023
(millions) | Historical | Transaction Accounting Adjustments |
Note 1 | Autonomous Entity Adjustments |
Note 2 | Pro Forma |
||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | (a) | $ | | ||||||||||||||||||
Accounts receivable, net |
224 | (5 | ) | (f) | 219 | |||||||||||||||||||
Inventories, net |
374 | 374 | ||||||||||||||||||||||
Other current assets |
18 | (9 | ) | (f) | 9 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current assets |
$ | 616 | $ | (14 | ) | $ | 602 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Property, net |
645 | (g) | 645 | |||||||||||||||||||||
Goodwill |
53 | | 53 | |||||||||||||||||||||
Other intangibles |
57 | | 57 | |||||||||||||||||||||
Other assets |
11 | (2 | ) | (c), (l) | 9 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 1,382 | $ | (16 | ) | $ | 1,366 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Accounts payable |
$ | 439 | $ | | $ | 439 | ||||||||||||||||||
Due to related parties |
13 | | 13 | |||||||||||||||||||||
Accrued advertising and promotion |
102 | | 102 | |||||||||||||||||||||
Accrued salaries and wages |
24 | 2 | (e) | 26 | ||||||||||||||||||||
Other current liabilities |
49 | (5 | ) | (d), (f) | 44 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current liabilities |
$ | 627 | $ | (3 | ) | $ | 624 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Long-term debt |
| (b) | ||||||||||||||||||||||
Deferred income taxes |
63 | (13 | ) | (c), (d), (h) | 50 | |||||||||||||||||||
Pension and postretirement liability |
14 | 116 | (c) , (d) | 130 | ||||||||||||||||||||
Other liabilities |
5 | 5 | ||||||||||||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
Equity |
||||||||||||||||||||||||
Net parent investment |
709 | (709 | ) | (i) | | |||||||||||||||||||
Common Stock |
(i) | |||||||||||||||||||||||
Capital in excess of par value |
606 | (i) | 606 | |||||||||||||||||||||
Accumulated other comprehensive income (loss) |
(36 | ) | (13 | ) | (c), (d) | (49 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total equity |
$ | 673 | $ | (116 | ) | $ | 557 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities and equity |
$ | 1,382 | $ | (16 | ) | $ | 1,366 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma combined financial statements
77 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Notes to the unaudited pro forma combined financial statements
Note 1: Transaction Accounting Adjustments:
(a) | Pursuant to the terms of the Separation and Distribution Agreement, as of immediately prior to the separation, WK Kellogg Co is expected to have a minimum cash balance of approximately $ in the aggregate. This intended amount may be subject to increase or decrease depending on adjustments deemed appropriate by the parties, including but not limited to the net proceeds from the financing transactions and the related use of proceeds to make a cash distribution to Kellogg ParentCo in connection with the Spin-Off. See note (b). |
(b) | Reflects indebtedness of approximately $ , consisting of a secured term loan, which will be issued in connection with the Spin-Off. We anticipate debt issuance costs of approximately $ , resulting in a net debt adjustment of $ . WK Kellogg Co plans to distribute approximately $ of the proceeds received from the issuance of debt to Kellogg ParentCo in connection with the Spin-Off. |
In addition, on the distribution date, a secured, unsubordinated -year revolving credit facility that provides for the availability of $ of borrowings will be available to WK Kellogg Co.
Based on the debt agreements, we have calculated interest expense using the rate, which resulted in an effective interest rate of approximately % and % for the year ended December 31, 2022 and fiscal quarter ended April 1, 2023 respectively. The unaudited pro forma combined statement of operations reflect estimated interest expense of $ and $ for the year ended December 31, 2022 and fiscal quarter ended April 1, 2023 respectively, which includes interest expense and amortization of debt issuance costs.
A 1/8 percent change to the annual interest rate would change interest expense by $ and $ for the year ended December 31, 2022 and fiscal quarter ended April 1, 2023 respectively.
(c) | Reflects adjustments to pension obligations that will be transferred to WK Kellogg Co prior to completion of the Spin-Off in the amount of $116 million. Pension related assets of $2 million that were included in WK Kellogg Cos historical unaudited combined financial statements will not be transferred and have accordingly been removed. The assets and obligations associated with such plans resulted in recognizing accumulated other comprehensive loss of $13 million, net of tax at April 1, 2023. The obligations associated with such plans will result in us recording $27 million of deferred tax assets, recorded as a decrease to deferred income taxes. |
The historical combined statement of operations included expense allocations for various pension plans of Kellogg ParentCo, in which WK Kellogg Co employees participated. Based on the costs related to the plans that are being transferred to WK Kellogg Co as compared to allocations in the historical combined statement of operations, incremental expense of $1 million was recorded to cost of goods sold (COGS) and $8 million to other income (expense), net for the year ended December 31, 2022. For the fiscal quarter ended April 1, 2023, the expense allocations included in the historical unaudited combined statement of operations was materially consistent with the balance of the plans being transferred to WK Kellogg Co and therefore no adjustments were required to the unaudited pro forma combined statement of operations for the fiscal quarter ended April 1, 2023.
(d) | Reflects adjustments to nonpension postretirement and postemployment benefit plan assets and obligations that will be transferred to WK Kellogg Co prior to completion of the Spin-Off, including assets in the amount of $ associated with our employees. Postretirement liabilities of $ that were included in WK Kellogg Cos historical unaudited combined financial statements will not be transferred and have been accordingly removed. The assets and obligations associated with |
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such plans resulted in recognizing accumulated other comprehensive income (loss) of $ , net of tax at April 1, 2023. The obligations associated with such plans will result in us recording $ of additional deferred income taxes. |
The historical combined statement of operations included expense allocations for various postretirement and postemployment plans of Kellogg ParentCo, in which WK Kellogg Co employees participated. Based on the costs related to the plans that are being transferred to WK Kellogg Co as compared to allocations in the historical combined statement of operations, incremental expense of $ was recorded to COGS and $ to other income (expense), net for the year ended December 31, 2022. For the fiscal quarter ended April 1, 2023, the incremental expense was $ in COGS and $ in other income (expense), net.
(e) | Reflects $2 million of current accrued liabilities for retention bonuses related to the Spin-Off estimated to be payable by WK Kellogg Co after the Spin-Off, pursuant to the terms of Employee Matters Agreement. The income statement impact has been reflected in the unaudited pro forma combined statement of operations for the year ended December 31, 2022. See note (k) below. This amount may be subject to increase or decrease depending on employees with retention awards actually transferred to WK Kellogg Co on Spin-Off. These costs are not expected to recur after the Spin-Off. |
(f) | As part of the Spin-Off, Kellogg ParentCo is expected to retain all existing workers compensation and insurance plans. This adjustment reflects the removal of $5 million of liabilities and $5 million of receivables related to the workers compensation and related insurance coverages and $9 million related to prepaid property insurance. |
(g) | Reflects the impact of property and equipment that will be transferred to WK Kellogg Co pursuant to the Separation and Distribution Agreement but were historically shared. The adjustment reflects the net book value of the property and equipment as of April 1, 2023. The adjustment for depreciation related to this additional property and equipment is expected to have an impact of $ and $ on the unaudited pro forma statement of operations for the year ended December 31, 2022 and the fiscal quarter ended April 1, 2023 respectively, as the historical costs allocated to the carve-out for all historically shared facilities was different from the depreciation expense on these specific properties and equipment. |
(h) | Reflects the tax effects of the transaction accounting adjustments at the applicable statutory income tax rates. Since the adjustments are primarily expected to be incurred in the U.S., the statutory tax rate applied is approximately 23.5 percent. Further, certain tax attributes related to U.S. federal net operating losses will not be transferred to WK Kellogg Co, resulting in an increase to deferred income taxes of $14 million. |
(i) | Represents the reclassification of Kellogg ParentCos net investment in WK Kellogg Co, including other pro forma adjustments, into common stock, par value $0.0001, and Capital in excess of par value to reflect the number of shares of WK Kellogg Co common stock expected to be outstanding at the distribution date. The assumed number of outstanding shares of common stock is based on the number of shares of Kellogg ParentCo common stock of approximately 343 million outstanding as of April 1, 2023 and an assumed pro-rata distribution ratio of one share of WK Kellogg Co common stock for every shares of Kellogg ParentCo common stock, which equates to approximately WK Kellogg Co shares. |
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Pursuant to 17 C.F.R. Section 200.83
The adjustments to Capital in excess of par value is summarized below:
Adjustment | Note | ($ in millions) | ||||||
Proceeds from debt, net of cash payment to Kellogg ParentCo |
(a), (b) | $ | ||||||
Pension and postretirement plans, net of tax |
(c), (d) | (78 | ) | |||||
Retention bonus |
(e) | (2 | ) | |||||
Workers compensation and insurance |
(f) | (9 | ) | |||||
Property, net |
(g) | |||||||
Tax impact |
(h) | (14 | ) | |||||
Net parent investment |
(i) | 709 | ||||||
Common stock issuance |
(i) | |||||||
|
|
|||||||
Total adjustment |
$ | 606 | ||||||
|
|
(j) | The weighted-average number of shares of our common stock used to compute basic earnings per share for the fiscal quarter ended April 1, 2023 and the year ended December 31, 2022 is based on the number of weighted average Kellogg ParentCo common shares outstanding during the fiscal quarter ended April 1, 2023 and year ended December 31, 2022, respectively, assuming a distribution ratio of shares of our common stock for every shares of Kellogg ParentCo common stock. |
For the fiscal quarter ended April 1, 2023, the number of shares to compute diluted earnings per share is based on the estimated basic shares of WK Kellogg Co common stock plus an estimated shares related to the assumed vesting of restricted stock units granted.
For the year ended December 31, 2022, the weighted average number of shares used to compute diluted loss per share is based on the weighted average number of basic shares of our common stock since the company had a net loss for the year ended December 31, 2022. The incremental shares associated with the stock-based awards granted to our employees under Kellogg ParentCos stock-based compensation plans of shares were not included in the computation of diluted loss per share since if included they would have been anti-dilutive. The actual future impact of potential dilution from stock-based awards granted to our employees under Kellogg ParentCo equity plans will depend on various factors, including employees who may change employment from one company to another.
(k) | All transaction costs incurred in 2022 and until April 1, 2023 related to the Spin-Off are included in our historical combined financial statements. The pro forma adjustments for the year ended December 31, 2022 include estimates for additional charges we expect to incur between April 1, 2023 and the Spin-Off date. For the year ended December 31, 2022, we recorded an adjustment of $4 million which consisted of $4 million of estimated employee retention and separation charges and $ of estimated system implementation and business separation charges. Actual amounts may differ from these estimates. These costs are not expected to recur beyond 12 months after the Spin-Off. |
(l) | Reflects the net impact of lease arrangements with third parties and lease and sub-lease arrangements with Kellogg ParentCo for distribution centers and administration buildings that have been entered into or will be entered into prior to the Spin-Off. These adjustments record the operating right-of-use assets and related operating lease liabilities based on the estimated present value of the lease payments over the lease term. There is no impact to the unaudited pro forma combined statement of operations as lease expense is expected to be materially consistent with facilities charges included in our historical combined statement of operations. |
Note 2: Autonomous Entity Adjustments:
(m) | Reflects the effect of the Supply Agreement that WK Kellogg Co and Kellogg ParentCo will enter into prior to the Spin-Off. The historical combined statement of operations reflects certain net sales and cost of goods sold pursuant to pre-existing intercompany arrangements between WK Kellogg Co and |
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Pursuant to 17 C.F.R. Section 200.83
Kellogg ParentCo. Sales of product from WK Kellogg Co to Kellogg ParentCo are expected to cease following the Spin-Off. Accordingly, net sales and cost of goods sold has been adjusted for the year ended December 31, 2022 and fiscal quarter ended April 1, 2023 related to these product sales. |
Agreements related to the purchases of product from Kellogg ParentCo by WK Kellogg Co are not expected to have a material impact on pro forma cost of goods sold for the year ended December 31, 2022 and the fiscal quarter ended April 1, 2023 as the historical related party cost of goods reflect pricing terms that are materially consistent to those set forth in the agreements.
The agreements are being drafted and will be completed prior to the Spin-Off. The adjustments have been determined based upon the terms of the latest draft agreements and are subject to change. Any changes to the final terms of the agreements are not expected to be significant.
(n) | Reflects the removal of royalty charges related to intellectual property usage that were historically paid by WK Kellogg Co to Kellogg ParentCo. Such royalty payments will no longer be required post Spin-Off as the usage of shared intellectual property has been agreed to be on a royalty-free basis. |
(o) | Reflects the tax effects of the autonomous entity adjustments at the applicable statutory income tax rates. Since the adjustments are primarily expected to be incurred in the U.S., the statutory tax rate applied is approximately 23.5 percent. |
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Pursuant to 17 C.F.R. Section 200.83
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) for the fiscal quarters ended April 1, 2023 and April 2, 2022 and the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, should be read as a supplement to, and should be read in conjunction with, our historical combined financial statements and the accompanying notes thereto included elsewhere in this Information Statement as well as the information presented under Selected Historical Combined Financial Data and Unaudited Pro Forma Combined Financial Statements. The following MD&A relates to the North American Cereal Business of Kellogg Company, which is referred to throughout this MD&A as WK Kellogg Co, the Company, we, us or our. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this information statement, particularly in Cautionary Statement Concerning Forward-Looking Statements and Risk Factors.
Our MD&A references consumption and net sales in discussing our sales trends for certain categories and brands. We record net sales upon delivery of shipments to our customers. Consumption and category share data noted within is based on Nielsen eXtended All Outlet Combined or other comparable source, for the applicable period. Consumption refers to consumer purchases of our products from our customers. Unless otherwise noted, consumption and shipment trends are materially consistent.
Business Overview
WK Kellogg Co is an iconic North American cereal company with a differentiated portfolio of brands that have delighted our consumers for over a century. As a leading manufacturer, marketer and distributor of branded ready-to-eat cereal, we endeavor to provide consumers with high-quality products while promoting consumer health and wellbeing. Our products are manufactured by us in the United States, Mexico, and Canada and marketed in the United States, Canada, and the Caribbean.
Iconic brands used in our business include Frosted Flakes, Special K, Froot Loops, Raisin Bran, Frosted Mini- Wheats, Rice Krispies, Kashi, Corn Flakes, and Apple Jacks, among many others. We believe our long-standing success is attributable to the strength the brands used in connection with the Cereal Business, our category expertise and over a century of institutional knowledge, all of which has created a diverse portfolio of Cereals that are intended to enhance the lives of our consumers. Our product offerings are well diversified across the cereal sub-categories of taste, wellness and balance, with strong consumer appeal across the spectrum of ages and demographics. The scale of our portfolio is evident as we are the second largest seller of ready-to-eat cereals in the United States with a 28% share of retail sales for the 52-week period ended April 1, 2023 and the leading player in Canadas cereal market, with 38% category share over that same period. According to data provided by Nielsen, for the year to date period ended March 23, 2023, we were the number one seller of ready-to-eat cereals in Puerto Rico with a 37% category share. As of April 1, 2023, nine of the top 20 brands in the cereal category across the United States and Canada are Kellogg brands. Our founding Corn Flakes brand is still to this day a top 20 cereal brand in the United States and Canada as of April 1, 2023, while Frosted Flakes introduced in 1952 is the third largest in the category across North America as of April 1, 2023. The WK Kellogg Co brand portfolio has expanded over time as a result of breakthrough marketing and innovation campaigns.
Our products are manufactured through our production platform consisting of six primary facilities that we expect to own upon consummation of the Spin-Off and sold through a variety of channels such as grocery stores, mass merchandisers, club stores, and drug stores.
Separation from Kellogg ParentCo
On June 21, 2022, Kellogg Company (Kellogg ParentCo) announced its intent to separate its business and operations conducted by Kellogg ParentCo in North America prior to the Distribution relating to (i) the
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Pursuant to 17 C.F.R. Section 200.83
development, production, packaging, distribution, marketing, licensing or sale of ready-to-eat cereal, hot cereal, muesli, and granola (other than RXBAR-branded granola), cereal-based snacks and cookies (other than Rice Krispies-branded snacks and Special K-branded cookies) and other food and beverage products produced under certain cereal brands and, (ii) the licensing of certain brands and related trademarks within North America to unaffiliated third parties for non-food and beverage applications (referred to collectively as the Cereal Business), via tax-free spin-off, with a target to complete the transaction by the end of 2023, resulting in two independent public companies, each better positioned to unlock their full standalone potential. Directly or indirectly through our subsidiaries, we will hold certain assets and liabilities of the Cereal Business after the Spin-Off. Each holder of Kellogg ParentCo common stock will receive shares of common stock of WK Kellogg Co for every shares of Kellogg ParentCo common stock held as of the close of business on the record date of the Distribution. Following the Spin-Off, Kellogg ParentCo will retain no ownership in WK Kellogg Co. For additional information, see The Spin-Off included elsewhere in this Information Statement.
Before our separation from Kellogg ParentCo, we intend to enter into a Separation and Distribution Agreement and several other agreements with Kellogg ParentCo related to the Spin-Off. These agreements will govern the relationship between Kellogg ParentCo and us up to and after completion of the Spin-Off and allocate between Kellogg ParentCo and us various assets, liabilities, rights and obligations, including with respect to employee benefits, intellectual property and tax. We describe these arrangements in greater detail under Certain Relationships and Related Party Transactions-Agreements with Kellogg ParentCo.
In addition, we will also enter into certain Intellectual Property Agreements with Kellogg ParentCo that will provide for the ownership, licensing and other terms relating to the trademarks currently used in the Cereal Business as well as certain other trademarks. We will sell some products under brands we plan to license from Kellogg ParentCo. We describe these arrangements in greater detail within Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo.
In connection with the Spin-Off, we anticipate having $ in new debt, which would result in additional interest expense in future periods. See Unaudited Pro Forma Combined Financial Statements.
Kellogg ParentCo believes that separating the Cereal Business into a standalone publicly-traded company will significantly enhance the long-term growth and return prospects of Kellogg ParentCo and WK Kellogg Co and offer substantially greater long-term value to shareholders, customers and employees of each company. In addition, the separation of the Cereal Business from the Kellogg ParentCo Business via the Spin-Off will better position each company to:
| Focus on their distinct strategic priorities, with financial targets that best fit their own markets and opportunities; |
| Execute with increased agility and operational flexibility, enabling more focused allocation of capital and resources in a manner consistent with those strategic priorities; |
| Realize improved outlooks for profitable growth; and |
| Shape distinctive corporate cultures, rooted in Kellogg ParentCos strong values, and rewarding career paths for employees of each company. |
Basis of Presentation
We have historically operated as part of Kellogg ParentCo and not as a standalone company. The accompanying audited combined financial statements for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 and unaudited combined financial statements for the quarters ended April 1, 2023 and April 2, 2022 were prepared on a stand-alone basis derived from the consolidated financial statements and accounting records of Kellogg ParentCo. These financial statements reflect the combined historical results of operations, financial position and cash flows of the Cereal Business in accordance with accounting principles generally accepted in the United States of America (GAAP) and pursuant to the rules and regulations of the SEC.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
These combined financial statements are presented as if WK Kellogg Co had been carved out of Kellogg ParentCo and had been combined for all periods presented. The combined financial statements include the attribution of certain assets and liabilities that have been held at Kellogg ParentCo but which are specifically identifiable or attributable to the business being transferred to WK Kellogg Co. The assets and liabilities in the carve-out financial statements have been presented on a historical cost basis, as immediately prior to the distribution of all of the assets and liabilities presented are wholly owned by Kellogg ParentCo and are being transferred to WK Kellogg Co at carry-over basis.
All significant intercompany transactions within WK Kellogg Co have been eliminated. All transactions between WK Kellogg Co and Kellogg ParentCo are considered to be effectively settled in the combined financial statements at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Combined Statement of Cash Flows as a financing activity and in the Combined Balance Sheet as net parent investment.
These combined financial statements include expense allocations for: (1) contract manufacturing, product warehousing and distribution; (2) a combined sales force and management team; (3) certain support functions that are provided on a centralized basis within Kellogg ParentCo, including, but not limited to executive oversight, treasury, finance, internal audit, legal, information technology, human resources, communications, facilities, and compliance; and (4) employee benefits and compensation, including stock based compensation. These expenses have been allocated to WK Kellogg Co on the basis of direct usage where identifiable, with the remainder allocated on a basis of gross sales value, production pounds, headcount or other applicable measures. For an additional discussion and quantification of expense allocations see Note 10 of the Notes to the combined financial statements included elsewhere in this Information Statement.
Management believes the assumptions underlying these combined financial statements, including the assumptions regarding allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by WK Kellogg Co during the periods presented. Nevertheless, the combined financial statements may not reflect the results of operations, financial position and cash flows had WK Kellogg Co been a standalone company during the periods presented. Actual costs that we may have incurred had we been a standalone company would depend on a number of factors, including the chosen organization structure, whether functions were outsourced or performed by our employees and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure.
Debt obligations and related financing costs of Kellogg ParentCo have not been included in the combined financial statements of WK Kellogg Co, because WK Kellogg Co is not a party to the obligation between Kellogg ParentCo and the debtholders. In connection with the Spin-Off, we anticipate having $ in new debt, which would result in additional interest expense in future periods. See Unaudited Pro Forma Combined Financial Statements included elsewhere in this Information Statement.
The income tax provision in the combined statement of income has been calculated as if WK Kellogg Co was operating on a standalone basis and filed separate tax returns in the jurisdiction in which it operates. Therefore cash tax payments and items of current and deferred taxes may not be reflective of WK Kellogg Cos actual tax balances prior to or subsequent to the carve-out.
Our fiscal year normally ends on the Saturday closest to December 31 and as a result, a 53rd week is added approximately every sixth year. Our 2022 and 2021 fiscal years contained 52 weeks and ended on December 31, 2022 and January 1, 2022, respectively. Our 2020 fiscal year ended on January 2, 2021 and included a 53rd week. While quarters normally consist of 13-week periods, the fourth quarter of fiscal 2020 included a 14th week.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Key Factors Affecting Our Business
We believe key industry and economic factors that are impacting our business include the following:
COVID-19. Since the World Health Organization categorized the novel coronavirus (COVID-19) as a pandemic in March 2020, our key objectives were to 1) protecting the health and safety of our employees, 2) safely producing and delivering our foods to customers and consumers, and 3) supporting the communities in which we operate.
We continued to actively monitor COVID-19 and adjust mitigation strategies as necessary to address changing health, operational or financial risks. During the first year of the pandemic, we experienced a significant increase in demand for food for at-home consumption. While this demand moderated in 2021, we continued to manage our production capacity during this period of volatility. We monitored the business for adverse impacts of the pandemic, including reduced demand in our away from home business, supply-chain disruptions, including bottlenecks and shortages of materials, labor, and freight that have required us to pursue alternative sources, incremental capacity, temporary labor and other incremental costs to maintain food supply. In the event we experienced adverse impacts from the above or other factors, we would also evaluated the need to perform interim impairment tests of our goodwill, indefinite lived intangible assets, and property, plant and equipment. There can be no assurance that volatility and/or disruption in the capital and credit markets will not impair our ability to access these markets on terms acceptable to us, or at all.
Supply chain challenges. We have experienced supply chain disruptions including economy-wide bottlenecks and shortages of materials, labor, and freight that have led to increasing prices of raw materials and labor as well as limitations on shipping capacity. We have worked to offset these challenges through productivity and revenue growth management initiatives. Additionally, we were adversely impacted by a fire at one of our facilities in late July, 2021, followed by an unrelated strike of approximately 1,400 employees at our four U.S. plants, which began in early October 2021 and ended in late December of the same year. Both of these events resulted in operational and financial impacts that extended into the first quarter of 2022.
Inflationary pressures. Events such as the COVID-19 pandemic have resulted in certain impacts to the global economy, including market disruptions, supply chain challenges, and inflationary pressures. Like the rest of the industry and economy, the Company experienced a sharp increase in input costs beginning in 2021, ranging from ingredients and packaging, to energy, freight, and labor. The increase in input costs has persisted through our fiscal year 2022 and into our fiscal 2023. The Company mostly offset the dollar impact of this input-cost inflation through the execution of productivity initiatives and the implementation of revenue growth management actions to realize price. In addition to input-cost inflation, the industry and economy also experienced widespread bottlenecks and shortages of labor and materials, creating substantial inefficiencies and incremental costs. For the Company, these inefficiencies and costs had a significant impact on profit margins in the first half of 2021. In the second half of 2021, the bottlenecks and shortages were supplanted by a significant Company-specific interruption in production, first because of a fire that temporarily shut down one of our U.S. plants, and then by a three-month labor strike in all four of our U.S. plants. The fire and strike combined to negatively impact results through depleted inventory, lost net sales, lost fixed-cost absorption, and incremental costs during the second half of 2021 and into the first quarter of 2022, though such negative impacts were partially offset by curbed commercial investment and reduced overhead.
Additionally, Kellogg ParentCo has historically used a combination of long-term contracts with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted raw material purchases over a duration of generally less than 18 months. We have participated in this hedging program and the combined statement of operations reflects a reasonable allocation of the impacts of our participation in Kellogg ParentCos hedging program.
The war in Ukraine and the related sanctions have increased global economic and geopolitical uncertainty. WK Kellogg Co is a North American focused company with no direct exposure to Russia or Ukraine. However,
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
sanctions imposed by the United States on Russian oil and gas imports, as well as disruption to Ukraines wheat and other agricultural supply due to the ongoing military conflict, is causing further inflation of our commodity costs.
We expect supply pressures, supply chain and logistics delays, and other disruptions to continue into 2023, though we are unable to predict the impact such disruptions may have on our future results.
Highly competitive environment. Our business is concentrated primarily in a single product category that faces intense competition. The principal aspects of our business where we experience competition include brand recognition, taste, nutritional value, price, promotion, innovation, shelf space and customer service. We have competition from both branded and private label product offerings. Our ability to successfully compete in the marketplace is dependent on our strategic execution on the items above.
Challenging retail environment. Our business is largely concentrated in the traditional retail grocery trade with a significant percentage of our sales coming from a small group of large U.S. retail customers. The U.S. retail environment continues to face further consolidation. We must leverage our marketing expertise, product innovation and category leadership position to respond to our customers and provide high service levels.
These factors contribute to a market environment of intense competition, constant product innovation and continuing cost pressure that creates a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies. For more information on the risk factors affecting our business, see Risk Factors in this Information Statement.
Non-GAAP Financial Measures
This Information Statement includes non-GAAP financial measures that we provide to management and investors that exclude certain items that we do not consider part of on-going operations. Items excluded from our non-GAAP financial measures are discussed in the Significant items impacting comparability section included in this MD&A. Our management team consistently utilizes a combination of GAAP and non-GAAP financial measures to evaluate business results, to make decisions regarding the future direction of our business, and for resource allocation decisions. As a result, we believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors understanding of our underlying operating performance and in their analysis of ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.
Non-GAAP financial measures used for evaluation of performance include adjusted operating profit, adjusted gross profit, adjusted gross margin, and adjusted net income. These non-GAAP financial measures may not be comparable to similar measures used by other companies.
Adjusted: gross profit, gross margin, operating profit and net income: We adjust the GAAP financial measures to exclude the effect of restructuring programs, separation costs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodity contracts, and certain foreign currency contracts, and other costs impacting comparability resulting in adjusted gross profit, gross margin, operating profit, and net income. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of WK Kellogg Cos profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives.
These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures. Investors are encouraged to review the related GAAP financial measures and the
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
Significant Items Impacting Comparability
Mark-to-Market
We recognize allocations of mark-to-market adjustments for pension and postretirement benefit plans, commodity contracts, and certain foreign currency contracts as incurred. Actuarial gains/losses for pension plans are recognized in the year they occur. Changes between contract and market prices for commodity contracts and certain foreign currency contracts result in gains/losses that are recognized in the quarter they occur. We recorded a pre-tax mark-to-market loss of $5 million in the first quarter of 2023, and a mark-to-market gain of $19 million in the first quarter of 2022. Included within the aforementioned totals was a pre-tax mark-to-market gain of $5 million for pension plans in the first quarter of 2022.
Additionally, we recognized a loss of $192 million in 2022, a gain of $65 million in 2021 and a loss of $53 million in 2020. Included within the aforementioned totals was a pre-tax mark-to-market loss for pension plans of $183 million in 2022, gain of $77 million in 2021 and a loss of $51 million in 2020.
Separation Costs
The Company incurred pre-tax charges related to the planned separation from Kellogg ParentCo, primarily related to legal and consulting costs, of $21 million for the first quarter of 2023. Additionally, we recorded separation costs of $26 million for fiscal year 2022.
Business and Portfolio Realignment
One-time costs were related primarily to a reconfiguration of our supply chain network designed to drive increased productivity. As a result, we incurred pre-tax charges, primarily related to reorganizations of $1 million in the first quarter of 2022. Additionally, we recorded costs of $8 million in 2022, $7 million in 2021 and $1 million in 2020.
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Financial Results
Fiscal quarter ended April 1, 2023 compared to fiscal quarter ended April 2, 2022
Net Sales and Operating Profit
The following tables provide an analysis of net sales and operating profit performance for the fiscal quarter ended April 1, 2023 versus fiscal quarter ended April 2, 2022:
(millions) |
2023 | 2022 | ||||||
Reported net sales |
$ | 720 | $ | 623 | ||||
|
|
|
|
|||||
% change2023 vs. 2022: |
||||||||
Reported net sales growth |
15.6 | % | ||||||
|
|
|||||||
Volume (tonnage) |
(2.7 | )% | ||||||
Pricing/mix |
18.3 | % | ||||||
|
|
(millions) |
2023 | 2022 | ||||||
Reported operating profit |
$ | 26 | $ | 36 | ||||
Mark-to-market |
(5 | ) | 14 | |||||
Separation costs |
(21 | ) | | |||||
Business and portfolio realignment |
| (1 | ) | |||||
|
|
|
|
|||||
Adjusted operating profit |
$ | 52 | $ | 23 | ||||
|
|
|
|
|||||
% change2023 vs. 2022: |
||||||||
Reported growth |
(27.8 | )% | ||||||
Mark-to-market |
(68.7 | )% | ||||||
Separation costs |
(95.5 | )% | ||||||
Business and portfolio realignment |
10.3 | % | ||||||
|
|
|||||||
Adjusted operating profit growth |
126.1 | % | ||||||
|
|
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
Reported net sales increased approximately 16% due to revenue growth management initiatives designed to cover rising input-cost inflation which resulted in favorable price/mix of approximately 18%. Volume decreased 3% compared to the prior year, reflecting price elasticity, even as we continued to recover share in our U.S. cereal business following the 2021 fire and strike.
Reported operating profit decreased 28% as the impact of higher net sales was more than offset by unfavorable mark-to-market resulting from changes in commodity prices of $19 million, incremental separation costs of $21 million, and an increase in advertising and promotion of approximately $38 million from the prior year quarter due to the slow ramp up of commercial activities in the first half of 2022 following the fire and strike in late 2021. These impacts were partially offset by incremental manufacturing costs totaling approximately $50 million in the first quarter of 2022 resulting from the 2021 fire and strike.
Adjusted operating profit increased 126%, after excluding the unfavorable impacts of mark-to-market totaling $19 million and separation costs of $21 million.
Selling, General, and Administrative Expense
Selling, general, and administrative expense increased by 76% to $155 million in the first quarter of 2023 compared to $87 million in the prior year quarter. Expense for the first quarter of 2023 and 2022 was 22% and
88 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
14% of net sales, respectively. The increase was due primarily to a $38 million increase in advertising and promotion expense due to the slow ramp up of commercial activities in the first half of 2022 following the fire and strike in late 2021. Additionally, we incurred $21 million of incremental separation costs in the first quarter of 2023.
Selling, general, and administrative expense also includes expense allocations for product distribution; a combined sales force and management; certain support functions that are provided on a centralized basis within Kellogg ParentCo, including, but not limited to executive oversight, treasury, finance, internal audit, legal, information technology, human resources, communications, facilities, and compliance; and employee benefits and compensation, including stock based compensation.
Margin Performance
2023 versus 2022 gross margin performance for the first quarter was as follows:
Change vs. prior year (pts.) |
||||||||||||
2023 | 2022 |
|
||||||||||
Reported gross margin(a) |
25.1 | % | 19.7 | % | 5.4 | |||||||
Mark-to-market |
(0.7 | )% | 2.1 | % | (2.8 | ) | ||||||
Separation costs |
(0.3 | )% | | % | (0.3 | ) | ||||||
Business and portfolio realignment |
| % | (0.2 | )% | 0.2 | |||||||
|
|
|
|
|
|
|||||||
Adjusted gross margin |
26.1 | % | 17.8 | % | 8.3 | |||||||
|
|
|
|
|
|
For information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) | Reported gross margin as a percentage of net sales. Gross margin is equal to net sales less cost of goods sold. |
Our 2023 and 2022 first quarter adjusted gross profit is reconciled to the most comparable U.S. GAAP measure as follows:
(dollars in millions) |
2023 | 2022 | ||||||
Reported gross profit(a) |
$ | 181 | $ | 123 | ||||
Mark-to-market |
(5 | ) | 13 | |||||
Separation costs |
(2 | ) | | |||||
Business and portfolio realignment |
| (1 | ) | |||||
|
|
|
|
|||||
Adjusted gross profit |
$ | 188 | $ | 111 | ||||
|
|
|
|
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) | Gross profit is equal to net sales less cost of goods sold. |
Reported gross margin for the quarter ended April 1, 2023, increased 540 basis points compared to the prior year quarter as 2023 was favorably impacted by revenue growth management initiatives partially offset by unfavorable mark-to-market impacts totaling $19 million. Additionally, the first quarter of 2022 was unfavorably impacted by incremental manufacturing costs resulting from the 2021 fire and strike totaling approximately $50 million.
Adjusted gross margin increased 830 basis points after excluding the unfavorable impact of mark-to-market totaling $18 million and separation costs of $2 million.
89 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Other Income (Expense)
Other income (expense) consists primarily of allocated pension and postretirement benefit plan related mark-to-market, interest cost, and expected return on plan assets. For the quarter ended April 1, 2023, other income (expense) decreased by 72% to $8 million compared to $29 million in the quarter ended April 2, 2022. The decrease was due primarily to lower expected returns on plan assets in the current quarter due to a decrease in plan asset values during 2022. Pension and postretirement benefit plan income included in other income (expense) decreased from $30 million for the quarter ended April 2, 2022 to $10 million for the quarter ended April 1, 2023.
Income Tax Expense
The effective tax rate for each of the quarters ended April 1, 2023 and April 2, 2022 was 23.3%. The effective tax rate for both periods was impacted by state and local income taxes and the differential of WK Kellogg Cos foreign statutory tax rates from the U.S. federal statutory tax rate.
Net Income
Combined results (dollars in millions, except per share data) |
April 1, 2023 | April 2, 2022 | ||||||
Reported net income attributable to WK Kellogg Co |
$ | 26 | $ | 51 | ||||
Mark-to-market (pre-tax) |
(5 | ) | 19 | |||||
Separation costs (pre-tax) |
(21 | ) | | |||||
Business and portfolio realignment (pre-tax) |
| (1 | ) | |||||
Income tax impact applicable to adjustments, net* |
6 | (4 | ) | |||||
|
|
|
|
|||||
Adjusted net income attributable to WK Kellogg Co |
$ | 46 | $ | 37 | ||||
|
|
|
|
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
* | Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction. |
90 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Financial Results
Full year 2022 compared to 2021
Net Sales and Operating Profit
The following tables provide an analysis of net sales and operating profit performance for the year 2022 versus 2021:
(millions) |
2022 | 2021 | ||||||
Reported net sales |
$ | 2,695 | $ | 2,460 | ||||
|
|
|
|
|||||
% change2022 vs. 2021: |
||||||||
Reported net sales growth |
9.6 | % | ||||||
|
|
|||||||
Volume (tonnage) |
(0.1 | )% | ||||||
Pricing/mix |
9.7 | % | ||||||
|
|
(millions) |
2022 | 2021 | ||||||
Reported operating profit |
$ | 75 | $ | 37 | ||||
Mark-to-market |
(9 | ) | (11 | ) | ||||
Separation costs |
(26 | ) | | |||||
Business and portfolio realignment |
(8 | ) | (7 | ) | ||||
|
|
|
|
|||||
Adjusted operating profit |
$ | 118 | $ | 55 | ||||
|
|
|
|
|||||
% change2022 vs. 2021: |
||||||||
Reported growth |
102.7 | % | ||||||
Mark-to-market |
27.7 | % | ||||||
Separation costs |
(54.2 | )% | ||||||
Business and portfolio realignment |
14.6 | % | ||||||
|
|
|||||||
Adjusted operating profit growth |
114.6 | % | ||||||
|
|
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
Reported net sales increased approximately 10% due to revenue growth management initiatives designed to cover rising input-cost inflation resulting in favorable price/mix of approximately 10%. Volume was flat compared to the prior year.
Reported operating profit increased 103% due primarily to the impact of higher net sales and resulting higher gross profit due to a faster-than-expected recovery in our U.S. cereal business following the 2021 fire and strike. Operating profit also improved due to a decrease in advertising and promotion expense of approximately $43 million from the prior year due to the slow ramp up of commercial activities in the first half of 2022 following the fire and strike in late 2021.
These impacts to operating profit were partially offset by incremental separation costs of $26 million.
Selling, General, and Administrative Expense
Selling, general, and administrative expense increased to $556 million in 2022 compared to $539 million in 2021. Selling, general and administrative expense for 2022 and 2021 was 21% and 22% of net sales, respectively. The increase was due primarily to a $60 million increase in allocated corporate overhead, including $26 million in separation costs, and allocated research and development costs. These increases were partially offset by a $43 million decrease in advertising and promotion expense due to the slow ramp up of commercial activities following the 2021 fire and strike.
91 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Selling, general, and administrative expense also includes expense allocations for product distribution; a combined sales force and management; certain support functions that are provided on a centralized basis within Kellogg ParentCo, including, but not limited to, executive oversight, treasury, finance, internal audit, legal, information technology, human resources, communications, facilities, and compliance; and employee benefits and compensation, including stock based compensation.
Margin Performance
2022 versus 2021 gross margin performance was as follows:
Change vs. prior year (pts.) |
||||||||||||
2022 | 2021 |
|
||||||||||
Reported gross margin(a) |
23.4 | % | 23.4 | % | | |||||||
Mark-to-market |
(0.3 | )% | (0.5 | )% | 0.2 | |||||||
Separation costs |
(0.1 | )% | | % | | |||||||
Business and portfolio realignment |
(0.3 | )% | (0.2 | )% | (0.1 | ) | ||||||
|
|
|
|
|
|
|||||||
Adjusted gross margin |
24.1 | % | 24.1 | % | | |||||||
|
|
|
|
|
|
For information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) | Reported gross margin as a percentage of net sales. Gross margin is equal to net sales less cost of goods sold. |
Our 2022 and 2021 adjusted gross profit is reconciled to the most comparable U.S. GAAP measure as follows:
(dollars in millions) |
2022 | 2021 | ||||||
Reported gross profit(a) |
$ | 631 | $ | 576 | ||||
Mark-to-market |
(9 | ) | (11 | ) | ||||
Separation costs |
(3 | ) | | |||||
Business and portfolio realignment |
(8 | ) | (5 | ) | ||||
|
|
|
|
|||||
Adjusted gross profit |
$ | 651 | $ | 592 | ||||
|
|
|
|
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) | Gross profit is equal to net sales less cost of goods sold. |
Reported gross margin for the year ended December 31, 2022, was flat compared to the prior year as the impact of revenue growth management initiatives were offset by input cost inflation and the residual impact of last years fire and strike. Gross profit increased from the prior year due to the impact of net sales resulting from favorable price increases and product mix.
Other Income (Expense)
Other income (expense) consists primarily of allocated pension and postretirement benefit plan related mark-to-market, interest cost, and expected return on plan assets. For the year ended December 31, 2022, other income (expense) decreased to ($101) million compared to $177 million in 2021. The decrease was due to higher mark-to-market pension expense driven by the impact of lower than expected returns on plan assets partially mitigated by higher discount rates. Pension and postretirement benefit plan-related mark-to-market expense was ($183) million for the year ended December 31, 2022 compared to $77 million in 2021. Total pension and postretirement benefit plan income (expense), including mark-to-market, in other income (expense) was ($94) million and $178 million for the years ended December 31, 2022 and January 1, 2022, respectively.
92 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Income Tax Expense
The effective tax rate for fiscal years 2022 and 2021 was 5.7% and 24.4%, respectively. The effective tax rate for 2022 decreased as compared to the prior year as a result of a change in the jurisdictional mix of pre-tax earnings, most notably a decrease in U.S. pretax earnings.
Financial Results
Net Sales and Operating Profit
Full year 2021 compared to 2020
The following tables provide an analysis of net sales and operating profit performance for 2021 versus 2020:
(millions) |
2021 | 2020 | ||||||
Reported net sales |
$ | 2,460 | $ | 2,867 | ||||
|
|
|
|
|||||
% change2021 vs. 2020: |
||||||||
Reported net sales growth |
(14.2 | )% | ||||||
|
|
|||||||
Volume (tonnage) |
(17.2 | )% | ||||||
Pricing/mix |
3.0 | % | ||||||
|
|
(millions) |
2021 | 2020 | ||||||
Reported operating profit |
$ | 37 | $ | 196 | ||||
Mark-to-market |
(11 | ) | (2 | ) | ||||
Business and portfolio realignment |
(7 | ) | (1 | ) | ||||
|
|
|
|
|||||
Adjusted operating profit |
$ | 55 | $ | 199 | ||||
|
|
|
|
|||||
% change2021 vs. 2020: |
||||||||
Reported growth |
(81.1 | )% | ||||||
Mark-to-market |
(5.6 | )% | ||||||
Business and portfolio realignment |
(3.0 | )% | ||||||
|
|
|||||||
Adjusted operating profit growth |
(72.5 | )% | ||||||
|
|
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
Reported net sales decreased 14% as volume declined 17% from the prior year partially offset by a 3% benefit from price/mix. The Company estimates that about half of the volume decline was attributable to lapping strong 2020 pandemic-related growth, with another 2 percentage points attributable to lapping fiscal 2020s 53rd week, and the remainder of the decline related to challenging supply conditions in 2021, including the impact of economy-wide supply bottlenecks and shortages on first-half results, and the impact in the second half of a fire and strike at our U.S. cereal plants. Primarily as a result of the fire and strike, U.S. retail cereal market share declined 3.1 basis points during the fourth quarter of 2021.
Reported operating profit decreased approximately 81%, or about $159 million, compared to the prior year. The Company estimates approximately half of this decline was attributable to supply disruptions in 2021, including lost sales and incremental costs related to the fire and strike in the second half, and inefficiencies and incremental costs related to economy-wide bottlenecks and shortages in the first half.
The remaining decline in operating profit was due primarily to 2021 results lapping substantial operating leverage in 2020 when our plants were running limited SKUs at maximum capacity due to the acceleration of demand as a result of the pandemic and the impact of the 53rd week in 2020.
93 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
These negative impacts to operating profit in 2021 were partially offset by lower incentive compensation expense and lower advertising and promotion expense within selling, general, and administrative expense, as planned commercial activity was moderated significantly during the strike.
Selling, General, and Administrative Expense
Selling, general, and administrative expense decreased to $539 million in 2021 compared to $639 million in 2020. Expense for both years was approximately 22% of net sales. The decrease was due primarily to a decrease of approximately $63 million in allocated overhead and research and development costs and approximately $32 million in advertising and promotion expense, as planned commercial activity was moderated significantly as a result of the fire and strike.
Selling, general, and administrative expense also includes expense allocations for product distribution; a combined sales force and management; certain support functions that are provided on a centralized basis within Kellogg ParentCo, including, but not limited to, executive oversight, treasury, finance, internal audit, legal, information technology, human resources, communications, facilities, and compliance; and employee benefits and compensation, including stock based compensation.
Margin Performance
2021 versus 2020 gross margin performance was as follows:
Change vs. prior year (pts.) |
||||||||||||
2021 | 2020 |
|
||||||||||
Reported gross margin(a) |
23.4 | % | 29.1 | % | (5.7 | ) | ||||||
Mark-to-market |
(0.5 | )% | (0.1 | )% | (0.4 | ) | ||||||
Business and portfolio realignment |
(0.2 | )% | | % | (0.2 | ) | ||||||
|
|
|
|
|
|
|||||||
Adjusted gross margin |
24.1 | % | 29.2 | % | (5.1 | ) | ||||||
|
|
|
|
|
|
For information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) | Reported gross margin as a percentage of net sales. Gross margin is equal to net sales less cost of goods sold. |
Our 2021 and 2020 adjusted gross profit is reconciled to the most comparable U.S. GAAP measure as follows:
(dollars in millions) |
2021 | 2020 | ||||||
Reported gross profit(a) |
$ | 576 | $ | 835 | ||||
Mark-to-market |
(11 | ) | (2 | ) | ||||
Business and portfolio realignment |
(5 | ) | | |||||
|
|
|
|
|||||
Adjusted gross profit |
$ | 592 | $ | 837 | ||||
|
|
|
|
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) | Gross profit is equal to net sales less cost of goods sold. |
Reported gross margin for the year ended January 1, 2022, decreased 570 basis points, approximately half of which is estimated to be related to challenging supply conditions in 2021, including inefficiencies and incremental costs related to economy-wide bottlenecks and shortages in the first half, and a third-quarter fire at one of our U.S. plants and fourth-quarter strike affecting all U.S. cereal plants.
94 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
The remaining gross margin decline was due primarily to 2021 results lapping substantial operating leverage in 2020 when our plants were running limited SKUs at maximum capacity due to the acceleration of demand as a result of the pandemic and the impact of the 53rd week in 2020.
The impact of accelerated input-cost inflation, including commodities, labor, and logistics, was largely offset by productivity and price realization.
Other Income (Expense)
Other income (expense) consists primarily of allocated pension and postretirement benefit plan related mark-to-market, interest cost, and expected return on plan assets. For the year ended January 1, 2022, other income increased to $177 million compared to $46 million in 2020. The increase was due to higher mark-to-market pension income driven by the impact of higher discount rates at the end of 2021 versus 2020. Pension and postretirement benefit plan-related mark-to-market income (expense) was $77 million for the year ended January 1, 2022 compared to ($51) million in 2020. Total pension and postretirement benefit plan income (expense), including mark-to-market, in other income (expense) was $178 million and $50 million for the years ended January 1, 2022 and January 2, 2021, respectively.
Income Tax Expense
The effective tax rate for fiscal years 2021 and 2020 was 24.4% and 24.7%, respectively. The effective tax rate was impacted by state and local income taxes and the differential of WK Kellogg Cos foreign statutory tax rates from the U.S. federal statutory tax rate.
Net (Loss) Income
Combined results (dollars in millions, except per share data) |
2022 | 2021 | 2020 | |||||||||
Reported net income attributable to WK Kellogg Co |
$ | (25 | ) | $ | 162 | $ | 182 | |||||
Mark-to-market (pre-tax) |
(192 | ) | 65 | (53 | ) | |||||||
Separation costs (pre-tax) |
(26 | ) | | | ||||||||
Business and portfolio realignment (pre-tax) |
(8 | ) | (7 | ) | (1 | ) | ||||||
Income tax impact applicable to adjustments, net* |
53 | (14 | ) | 13 | ||||||||
|
|
|
|
|
|
|||||||
Adjusted net income attributable to WK Kellogg Co |
$ | 148 | $ | 118 | $ | 223 | ||||||
|
|
|
|
|
|
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
* | Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction. |
LIQUIDITY AND CAPITAL RESOURCES
We have operated within Kellogg ParentCos consolidated cash management structure, which uses a centralized approach to cash management and financing of our operations. A substantial portion of our cash is transferred to Kellogg ParentCo. This arrangement is not reflective of the manner in which we would have financed our operations had we been an independent, publicly traded company during the periods presented.
The cash and cash equivalents held by Kellogg ParentCo at the corporate level are not specifically identifiable to us and, therefore, have not been reflected in our combined financial statements. As a result of our participation in Kellogg ParentCos cash management arrangement, we do not hold our own cash and do not have access to any of Kellogg ParentCos credit facilities as a source of additional liquidity. Accordingly, these events and conditions can result in a net working capital deficit (i.e., total current liabilities in excess of total current assets)
95 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
at the end of certain reporting periods. As a result, our combined balance sheet presents a net working capital deficit (i.e. total current liabilities exceed total current assets as of April 1, 2023). To alleviate such conditions, Kellogg ParentCo has committed that it will provide assistance to WK Kellogg Co as determined by Kellogg ParentCo to enable WK Kellogg Co to continue its operations and fulfill all of its financial obligations expiring at the earlier of the consummation of the Spin-Off or December 2024. Accordingly, management believes that the financial support from Kellogg ParentCo will provide sufficient liquidity to meet our projected obligations for at least the next twelve months from the filing of this Form 10.
Following the Spin-Off, our capital structure and sources of liquidity will change from the historical capital structure because we will no longer participate in Kellogg ParentCos centralized cash management program. Our ability to fund our operating needs will depend on our future ability to continue to generate positive cash flow from operations, and on our ability to obtain debt financing on acceptable terms. Management believes that our cash balances and funds provided by operating activities, along with expected borrowing capacity and access to capital markets, taken as a whole, provide (i) adequate liquidity to meet all of our current and long-term obligations when due, including third-party debt that we expect to incur in connection with the Spin-Off, (ii) adequate liquidity to fund capital expenditures, and (iii) flexibility to meet investment opportunities that may arise. However, our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including (1) our credit ratings, including the lowering of any of our credit ratings, or absence of a credit rating, (2) the liquidity of the overall capital markets and (3) the current state of the economy and, accordingly, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future, or at all. The cash flows presented in our combined statement of cash flows may not be indicative of the cash flows we would have recognized had we operated as a standalone publicly traded company for the periods presented.
Kellogg ParentCos third-party long-term debt and the related interest expense have not been allocated to WK Kellogg Co for any of the periods presented as WK Kellogg Co was not the legal obligor of such debt. Additionally, we have no third-party borrowing as of the date of this Information Statement. In connection with the Spin-Off, we anticipate having $ in new debt. The debt may also restrict our business and may adversely impact our financial condition, results of operations or cash flows. In addition, the Spin-Off may increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to us. We expect to provide details about our financing arrangements in an amendment to this Information Statement. See Description of Material Indebtedness.
We believe our operating cash flow will allow us significant financial flexibility as a standalone company. We plan to utilize such flexibility to drive an investment philosophy that balances capital investments in areas such as supply chain optimization, cost-saving projects and new capabilities, with the ability to further increase shareholder value through a combination of debt reduction, return of capital to our shareholders in the form of dividends or share repurchases as well as potential acquisitions. Initially, in connection with the Spin-Off, we may increase our indebtedness to fund important capital projects. Thereafter, however, we plan to reduce indebtedness as a way to enhance financial flexibility for enhancing shareholder value. In addition, we also expect to enter into certain financing arrangements prior to or concurrently with the Spin-Off.
The following table sets forth a summary of our cash flows for the first quarter of 2023 and 2022:
(dollars in millions) |
April 1, 2023 |
April 2, 2022 |
||||||
Net cash provided by (used in): |
||||||||
Operating activities |
$ | 67 | $ | 2 | ||||
Investing activities |
(31 | ) | (10 | ) | ||||
Financing activities |
(36 | ) | 8 | |||||
Effect of exchange rates on cash and cash equivalents |
| | ||||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
$ | | $ | | ||||
|
|
|
|
96 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Operating Activities
Cash flow from operating activities for the quarter ended April 1, 2023, increased to $67 million, compared to $2 million during the quarter ended April 2, 2022. The increase was due to higher gross profit dollars from the prior year due to the increase in net sales as well as lapping the replenishment of inventory and increase in accounts receivable balances in the prior year quarter due to the resumption of normal business activity following the strike in the fourth quarter of 2021.
Investing Activities
Cash flow used in investing activities consists primarily of capital expenditures, which increased from $10 million in the first quarter of 2022 to $31 million in the first quarter of 2023 due to the resumption of capital projects after the strike.
Financing Activities
Cash flow used in financing activities consists of net transactions with Kellogg ParentCo. WK Kellogg Co paid $36 million to Kellogg ParentCo and received $8 million from Kellogg ParentCo during the quarters ended April 1, 2023 and April 2, 2022, respectively. The year-over-year changes in net cash to the parent was due primarily to the change in allocated pension and postretirement plan expense.
The following table sets forth a summary of our cash flows for the full fiscal years 2022, 2021 and 2020:
(dollars in millions) |
2022 | 2021 | 2020 | |||||||||
Net cash provided by (used in): |
||||||||||||
Operating activities |
$ | 53 | $ | 7 | $ | 303 | ||||||
Investing activities |
(71 | ) | (75 | ) | (87 | ) | ||||||
Financing activities |
18 | 68 | (216 | ) | ||||||||
Effect of exchange rates on cash and cash equivalents |
| | | |||||||||
|
|
|
|
|
|
|||||||
Net increase (decrease) in cash and cash equivalents |
$ | | $ | | $ | | ||||||
|
|
|
|
|
|
Operating Activities
Cash flow from operating activities for the year ended December 31, 2022, increased to $53 million, compared to $7 million in 2021. The increase was due to higher gross profit dollars from the prior year due to the increase in net sales as gross margin percentage was flat year-over-year. This impact was partially offset by the increase in core working capital from the prior year as accounts receivable and inventory balances increased significantly from the prior year due to the resumption of normal business activity following the strike in the fourth quarter of 2021.
Cash flow from operating activities for the year ended January 1, 2022, decreased to $7 million, compared to $303 million in 2020. The decrease was due primarily to lower profitability in 2021 as a result of strong 2020 pandemic-related net sales growth, and challenging supply conditions in 2021, including economy-wide bottlenecks, a third-quarter fire at one of our U.S. plants and a subsequent fourth-quarter strike affecting all U.S. plants.
Additionally, 2021 versus 2020 fiscal year operating cash flow was negatively impacted by the sharp reduction of inventory in 2020, resulting from the pandemic-related increase in demand, followed by the replenishment of inventory in 2021. Operating cash flow in 2021 was also unfavorably impacted by the phasing of our brand building investment. Due to the pandemic-related surge in demand, significant brand building investment was delayed and heavily weighted to the back half of the year resulting in a higher than typical accruals at the end of 2020. Brand building investments were largely suspended during the fourth quarter of 2021 due to the strike.
97 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Accounts receivable and accounts payable balances were also impacted by the timing of the fire and strike in the second half of 2021. Accounts receivable was lower at the end of 2021 compared to 2020 as sales in the second half of 2021 were negatively impacted by limited product availability due to the fire and strike. Additionally, production volumes in our U.S. plants were negatively impacted by the fire and strike in the second half of 2021 compared to 2020 levels, resulting in lower accounts payable at the end of 2021 compared to 2020.
Investing Activities
Cash flow used in investing activities consists primarily of capital expenditures, which increased slightly in 2022 from 2021 due to the resumption of capital projects after the strike. Capital expenditures in 2021 decreased from 2020 due primarily to the suspension of capital projects during the strike. Capital expenditures for 2022, 2021, and 2020 consisted primarily of investments in production and packaging lines.
Financing Activities
Cash flow used in financing activities consists of net transactions with Kellogg ParentCo. WK Kellogg Co received $18 million from Kellogg ParentCo in 2022. WK Kellogg Co received $68 million from Kellogg ParentCo in 2021. WK Kellogg Co paid $216 million to Kellogg ParentCo in 2020. The year-over-year changes in net cash to or from the parent was due primarily to the change in allocated pension and postretirement plan expense.
Monetization and Supplier Finance Programs
Kellogg ParentCo has a program in which customers can extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program). In order to mitigate the net working capital impact of the Extended Terms Program for discrete customers, Kellogg ParentCo entered into agreements to sell, on a revolving basis, certain trade accounts receivable balances to third party financial institutions (Monetization Programs). Transfers under the Monetization Programs are accounted for as sales of receivables resulting in the receivables being de-recognized from Kellogg ParentCos balance sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum funding from receivables that may be sold at any time is currently approximately $920 million, but may be increased or decreased as customers move in or out of the Extended Terms Program and as additional financial institutions move in or out of the Monetization Programs. As WK Kellogg Co receivables were a part of Kellogg ParentCos accounts receivable balance, the impact of WK Kellogg Cos participation in the Monetization Programs has been reflected in the accompanying combined financial statements.
Kellogg ParentCo, and consequently WK Kellogg Co has no retained interest in the receivables sold, however Kellogg ParentCo does have collection and administrative responsibilities for the sold receivables. Kellogg ParentCo, and consequently WK Kellogg Co has not recorded any servicing assets or liabilities as of December 31, 2022 and January 1, 2022 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the combined financial statements.
For WK Kellogg Co, accounts receivable sold of $256 million and $150 million remained outstanding under these arrangements as of December 31, 2022 and January 1, 2022, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Combined Statement of Cash Flows included elsewhere in this Information Statement. The allocated recorded net loss on sale of receivables, based on the proportion of monetized receivables, was $7 million and $2 million for the years ended December 31, 2022 and January 1, 2022, respectively. The recorded loss is included in Other income (expense) (OIE) on the Combined Statement of Income.
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The Monetization Programs are designed to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Kellogg ParentCos accounts receivable balance and overall working capital.
Kellogg ParentCo has agreements with third parties (Supplier Finance Programs) to provide accounts payable tracking systems which facilitate participating suppliers ability to monitor and, if elected, sell our payment obligations to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more of our payment obligations prior to their scheduled due dates at a discounted price to participating financial institutions. The agreements facilitate the suppliers ability to sell payment obligations, while providing them with greater working capital flexibility. Kellogg ParentCo has no economic interest in the sale of these suppliers receivables and no direct financial relationship with the financial institutions concerning these services. Kellogg ParentCos obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers decisions to sell amounts under the arrangements. However, Kellogg ParentCos right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers.
As WK Kellogg Co suppliers also had the ability to participate in this program during the periods presented, the impact of this program has been included in these accompanying combined financial statements. The payment of these obligations by WK Kellogg Co is included in cash used in operating activities in the Combined Statement of Cash Flows. As of December 31, 2022 and January 1, 2022, $138 million and $108 million, respectively, of WK Kellogg Cos outstanding payment obligations had been placed in the accounts payable tracking system.
Kellogg ParentCo has historically utilized extended payment terms for customers and suppliers supplemented with the above programs to assist in effectively managing core working capital. Following the Spin-Off, we intend to implement policies or programs to provide working capital to meet our short-term liquidity requirements.
CONTRACTUAL OBLIGATIONS
We have material contractual obligations that arise in the normal course of business. These estimated contractual obligations may not be representative of our future contractual obligations profile as an independent, publicly traded company. Our estimated contractual obligations do not reflect changes that we expect to experience in the future as a result of the Spin-Off, such as contractual arrangements that we may enter into in the future that were historically entered into by the Kellogg ParentCo for shared-services.
A summary of our pension and postretirement benefit obligations as of December 31, 2022 can be found in Notes 7 Pension Benefits and Note 8 Nonpension Postretirement and Postemployment Benefits, to the combined financial statements contained in this Information Statement.
Our unconditional purchase obligations consist primarily of fixed commitments for raw materials to be utilized in the normal course of business and for marketing, advertising and other services. As of December 31, 2022, unconditional purchase obligations totaled approximately $357 million. Approximately $260 million of these unconditional purchase obligations will be settled in the ordinary course of business in the next 12 months.
As of April 1, 2023, we did not have any material off-balance sheet arrangements.
CRITICAL ACCOUNTING ESTIMATES
Promotional Expenditures
Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in-store displays and events, feature price discounts, consumer coupons, contests and loyalty
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programs. The costs of these activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure by the company. The recognition of these costs therefore requires significant management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are recognized as a change in management estimate in a subsequent period. On a full-year basis, these subsequent period adjustments represent approximately 1% of our companys net sales. However, our companys total promotional expenditures (including amounts classified as a reduction of net sales) are significant, so it is likely our results would be materially different if different assumptions or conditions were to prevail.
Income Taxes
Kellogg ParentCo and its domestic subsidiaries, prior to the Spin-Off, file a consolidated U.S. federal income tax return. Income taxes as presented in the combined financial statements attribute current and deferred income taxes of Kellogg ParentCo to us in a manner that is systematic, rational and consistent with the asset and liability method prescribed by the accounting guidance for income taxes. Our income tax provision is prepared using the separate return method. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise.
Our combined effective income tax rate is influenced by tax planning opportunities available to us in the jurisdictions in which we operate. The calculation of our income tax provision and deferred income tax assets and liabilities is complex and requires the use of estimates and judgment.
We recognize tax benefits associated with uncertain tax positions when, in our judgment, it is more likely than not that the positions will be sustained upon examination by a taxing authority. For tax positions that meet the more likely than not recognition threshold, we initially and subsequently measure the tax benefits as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, new or emerging legislation and tax planning. The tax position will be de-recognized when it is no longer more likely than not of being sustained. Significant adjustments to our liability for unrecognized tax benefits impacting our effective tax rate are separately presented in the rate reconciliation table of Note 9 within Notes to Combined Financial Statements.
Management monitors our ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration as well as the reinvestment assertion regarding our undistributed foreign earnings. Changes resulting from managements assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances are recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future.
Retirement Benefits
Kellogg ParentCo sponsors a number of U.S., Canadian and Mexican plans to provide pension, health care, and other welfare benefits to retired employees, as well as salary continuance, severance, and long-term disability to former or inactive employees. Certain WK Kellogg Co employees participate in defined benefit pension and postretirement plans sponsored by Kellogg ParentCo, which include participants of other Kellogg ParentCo businesses. For purposes of these combined financial statements, these plans are accounted for as multiemployer plans. Accordingly, WK Kellogg Co does not record an asset or liability to recognize the funded status of these plans. However, the related pension and postretirement expenses allocated to WK Kellogg Co are based primarily on the proportion of the liabilities related to WK Kellogg Co employees in these plans.
There are also certain defined benefit pension plans that our employees participate in that are either dedicated to our employees or where the plan assets and liabilities that relate to our employees are legally required to transfer
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to WK Kellogg Co at the time of our Spin-Off from Kellogg ParentCo. An asset or liability is included on the Combined Balance Sheet for the funded status of such plans and the appropriate pension expense is recorded in the Combined Statement of Income.
Plan funding strategies are influenced by tax regulations and asset return performance. A majority of plan assets are invested in a globally diversified portfolio of debt and equity securities with smaller holdings of other investments. We recognize the cost of benefits provided during retirement over the employees active working life to determine the obligations and expense related to our retiree benefit plans. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of our combined benefits expense and accumulated obligation include the long-term rates of return on plan assets, the health care cost trend rates, the mortality table and improvement scale, and the interest rates used to discount the obligations for our major plans, which cover employees in the United States and Canada.
Our expense recognition policy for pension and nonpension postretirement benefits is to immediately recognize actuarial gains and losses in our operating results in the year in which they occur. Actuarial gains and losses are recognized annually as of our measurement date, which is our fiscal year-end, or when remeasurement is otherwise required under generally accepted accounting principles.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks, which exist as a part of our ongoing business operations. Management, as part of Kellogg ParentCo, uses derivative financial and commodity instruments, where appropriate, to manage these risks. As a matter of policy, Kellogg ParentCo does not engage in trading or speculative transactions. Refer to Note 11 within Notes to Combined Financial Statements for further information on our derivative financial and commodity instruments.
Foreign Exchange Risk
We are exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases and intercompany transactions.
Additionally, volatile market conditions arising from the COVID-19 pandemic and geopolitical uncertainty may result in significant changes in foreign exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect the translation of foreign currency denominated earnings to U.S. dollars. Primary exposures include the U.S. dollar versus the Canadian dollar and Mexican peso.
We assess foreign currency risk based on transactional cash flows and translational volatility. Historically, Kellogg ParentCo entered into forward contracts, options, and currency swaps to reduce fluctuations in long or short currency positions. Forward contracts and options are generally less than 18 months in duration. We have participated in this hedging program and the combined statement of income reflects a proportional allocation of the effects of this program. However, because Kellogg ParentCo is the legal obligor of these contracts, we have not recognized any assets or liabilities on our combined balance sheet, nor in our combined statement of comprehensive income. Following the Spin-Off, we intend to implement a foreign currency risk management program on our own behalf.
Interest Rate Risk
Our interest expense and related risks as reported in our combined statements of earnings are immaterial. Our combined balance sheets and statements of earnings do not include an allocation of third-party debt or interest expense from Kellogg ParentCo because we are not the legal obligor of the debt and the borrowings were not
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directly attributable to our business. We expect to incur approximately $ in aggregate principal amount of indebtedness in connection with the Spin-Off. A hypothetical 100 basis point change in interest rates affecting our borrowings under the financing arrangements for the week period ended and our 2022 fiscal year would impact our pre-tax income by $ and $ , respectively, on a pro forma basis. We expect to provide details about these financing arrangements in an amendment to this Information Statement. See Description of Material Indebtedness.
Price Risk
We are exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials, fuel, and energy. Primary exposures include corn, wheat, rice, vegetable oils, sugar, cocoa, fruit, nuts, cartonboard, natural gas, and diesel fuel. Kellogg ParentCo has historically used a combination of long-term contracts with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted raw material purchases over a duration of generally less than 18 months. We have participated in this hedging program and the combined statement of operations reflects a reasonable allocation of the impacts of our participation in Kellogg ParentCos hedging program. However, because Kellogg ParentCo is the legal obligor of these contracts, we have not recognized any assets or liabilities on our combined balance sheet, nor in our combined statement of comprehensive income. Following the Spin-Off, we intend to implement a risk management program on our own behalf.
Credit Risk
Management believes concentrations of credit risk with respect to customer accounts receivable is limited due to
the generally high credit quality of our major customers, as well as the large number and geographic dispersion of smaller customers. However, we conduct a disproportionate amount of business with a small number of large grocery retailers. The five largest accounts represent approximately 51% of net sales for the year ended December 31, 2022 and less than 10% of combined trade receivables at December 31, 2022.
Accounting Standards to be Adopted in Future Periods
Supplier Finance Programs: Disclosure of Supplier Finance Program Obligations. In September 2022, the FASB issued an ASU to improve the disclosures of supplier finance programs. Specifically, the ASU requires disclosure of key terms of the supplier finance programs and a rollforward of the related obligations. The amendments in this ASU do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. We have disclosed information regarding the nature and amount of outstanding Accounts Payable obligations confirmed into Supplier Finance Programs within Note 2 of Notes to Combined Financial Statements. The Company adopted the ASU in the first quarter of 2023 and plans to include the rollforward information in the first quarter of 2024.
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Overview
WK Kellogg Co is an iconic North American food company with a differentiated portfolio of brands that have delighted our consumers for over a century. As a leading manufacturer, marketer and distributor of branded ready-to-eat cereal, we endeavor to provide consumers with high-quality products while promoting consumer health and wellbeing. Our products are manufactured by us in the United States, Mexico, and Canada and marketed in the United States, Canada and the Caribbean.
Kellogg Company (Kellogg ParentCo), formally founded in 1906 as a mission-led and family-oriented company, sprang to life when W. K. Kellogg changed breakfast forever by creating Corn Flakes in Battle Creek, Michigan. We have since upheld W. K. Kelloggs passion and commitment to wellness by producing nutritious, high quality and delicious cereal, which reached about 60% of households in the United States during the 52 weeks ended April 1, 2023. According to Nielsen data, we are the second largest seller of ready-to-eat cereals in the United States with a 28% share of retail sales for the 52-week period ended April 1, 2023 and the leading player in Canadas cereal market, with a 38% category share over that same period. According to data provided by Nielsen, for the year-to-date period ended March 23, 2023, we were the number one seller of ready-to-eat cereals in Puerto Rico with a 37% category share.
We believe our long-standing success is attributable to the strength of the brands used in connection with the Cereal Business, our category expertise and over a century of institutional knowledge, all of which have created a diverse portfolio of cereals that are intended to enhance the lives of our consumers. Our product offerings are well diversified across the cereal sub-categories of taste, wellness and balance, with strong consumer appeal across the spectrum of ages and demographics. Iconic brands used in our business include Frosted Flakes, Special K, Froot Loops, Raisin Bran, Frosted Mini-Wheats, Rice Krispies, Kashi, Corn Flakes and Apple Jacks, among many others. We believe these brands also derive a differentiated advantage from the beloved brand characters which have been developed over time, starting in the 1950s with the introduction of Tony the Tiger, Toucan Sam as well as Snap, Crackle and Pop, which have since been joined by many other brand characters.
The Cereal Business generated net sales of $2,695 million, $2,460 million and $2,867 million and net (loss) income of $(25) million, $162 million and $182 million during the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively. We believe our rich history coupled with our powerful brands serve as a base for strong cash flow generation. We aspire to prioritize operational excellence by investing in our business through initiatives like facility enhancement and distribution efficiencies.
Following the Spin-Off, we will become an independent, publicly traded company led by a highly experienced management team fully dedicated to leveraging our capabilities and driving our strategic initiatives. We will also have increased flexibility to deploy our free cash flow towards our operating and capital allocation priorities. We will trade under the ticker symbol on the NYSE.
Key Business Strengths
Diversified Cereal Portfolio of Iconic Brands and Beloved Characters
We believe the key to WK Kellogg Cos enduring and continued strength lies in its portfolio of diverse cereals and iconic brands. As of April 1, 2023, nine of the top 20 brands in the cereal category across the United States and Canada are Kellogg brands. In addition, our products span all product components of the cereal category and are supported by beloved brand characters and a commitment to environmental, social, and governance (ESG) endeavors.
We strive to deliver the most consumer-centric brand portfolio in the cereal category, offering a diverse set of products that reach a broad range of consumer occasions and demographics. We have a strong presence across all three of the cereal categorys major product components. In the taste component, where we have a 34% category share in the United States for the 52-week period ended April 1, 2023, we have an arsenal of leading Kellogg
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brands used in connection with the Cereal Business, including Frosted Flakes, Froot Loops and Apple Jacks. In the wellness component, where we have a 17% category share in the United States for the 52-week period ended April 1, 2023, we lead with nutrition-oriented Kellogg brands like Special K and natural Kellogg brands like Kashi and Bear Naked. In the balance component, which sits between taste and wellness, where we have a 36% category share in the United States for the 52-week period ended April 1, 2023, the Kellogg brands used in connection with the Cereal Business include Special K, Frosted Mini-Wheats, Raisin Bran and Corn Flakes.
Our brands have been supported by brand characters that are beloved by consumers. We believe our characters not only embody our company values, but also provide differentiated competitive positioning from others in the industry. For instance, Tony the Tiger reinforces the importance of physical activity, while Toucan Sam encourages curiosity, and Snap, Crackle and Pop promote creativity. Given the importance of our brands to our business, if we do not maintain the favorable perception of our brands, our results could be negatively impacted. See Risk FactorsRisks Related to Our BusinessOur results may be negatively impacted if consumers do not maintain their favorable perception of our brands or company.
Leading Market Position in Large and Stable Category
We believe the ready-to-eat cereal category that Mr. Kellogg helped to create has thrived for over a century. At roughly $10.4 billion in category retail sales in North America (according to data provided by Nielsen for the 52-week period ended April 1, 2023), cereal is the number one choice in breakfast foods for children and a top three breakfast choice for adults in the United States (Circana, National Eating Trends®, 12 months ending March 2023). The category drives nearly 49 million purchase decisions every week. According to data provided by Nielsen for the 52-week period ended April 1, 2023, cereal buying households in the United States purchased on average approximately 21 boxes of cereal per year while cereal buying households in Canada purchased on average approximately 16 boxes of cereal per year.
Driving this categorys enduring popularity is the fact that it provides taste, nutrition, convenience, affordability and versatility for consumers. The cereal category also provides exciting opportunities for WK Kellogg Co to address ongoing changes in eating trends, such as digestive health and out-of-breakfast consumption occasions.
This large category is important to retailers given its size and frequency of purchase. In fact, for the 52-week period ended April 1, 2023, cereal is among the largest center-of-store categories at retail in the United States, according to Numerator. The category also serves as an important everyday offering for away-from-home channels such as schools, travel and lodging, and restaurants. In addition, we believe this category has remained relatively stable in North America over the last decade, and it has held up well during economic downturns, as evidenced by its growth at an average rate of approximately 4% of retail sales in the U.S. and Canada over the last three years.
We are the second largest seller of ready-to-eat cereal in the United States. Following supply disruptions caused by a fire and strike in the second half of 2021, our current category share has regained stable footing and our cereals represent 28% of the U.S. market, for the 52-week period ended April 1, 2023. We are the leading manufacturer in Canada, with a category share of 38% over the same period. According to data provided by Nielsen, for the year-to-date period ended March 23, 2023, we were the number one seller of ready-to-eat cereals in Puerto Rico with a 37% category share.
Our cereals have been household staples among North American families since 1906 and generated net retail sales of over $2.7 billion in the United States and nearly $297 million in Canada according to Nielsen, for the 52-week period ended April 1, 2023. Our brands, measured by household penetration, reach approximately 60% of U.S. households every year, and a modestly higher percentage in Canada. Given the importance of this category and our brands, as well as the length and depth of our experience and expertise, we have developed long-term and deep relationships with retailers. These relationships were evidenced by the speed with which we recovered category share after a fire and strike in the second half of 2021 severely disrupted our supply. We recovered 4 percentage points of lost share for the period from January 2022 to August 2022.
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Proven Strength in Product and Marketing Innovation
We have a strong culture of innovation, both in terms of launching new or reformulated products, and in terms of marketing our products in effective and exciting ways.
We have a rich history of continuously innovating and renovating our product offerings. We have launched new flavors of existing brands and generally reduced sugar levels to respond to changing consumer tastes. One historical example is launching the first protein cereal with Special K in 1955. More recent acquisitions have bolstered our presence in natural cereals, including Kashi and Bear Naked, which we acquired in 2000 and 2007, respectively. Kashi is among one of the leading natural brands in the ready-to-eat cereal categorys wellness sub-category. With cereal consumption relating to snacking and other occasions outside breakfast now representing approximately 23% of cereal consumption in the United States (Circana, National Eating Trends®, 12 months ending March 2023), we also launched Jumbo Snax, a hand-held snacking cereal, in 2020.
With over a century of idea generation and category leadership, we believe we have a proven ability to build brands with authentic marketing campaigns that resonate with a broad consumer base. Brand investment has been a long-term tenet of our organization, ever since Mr. Kellogg made the bold choice to double Kellogg ParentCos advertising budget during the Great Depression. Kellogg ParentCo has strived to be at the vanguard of new media, from sponsoring a large-scale electric billboard in Times Square in 1912, to being an early adopter of commercials and sponsored programs on radio and television, to investing in digital and social media platforms today. We have also developed differentiated product marketing techniques, such as inserting prizes in our cereal boxes and turning our cereal boxes into a source of additional information and entertainment. We plan to continue this trajectory of marketing innovation going forward. As our business is largely concentrated in the traditional retail grocery trade and the U.S. retail environment continues to face further consolidation, we must continue to leverage our marketing expertise and product innovation to respond to our customers and provide high-service levels.
We have a long history of conveying and amplifying our brands and characters through social and environmental initiatives by connecting our brands to a number of important causes such as hunger and wellbeing. One example of connecting with our broader community in this way is the Mission Tiger program tied to our Frosted Flakes brand and Tony the Tiger. The purpose of Mission Tiger is to find inclusive, quality sports programs that schools can adopt, regardless of available funding. Since its inception in 2019, Mission Tiger has raised substantial funds for middle school sports programs. In our opinion, Mission Tiger has not only amplified our purpose-driven values, but also proved to be an effective marketing investment, with the brand experiencing significant retail growth since the programs inception.
We have complemented our brand building efforts with commercial arrangements with other third-parties, including Microsoft and Mojang Studios. These licenses and partnerships amplify our brand messaging, help create excitement in stores, and broaden our consumer audience.
Strong Financial Profile with Attractive Cash Flow Generation
We believe our operating cash flow will allow us financial flexibility as a standalone company. We plan to utilize such flexibility to drive an investment philosophy that balances capital investments in areas such as supply chain optimization, cost-saving projects and new capabilities, with the ability to further increase shareholder value through a combination of debt reduction, return of capital to our shareholders in the form of dividends or share repurchases as well as potential acquisitions. Initially, in connection with the Spin-Off, we may increase our indebtedness to fund important capital projects. Thereafter, however, we plan to reduce indebtedness as a way to bolster financial flexibility for enhancing shareholder value. In addition, we also expect to enter into certain financing arrangements prior to or concurrently with the Spin-Off.
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Talented and Passionate Management Team with Deep Industry Experience
Our strategy is driven by our talented management team that has substantial consumer packaged foods experience and a track record of operational success, brand management and acquisitions. Our management team is dedicated to upholding our culture with principles rooted in wellness, an appreciation for curiosity, diversity of thought, and a commitment to serving our communities, all upheld by the founding principles invoked by W.K. Kellogg.
Gary Pilnick is our Chief Executive Officer and a 23-year Kellogg ParentCo veteran whose inspiring leadership style, deep knowledge of the business and central role in defining Kellogg ParentCos strategy made him the natural choice to lead WK Kellogg Co. Leading Kellogg ParentCos corporate development function for the past two decades, Mr. Pilnick has played an instrumental role in Kellogg ParentCos most successful strategic initiatives, including the acquisition of Pringles, its expansion into Africa, and the development of Kellogg ParentCos strategy.
WK Kellogg Cos leadership team has significant operating experience across marketing, innovation, sales, supply chain, business planning and finance. WK Kellogg Cos management team will have over 120 years of experience collectively, with our chief growth officer and chief customer officer having notable experience within the cereal category, specifically.
The management team of seasoned leaders brings significant depth and breadth of experience and extensive knowledge to WK Kellogg Cos, all of which will assist the business in continuing to build momentum and capitalize on its compelling long-term opportunities for investment and profit growth, driven by its portfolio of iconic, world-class brands.
In addition, along with our Board of Directors, this management team also has the experience and is well-positioned to deliver on the ESG goals set for the organization.
Our Strategies
Invest in Modernizing and Optimizing our Supply Chain for Improved Efficiency and Profitability
As a standalone company, WK Kellogg Co will have an increased ability to build a fit-for-purpose supply chain focused on cereal. Our independent focus on cereal will allow us to redeploy capital to optimize the business, including manufacturing, packaging, and distribution in a differentiated way relative to being a division within Kellogg ParentCo.
As an independent company, our operating and sales planning process will be more devoted to cereal and holistically will cover all channels across the United States, Canada and the Caribbean. While we will be subject to additional risks associated with operating as an independent, publicly traded company, as discussed herein, we believe this devoted focus will drive more agile decision-making and more accurate supply planning, leading to improved efficiencies and service levels.
We believe our category focus will allow us to align our manufacturing network to meet business needs, drive production to our most advantaged platforms, and expand platforms and facilities to optimize in-network conversion costs. We envision one area of investment will be the modernization of our manufacturing plants, including modernizing equipment and increasing digitization and automation. For instance, we have plans in place to increase automation in our packaging lines, driving both efficiency and flexibility to meet customer and consumer needs while enabling commercial value creation levers.
Additionally, we plan to refocus our network of distribution centers, including initiatives such as relocating facilities to align more closely with our manufacturing plants and increasing direct plant shipments to drive more efficient transportation. With warehouse space and labor now dedicated to WK Kellogg Co products, we also expect to generate more efficiency in our distribution network.
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While we have been impacted by industry-wide and company-specific supply chain disruptions, we expect that our combined efforts will lead to reduced costs, improved margins and the minimization of working capital requirements, which will enable us to be nimbler and more responsive to consumer and customer needs.
Expand Consumer Base Through Brand Building, Innovation and Broadened Distribution
Leveraging our long history of innovative marketing and product launches, we plan to invest in brand building more effectively to adapt to changes in consumer behavior, taste profiles and brand resonance. By fully integrating all our sales and marketing across all channels and across the United States, Canada and the Caribbean in a more efficient manner, we expect to benefit from more agile decision making and synchronization of idea generation and execution across our North American region, leading to enhanced return on investment on marketing spend.
We believe we will be able to dedicate resources more effectively towards driving data-led insights that are more directly applicable to our standalone business. Our differentiated customer database gives us a considerable advantage in terms of understanding consumer behavior and gaining scale. As a result, we believe we will have a significant opportunity to expand our omnichannel presence and growth by better targeting and customizing messaging for specific consumer cohorts.
Additionally, we see a significant opportunity to increase net sales and household penetration by targeting out-of-breakfast cereal consumption, which we have already begun to address with our Cereal for Dinner advertising campaign and the launch of a snacking-oriented Jumbo Snax product line. We envision increased investment in food enhancements, packaging advancements and commercial improvements which will help our portfolio to address evolving consumer trends, such as snacking and out-of-breakfast occasions, with greater agility.
We also plan to more fully tap into our longstanding commitment to social and environmental purposes, which we believe will continue to drive a competitive advantage in connecting with our stakeholders, including our consumers. We believe social and environmental concerns are becoming increasingly relevant to our consumers, and we believe our strong brand recognition and history of investing in ESG initiatives will position us well to capitalize on this shift in consumer preferences.
Deepen our Retail Relationships and Leverage Strong Execution Capabilities to be the Cereal Provider of Choice
As the second largest player in the cereal category, we believe WK Kellogg Co is an important partner to our retail customers in a large and strategically important category. Following the Spin-Off, we will have a scaled sales force that we believe will be even more effective because of its singular category focus.
We strive to be an even more effective provider of choice for our retail partners, as we leverage our strong retail execution capabilities, endeavor to deliver best-in-class service, provide valuable analysis and consumer insights, and delight their consumers with brand building, innovation, and in-store merchandising. We also believe an optimized portfolio, more efficient supply planning and a streamlined manufacturing and logistics network will lead to a more efficient and responsive supply chain, further improving our ability to meet the needs of our customers.
As a standalone company, we will be devoted to analyzing the cereal category. Aided by first-party consumer data and advanced analytics capabilities, we will aim to provide our retail partners with deeper insights than other manufacturers in this category. These combined efforts will enhance our ability to drive revenue growth management, further improving our relationship with our retail partners and creating further value in the category.
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We envision that our strong innovation pipeline and effective brand building will continue to drive consumer demand. We plan to amplify our exciting product offerings with innovative merchandising programs and strong in-store sales execution to drive traffic and purchases for our retail partners. As another point of differentiation, we plan to leverage our legacy and commitment to ESG. We will partner with retailers in this important pursuit through programs like our Childhood Wellbeing Promise, which aims to improve access to affordable, nourishing and sustainable foods for children and families across North America.
Expand Into Adjacent Categories and Engage in Attractive Acquisition Opportunities
Our priorities in the near term are to expand profit margins and grow organically in the cereal category, but we also will explore other value-enhancing opportunities. Over time, we see potential for growth through expansion beyond the cereal category which will allow us to further broaden our consumer base as we use this strategy to tap into new taste profiles and occasions. In the long run, we believe attractive acquisition opportunities may present themselves in complementary categories that will leverage and enhance our scale, brands, marketing expertise, distribution reach and relationships with key retailers. When pursuing acquisition opportunities, our business may be faced with additional risks as described in Risk FactorsRisks Related to Our BusinessWhen pursuing strategic acquisitions, alliances, divestitures or joint ventures or seeking organic growth opportunities, we may not be able to successfully consummate favorable transactions, integrate acquired businesses or achieve the anticipated benefits of organic growth investments.
Create Value for Shareholders Through Improved Cash Flow Growth and Balanced Capital Allocation
We believe our near-term focus on increasing category share and optimizing supply chain will lead to balanced net sales and operating profit growth, while driving growth in operating cash flows. We envision that this cash flow will allow us to manage capital allocation priorities across investing in the business, returning cash to shareholders in the form of an attractive dividend and potential share repurchases, and executing potential acquisitions. We believe this balanced approach will enable us to deliver attractive long-term shareholder value.
Our Products
Our principal products are cereals that are split across taste, wellness and balance sub-categories, and serve a diverse set of occasions and demographics. These products are manufactured by us in the United States, Mexico and Canada and marketed in the United States, Canada and the Caribbean. They are sold to retailers through a mixture of a direct sales force, brokers, and distributors. The Kellogg leading taste brands used in connection with the Cereal Business include Frosted Flakes, Froot Loops, and Apple Jacks. The Kellogg wellness brands used in connection with the Cereal Business include Special K, Kashi, and Bear Naked. The Kellogg balance brands used in connection with the Cereal Business include Special K, Frosted Mini-Wheats, Raisin Bran, and Corn Flakes. Most of our products are also marketed under the Kelloggs name.
Customers
We sell our products primarily to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, drug stores, gasoline stations, value stores, online channels and other retail food outlets in the United States, Canada and the Caribbean. Our largest customer,Wal-Mart Stores, Inc., accounted for approximately 28% of combined net sales during 2022, comprised principally of sales within the United States. No other customer accounted for more than 10% of combined net sales in 2022. During 2022, our top five customers, collectively, including Wal-Mart Stores, Inc., accounted for approximately 51% of our combined net sales. There has been significant consolidation in the North American grocery industry, and we believe that this trend is likely to continue. Although the loss of any large customer for an extended length of time could negatively impact our sales and profits, we do not currently anticipate that this will occur due to the consumer demand for our products and our relationships with our customers. Our products have been generally sold through our own sales forces and through broker and distributor arrangements and have been generally resold to consumers in retail stores, restaurants, and other establishments, such as schools and hotels.
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Marketing and Advertising
We believe that our marketing efforts are fundamental to the success of our business. Since the creation of Kellogg ParentCo, we have supported our brands through innovative advertising campaigns and with the help of our beloved characters. We also invest heavily in consumer promotions to motivate demand for our products. To further hone our marketing campaigns, we combine knowledge pulled from our customer database to deepen our understanding of shifting consumer trends. Our marketing efforts are focused on building brand awareness, attracting new consumers and increasing consumption of our products.
Manufacturing and Processing
In order to best serve our customers needs, our manufacturing network is spread across the United States, Mexico and Canada.
Some of our plants are dedicated to the production of specific products or brands. Other plants can accommodate multiple product lines. In many cases, our facilities are strategically located close to major supply sources. In managing our network, we focus on eliminating excess capacity through consolidation, harmonizing production practices and safety procedures and pursuing productivity opportunities that cut across multiple divisions and product lines. We maintain all of our manufacturing and processing facilities in satisfactory condition and believe they are suitable and adequate for our needs.
We have also entered into a number of strategic partnerships for production and packaging. This can be beneficial when selected platforms are out of capacity or we need access to additional capabilities that we do not have in our network. In the past, we have deemed it beneficial to outsource production when developing new products or to better address customer demand.
Distribution
The distribution of our products is facilitated from six distribution centers strategically located in the United States, Mexico and Canada. Our sales staff is supported by a demand and revenue management department responsible for the administration and fulfillment of customer orders. The majority of our products are shipped from our production, warehouse and distribution facilities by contract and common carriers. We intend to enter into a Separation and Distribution Agreement with Kellogg ParentCo that will govern the allocation and transfer of owned real estate between us and Kellogg ParentCo, as well as a Transition Services Agreement pursuant to which Kellogg ParentCo will provide us with the right to use certain sites following the Spin-Off. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo for more detail.
Raw Materials
Agricultural commodities, including corn, wheat, rice, vegetable oils, sugar, cocoa, fruits and nuts are the principal raw materials used in our products. Cartonboard, corrugate, and flexible packaging are the principal packaging materials. We continually monitor world supplies and prices of such commodities and packaging materials, as well as government trade policies. The cost of such commodities and packaging materials may fluctuate widely due to government policy and regulation, changing weather patterns and conditions, climate change, and other supply and/or demand impacting events such as a pandemic (such as the COVID-19 pandemic), geopolitical events, or other unforeseen circumstances. Continuous efforts are made to maintain and improve the quality and supply of such commodities and materials for purposes of our short-term and long-term requirements. While most of these ingredients are purchased from sources in the United States, some materials are imported due to regional availability and specification requirements.
We will enter into long-term contracts for the materials described in this section and purchase these items on the open market, depending on our view of possible price fluctuations, supply levels and our relative negotiating power. Despite our ability to source materials necessary to meet increased demand for our products, certain ingredients, packaging and other goods and services have been adversely impacted as a result of geopolitical,
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economic and market conditions, including inflation and supply chain constraints. See Risk FactorsRisks Related to Our BusinessSupply chain disruptions and increases in costs and/or shortages of raw materials, labor, fuels and utilities as a result of geopolitical, economic and market conditions could adversely impact our profitability. Although we are unable to predict the impact to our ability to source these materials and services in the future, we expect supply pressures, supply chain and logistics delays, and other disruptions to continue through 2023. As further discussed herein under Quantitative and Qualitative Disclosures about Market Risk, we also use derivative financial and commodity instruments to hedge some of our costs.
Natural gas and propane are the primary sources of energy used to power processing equipment at our production facilities, although certain locations may use electricity, oil, propane or solar cells as needed. In addition, considerable amounts of diesel fuel are used in connection with the distribution of our products. We have experienced supply chain disruptions including bottlenecks and shortages of materials, labor and freight that have led to increasing prices of raw materials, packaging and labor as well as limitations on shipping capacity. We expect these market disruptions and inflationary pressures to continue throughout 2023.
Competition
We have experienced, and expect to continue to experience, intense competition for sales of all of our products. Our products compete with advertised and branded products of a similar nature as well as unadvertised and private label products, which are typically distributed at lower prices, and generally with other food products. Principal methods and factors of competition include new product introductions, product quality, taste, convenience, nutritional value, price, advertising and promotion. We believe we compete favorably with our competitors on the basis of these factors due to our diversified portfolio of beloved iconic brands and characters, our leading market position with significant scale in the North American cereal industry, our heritage of innovation and breakthrough marketing and our investment in our brands. Although we believe our competitive strengths will contribute to the growth and success of our company, our business is subject to risks including, among others, risks related to the incurrence of indebtedness in connection with the Spin-Off and risks related to operating as an independent, publicly traded company. See Risk Factors for a further description of these risks.
Trademarks and Intellectual Property
Generally, our products are marketed under trademarks that are currently owned by Kellogg ParentCo. The principal trademarks used in the Cereal Business are housemarks, brand names, slogans, and designs related to cereals and various other foods manufactured and marketed by us. These trademarks include, among others, Kelloggs, All-Bran, Apple Jacks, Bear Naked, Cocoa Krispies, Kelloggs Corn Flakes, Corn Pops, Cracklin Oat Bran, Crispix, Froot Loops, Kashi, Kelloggs Frosted Flakes, Krave, Frosted Krispies, Frosted Mini-Wheats, Mueslix, Kelloggs Raisin Bran, Raisin Bran Crunch, Rice Krispies, Smacks/Honey Smacks, Special K, Smart Start, Vector and Two Scoops.
Additional trademarks used in connection with the Cereal Business include logos and depictions of certain animated characters that can be used in conjunction with our branded products, including the characters Snap, Crackle and Pop, Tony the Tiger, Toucan Sam, Dig Em, Sunny, Coco the Monkey, Cornelius (aka Cornelio), Melvin the Elephant, and Sammy the Seal (aka Smaxey the Seal).
The slogans The Original & Best, Theyre Gr-r-reat! and Follow Your Nose, are used in connection with our products.
The trademarks listed above, among others, individually and when taken as a whole, are important to our business. Certain individual trademarks are also important to our business. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use and otherwise properly maintained.
We also rely on several patents in connection with the Cereal Business. While this patent portfolio as a whole is material to the Cereal Business, no one patent or group of related patents is material to the business. In addition, we rely on Kellogg ParentCo proprietary trade secrets, technology, know-how, processes and other intellectual property rights that are not registered. Kellogg ParentCo relies on a combination of trademark law, copyright
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law, trade secrets, non-disclosure and confidentiality agreements, other contractual provisions and other measures to establish and protect such proprietary rights to products, packaging, processes and intellectual property used in connection with the Cereal Business.
In connection with the Spin-Off, we will enter into certain Intellectual Property Agreements with Kellogg ParentCo that will provide for the ownership, use and selling rights relating to the intellectual property currently used in the Cereal Business. We will sell some products under the intellectual property we license from Kellogg ParentCo. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo for more detail.
Properties
Following the Spin-Off, our corporate headquarters and the principal research and development facilities we will use will be located in Battle Creek, Michigan.
We operated, as of July 1, 2023, offices, manufacturing plants and distribution and warehousing facilities totaling more than square feet of building area in the United States, Mexico and Canada. Our plants have been designed and constructed to meet our specific production requirements, and we periodically invest money for capital and technological improvements. At the time of its selection, each location was considered to be favorable, based on the location of markets, sources of raw materials, availability of suitable labor, transportation facilities, location of our other plants producing similar products, and other factors. Our manufacturing facilities are located in Battle Creek, Michigan; Belleville, Ontario; Lancaster, Pennsylvania; Memphis, Tennessee; Mexicali, Mexico; and Omaha, Nebraska. We believe our facilities are generally in good operating condition and adequate to support the current operations of the business.
We intend to enter into a Separation and Distribution Agreement with Kellogg ParentCo that will govern the allocation, transfer and leasing of real estate between us and Kellogg ParentCo following the Spin-Off. Kellogg ParentCos current corporate headquarters located in Battle Creek, Michigan and manufacturing plants related to the Cereal Business will be transferred to WK Kellogg Co. Leased distribution centers will be occupied by both WK Kellogg Co and Kellogg ParentCo employees following the Spin-Off pursuant to the Transition Services Agreement, and after the termination of the Transition Services Agreement, will be fully or partially subleased from Kellogg ParentCo to WK Kellogg Co. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo for more detail.
Research and Development
Research to support and expand the use of our existing products and to develop new food products is carried on in Battle Creek, Michigan, including at the W. K. Kellogg Institute for Food and Nutrition Research. Our expenditures for research and development were approximately $26 million for the year ended December 31, 2022. Information concerning our research and development expense is in Note 2 within Notes to the Combined Financial Statements. Following the Spin-Off, we will continue to utilize this space pursuant to the terms of a Management Services Agreement to be entered into in connection with the Spin-Off. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCo for more detail.
Regulation
Our activities in the United States are subject to regulation by various government agencies, including the U.S. Food and Drug Administration, FTC and the U.S. Departments of Agriculture, Commerce and Labor, as well as voluntary regulation by other bodies. Various state and local agencies also regulate our activities. Other agencies and bodies outside of the United States, including those of various countries, states, provinces and municipalities, also regulate our activities. To appropriately address these obligations, upon consummation of the Spin-Off, we will maintain internal controls and management processes that govern our actions and are intended to mitigate the risk of non-compliance.
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While there are no current regulatory matters that we expect to be material to our results of operations, financial position, or cash flows, there can be no assurances that existing or future laws, regulations and standards applicable to our operations or products will not lead to a material adverse impact on our results of operations, financial position or cash flows. Due to the rapidly evolving nature of these laws and regulations (including as related to legal developments as a result of COVID-19) and geopolitical considerations, there can be no assurance that current expenditures will be adequate or that violations will not occur. Any violations could result in fines, penalties or customer disengagements that may have a material impact on our financial performance. See Risk Factors included elsewhere in this Information Statement, for more detail around risks pertaining to compliance with laws and regulations.
Environmental Matters
Our facilities are subject to various U.S. and foreign, federal, state and local laws and regulations regarding the release of material into the environment and the protection of the environment in other ways. We are not a party to any material proceedings arising under these regulations. We believe that compliance with existing environmental laws and regulations will not materially affect our combined financial condition or our competitive position.
Human Capital Resources
On , 2023, we had approximately employees. Following the Spin-Off, we will also be party to numerous collective bargaining agreements. Our human capital objectives include attracting, developing, engaging, rewarding and retaining our employees.
Equity, Diversity and Inclusion (ED&I): In 2005, Kellogg ParentCo established an Office of Diversity & Inclusion. We plan to also establish a similar office intended to be focused on recruiting and retaining employees, creating awareness of diversity issues, fostering a supportive, positive environment where inclusive behaviors are the norm, and embedding accountability for diversity throughout the organization. Our goal is to reflect the diversity of our consumers throughout our company. We will report to our Board on a periodic basis about the actions we have taken to make progress on our ED&I journey, and we are firmly committed to continuing to advance our priorities. Our focus on ED&I will enable us to build a culture where employees are inspired to share their passion, talents and ideas.
Training and Development: We plan to invest in ongoing leadership development programs that target current and future leaders.
Employee Engagement: We plan to communicate frequently and transparently with our employees through a variety of engagement vehicles, from externally managed global opinion surveys to weekly check-ins via our internal global recognition platform. We also plan to provide a wide array of opportunities for volunteerism and to provide matching donations for employees service to charities of their choosing.
Total Rewards: We will provide a market-based competitive compensation through our salary, annual incentive and long-term incentive programs and a benefits package that promotes employee well-being across all aspects of their lives, including physical, financial, social and emotional wellbeing. We will sponsor a number of benefit plans for eligible employees in the United States, Canada and Mexico, including defined benefit pension plans, defined contribution retirement plans, retiree health and welfare, active health care, severance and other post-employment benefits. We will continually review and implement new programs to meet the evolving needs of our employees, including, but not limited, to benefit programs for same sex partners and progressive leave benefits (e.g., paternity/maternity and active military). We will also offer flexible work arrangements across our population.
Health and Wellness: We aim to create a culture where all colleagues feel supported and valued, which is in line with our corporate mission. We will continue to evolve our programs to meet our colleagues health and wellness needs, which we believe are essential to attract and retain employees of the highest caliber, and we will offer a competitive benefits package focused on fostering work/life integration.
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Company Ethics: Upon completion of the Spin-Off, we will have processes in place for compliance with the Code of Conduct for the Board and Code of Ethics for WK Kellogg Co employees, each including a requirement for annual certification that provides employees an opportunity to disclose actual or potential conflicts of interest, report actual or potential violations of the law, the Code of Conduct or Code of Ethics, as applicable, or policy and acknowledge their obligation to comply with the applicable code. We will regularly re-enforce our commitment to ethics and integrity in employee communications, in our everyday actions and through our processes. In addition, we will provide targeted training during the course of the year. We will also maintain an ethics related hotline, managed by a third party, through which individuals can anonymously raise concerns or ask questions about business behavior.
Legal Proceedings
We may be subject to various legal proceedings, claims, and governmental inspections, audits or investigations arising out of our business which cover matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, employment and other actions. We are not involved in any legal proceedings that we believe will result, individually or in the aggregate, in a material adverse effect upon our financial condition or results of operations.
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The following table presents information, as of April 1, 2023, concerning our directors and executive officers following the Spin-Off, including their respective business experience. We are in the process of identifying the individuals who will serve on our Board following the Spin-Off. We expect to provide details about these individuals in an amendment to this Information Statement.
Name |
Age | Position | ||
Gary Pilnick | 58 | Chief Executive Officer | ||
Norma Barnes-Euresti | 55 | Chief Legal Officer | ||
Sherry Brice | 46 | Chief Supply Chain Officer | ||
Bruce Brown | 58 | Chief Customer Officer | ||
David McKinstray | 38 | Chief Financial Officer | ||
Doug VanDeVelde | 57 | Chief Growth Officer |
Gary H. Pilnick is expected to serve as Chief Executive Officer of WK Kellogg Co following the Spin-Off. Mr. Pilnick has served as Vice Chairman, Corporate Development and Chief Legal Officer of Kellogg ParentCo since January 2016. In August 2003, he was appointed Senior Vice President, General Counsel and Secretary and assumed responsibility for Corporate Development in June 2004. He joined Kellogg ParentCo as Vice President, Deputy General Counsel and Assistant Secretary in September 2000 and served in that position until August 2003. Before joining Kellogg ParentCo, he served as Vice President and Chief Counsel of Sara Lee Branded Apparel, now Hanesbrands, an apparel company, and as Vice President and Chief Counsel, Corporate Development and Finance at Sara Lee Corporation, formerly a consumer goods corporation now held by Kohlberg & Company.
Norma Barnes-Euresti is expected to serve as Chief Legal Officer of WK Kellogg Co following the Spin-Off. Ms. Barnes-Euresti has served as Vice President and Chief Counsel, Employment, Labor, Ethics & Compliance of Kellogg ParentCo since January 2012. Ms. Barnes-Euresti joined Keebler Company, a cookie manufacturer, in November 1999 and subsequently joined Kellogg ParentCo as part of its acquisition of Keebler in 2001. Ms. Barnes-Euresti is currently the Treasurer and a member of the Board of Trustees for the National Judicial College. Ms. Barnes-Euresti is also a member of the Board of Directors on the Foundation side for the National LQBTQ+ Bar Association and Foundation.
Sherry Brice is expected to serve as Chief Supply Chain Officer of WK Kellogg Co following the Spin-Off. Ms. Brice has served as Vice President, Global Quality and Food Safety of Kellogg ParentCo since January 2020. Prior to her current role, Ms. Brice served as Senior Director, Supply Chain Category Lead of Frozen Foods and Canada from January 2019 to January 2020 and as Plant Director from July 2017 to January 2019. Throughout her nearly 11 years at Kellogg ParentCo, Ms. Brice held various leadership roles spanning manufacturing, category operations and quality and compliance. Ms. Brice joined Kellogg ParentCo as part of its acquisition of the Pringles business from Procter & Gamble, a consumer goods company, where she served in a variety of supply chain roles for nearly 14 years.
Bruce Brown is expected to serve as Chief Customer Officer of WK Kellogg Co following the Spin-Off. Mr. Brown has served as Vice President, Customer Strategy and Planning of Kellogg ParentCo since January 2019. Prior to his current role, Mr. Brown served as Vice President, Customer Marketing from January 2014 to December 2018. Throughout his nearly 25 years at Kellogg ParentCo, Mr. Brown held a variety of leadership roles across sales and customer marketing in both the cereal and snacks businesses, including as Senior Vice President, Western Customer Teams and Senior Vice President, National Customer Teams. Prior to Kellogg ParentCo, Mr. Brown held sales roles at Motts USA, a manufacturer of apple products, and The Dial Corporation, now Henkel Corporation, a manufacturer of personal care and household cleaning products.
David McKinstray is expected to serve as Chief Financial Officer of WK Kellogg Co following the Spin-Off. Mr. McKinstray has served as Vice President, Integrated Business Planning of Kellogg ParentCo since April
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2020. Prior to his current role, Mr. McKinstray held multiple finance roles throughout his nearly 15 years at Kellogg ParentCo, having served as Vice President, Finance, U.S. Commercial & Business Management from January 2019 to April 2020, Vice President, Finance, and Chief Financial Officer of the U.S. snacks business from April 2018 to March 2019 and Vice President, Finance, Corporate Financial Planning & Accounting and Strategy from September 2016 to April 2018. He played a leading role in several strategic initiatives at Kellogg ParentCo and has significant experience in global roles across risk management, treasury and corporate and financial planning. His roles prior to Kellogg ParentCo included positions in commodity risk management and trading.
Doug VanDeVelde is expected to serve as the Chief Growth Officer of WK Kellogg Co following the Spin-Off. Mr. VanDeVelde has served as the General Manager of Kellogg ParentCos U.S. cereal business since January 2019. Prior to his current role, Mr. VanDeVelde served as Senior Vice President, Global Breakfast Category from November 2013 to January 2019. Throughout his 25 years at Kellogg ParentCo, Mr. VanDeVelde held various leadership roles in marketing, including as Senior Vice President, Marketing and Innovation for U.S. Morning Foods and Senior Vice President, Marketing for U.S. Snacks. Prior to joining Kellogg ParentCo in December 1997, Mr. VanDeVelde was a Marketing Director at Proctor & Gamble.
Our Board of Directors Following the Spin-Off and Director Independence
Immediately following the Spin-Off, we expect that our Board will comprise directors. The NYSE rules require that our Board have a majority of independent directors. Immediately following the Distribution Date, our Board will have a majority of independent directors, and our Board committees will comprise only independent directors. Our Board expects to determine that each of is independent under the NYSE rules. A copy of our corporate governance guidelines setting forth our director qualification standards will be posted on our Web site after the Spin-Off.
Committees of the Board
Effective upon the completion of the Spin-Off, the Board will have an Audit Committee, a Compensation and Talent Management Committee and a Nominating and Governance Committee, each of which will operate under written charters approved by the full Board. In accordance with current NYSE listing standards, all of the directors who serve on each such Committee will be independent from us and our management. The charters of all the Committees will be posted on our Web site after the Spin-Off.
Audit Committee
The members of our Audit Committee are expected to be . is expected to be the Chair of our Audit Committee. We expect that each member of our Audit Committee will meet the requirements for independence under the current NYSE listing standards and SEC rules and regulations. We expect that each member of our Audit Committee will be financially literate. In addition, our Board expects to determine that is an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act. This designation does not impose on him/her any duties, obligations or liabilities that are greater than are generally imposed on members of our Audit Committee and our Board. The responsibilities of the Audit Committee will be more fully described in our Audit Committee charter and will include, among other duties:
| assisting the Board in monitoring the following: |
| the integrity of the financial statements of WK Kellogg Co; |
| the independence and performance of WK Kellogg Cos independent registered public accounting firm; |
| the performance of WK Kellogg Cos internal audit function; |
| WK Kellogg Cos enterprise risk management process and key risks; |
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| WK Kellogg Cos technology and information security, including cybersecurity; |
| ESG priorities; |
| compliance by WK Kellogg Co with legal and regulatory requirements; and |
| other related matters. |
| pre-approving all audit, audit-related, internal control-related and permitted non-audit engagements and services by the independent registered public accounting firm and their affiliates; |
| discussing and/or reviewing specified matters with, and receiving specified information or assurances from, WK Kellogg Co management and the independent registered public accounting firm; and |
| appointing, subject to shareholder ratification, or replacing the independent registered public accounting firm, which directly reports to the Audit Committee, and is directly responsible for determining the compensation and overseeing the independent registered public accounting firm. |
Compensation and Talent Management Committee
The members of our Compensation and Talent Management Committee are expected to be . is expected to be the Chair of the Compensation and Talent Management Committee. We expect that each member of the Compensation and Talent Management Committee will meet the requirements for independence under the current NYSE listing standards and SEC rules and regulations. The responsibilities of the Compensation and Talent Management Committee will be more fully described in the Compensation and Talent Management Committee Charter and will include, among other duties:
| reviewing and approving the compensation philosophy and principles for senior executives; |
| reviewing and making recommendations for the compensation of senior management personnel and monitoring overall compensation for senior executives, including reviewing risks arising from WK Kellogg Cos compensation policies and practices; |
| reviewing and recommending the compensation of the CEO; |
| sole authority to retain or terminate any compensation consultant or other advisor used to evaluate senior executive compensation; |
| overseeing and administering employee benefit plans to the extent provided in those plans; |
| reviewing with management employment and employment-related matters and employment programs; |
| reviewing trends in management compensation; |
| reviewing talent development; |
| setting the composition of the peer company group used for market comparison for executive compensation; |
| determining applicable stock ownership guidelines for certain executives and monitoring compliance with guidelines; |
| assisting the Board in monitoring ESG priorities; |
| reviewing WK Kellogg Cos ED&I programs and policies; and |
| overseeing the review and assessment of risks arising from WK Kellogg Cos compensation policies and practices, which includes the annual review of our compensation program for design features considered to encourage excessive risk taking and WK Kellogg Cos approach to those features. |
Nominating and Governance Committee
The members of our Nominating and Governance Committee are expected to be . is expected to be the Chair of our Nominating and Governance Committee. We expect that each member of the
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Nominating and Governance Committee will meet the requirements for independence under the current NYSE listing standards. The responsibilities of the Nominating and Governance Committee will be more fully described in our Nominating and Governance Committee Charter and will include, among other duties:
| identifying and reviewing the qualifications of candidates for director and in determining the criteria for new directors; |
| recommending nominees for director to the Board; |
| recommending committee assignments to the Board; |
| reviewing annually the Boards compliance with the Corporate Governance Guidelines; |
| reviewing annually the Corporate Governance Guidelines and recommending changes to the Board; |
| monitoring the performance of directors and conducting performance evaluations of each director before the directors re-nomination to the Board; |
| administering the annual evaluation of the Board; |
| providing annually an evaluation of CEO performance used by the independent members of the Board in their annual review of CEO performance; |
| considering and evaluating potential waivers of the Code of Conduct for directors and Global Code of Ethics for senior officers; |
| making a report to the Board on CEO succession planning at least annually; |
| providing an annual review of the independence of directors to the Board; |
| reviewing and recommending to the Board responses to shareholder proposals; |
| overseeing governance-related engagement with shareholders and proxy advisory firms, and reviewing proxy advisory firm policies and voting recommendations; |
| reviewing, approving and overseeing any transaction between WK Kellogg Co and any related person (as defined in Item 404 Regulation S-K) on an ongoing basis, in accordance with WK Kellogg Cos related party transactions policies; and |
| reviewing director compensation. |
Compensation Committee Interlocks and Insider Participation
None of our executive officers currently serves, or in the past fiscal year has served, as a member of the board or compensation committee of any entity that has one or more executive officers serving on our Board or Compensation and Talent Management Committee.
Risk Oversight
Our Board will oversee the risk management activities designed and implemented by our management. Our Board will execute its oversight responsibility for risk management, including the oversight of cybersecurity risks, both directly and through its committees. The full Board will also consider specific risk topics, including risks associated with our strategic plan, business operations and capital structure. In addition, our Board will receive detailed regular reports from members of our senior management and other personnel that include assessments and potential mitigation of the risks and exposures involved with their respective areas of responsibility.
While risk oversight is a full Board responsibility, our Board will delegate to the Audit Committee oversight of our risk management process. Our Audit Committee will be charged with reviewing cybersecurity, as well as our
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technology and information security, with senior management. Managements reporting to the Audit Committee will include a review of potential digital threats and vulnerabilities, cybersecurity priorities and our cybersecurity framework, including the potential for heightened risks in connection with our supply chain and as a result of global and macroeconomic events. In connection with overseeing the risk management process, the Audit Committee will review an assessment of our enterprise risks and the allocation of risk oversight among the Board and our other Committees.
Our other Committees will also consider and address risk as they perform their respective Committee responsibilities. All Committees will report to the full Board as appropriate, including when a matter rises to the level of a material or enterprise level risk.
Although we are not aware of any new or heightened exposure to cyberattacks as a result of Russias invasion of Ukraine that pose a material risk to our business, we will continue to assess the risk of evolving cyberthreats and global and macroeconomic events to determine whether any new cybersecurity risks are presented by such events, with the Kellogg ParentCo Audit Committee overseeing and monitoring certain key risks, including cybersecurity risks. Our Audit Committee will assume oversight of these risks after completion of the Spin-Off and, with senior management, will continue to assess whether developments related to global and macroeconomic events have had, or are reasonably likely to have, a material impact on WK Kellogg Co.
Code of Business Conduct and Ethics
Prior to the completion of the Spin-Off, we intend to adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Upon completion of the Spin-Off, our code of business conduct and ethics will be available on our Web site. We intend to disclose any amendments to the code, or any waivers of its requirements, on our Web site.
Director Nomination Process
Our initial Board will be selected through a process involving both Kellogg ParentCo and us.
We will adopt corporate governance guidelines that will contain information concerning the responsibilities of the Nominating and Governance Committee with respect to identifying and evaluating future director candidates.
The Nominating and Governance Committee will evaluate future director candidates in accordance with the director membership criteria described in our corporate governance guidelines. The Nominating and Governance Committee will evaluate a candidates qualifications to serve as a member of our Board based on the skills and characteristics of individual directors as well as the composition of our Board as a whole. In addition, the Nominating and Governance Committee will evaluate a candidates professional skills and background, experience in relevant industries, age, diversity, geographic background and number of other directorships, along with qualities expected of all directors, including integrity, judgment, acumen and the time and ability to make a constructive contribution to our Board.
Communication with Non-Management Members of our Board
Information for shareholders and other parties interested in communicating with our Board or our independent directors, individually or as a group, will be posted on our Web site prior to the Spin-Off. Our corporate secretary will forward communications relating to matters within our Boards purview to the independent directors; communications relating to matters within a Board committees area of responsibility to the chair of the appropriate committee; and communications relating to ordinary business matters, such as suggestions, inquiries and consumer complaints, to the appropriate WK Kellogg Co executive or employee. Our corporate secretary will not forward solicitations, junk mail and obviously frivolous or inappropriate communications, but will make them available to any independent director who requests them.
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Director Compensation and Benefits
We have not paid any director compensation for service on the Board prior to the Spin-Off. Prior to the completion of the Spin-Off, we intend to adopt a director compensation program, the terms of which will be described in a future amendment to the Registration Statement of which this Information Statement forms a part.
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COMPENSATION DISCUSSION AND ANALYSIS
Prior to the Spin-Off, we have been a wholly owned subsidiary of Kellogg ParentCo, and therefore Kellogg ParentCos senior management and the Compensation and Talent Management Committee of the Kellogg ParentCo Board, which we refer to in this Compensation Discussion and Analysis (CD&A) as the C&T Committee, oversaw our historical compensation strategy. Because the information presented in the compensation tables of this Information Statement relates to the 2022 fiscal year, which ended on December 31, 2022, this CD&A focuses primarily on Kellogg ParentCos compensation programs and decisions with respect to 2022 and the processes for determining 2022 compensation while we were part of Kellogg ParentCo. In order to present Kellogg ParentCos executive compensation program for our named executive officers in a simple and understandable manner, the CD&A has been organized into the following sections:
A. | Key Decision Summaryan overview of compensation decisions and program updates. |
B. | Core Principlesthe fundamental tenets upon which our compensation program is built, such as pay for performance. |
C. | Compensation Approachthe process used to develop plan design, set compensation and verify that actual pay is consistent with Kellogg ParentCos core principles. |
D. | Compensation Plans and Designthe specific elements of the compensation program and 2022 pay. |
E. | Compensation Policieskey policies that govern the operation of the plans. |
It is important to read this section in conjunction with the detailed tables and narrative descriptions under Executive Compensation Tables beginning on page 138 of this Information Statement.
The WK Kellogg Co Compensation and Talent Management Committee (also referred to in this CD&A as the WKKC Compensation Committee) has not yet been established and therefore has not established a specific set of objectives or principles for our executive compensation program. Prior to the Spin-Off, the C&T Committee will make certain compensation decisions and take actions regarding our compensation philosophy, principles and program design and, following the Spin-Off, the WKKC Compensation Committee will make additional compensation decisions and actions, including establishing objectives and principles similar to the objectives and principles that Kellogg ParentCo maintained for its compensation programs in 2022, as described in this CD&A. It is anticipated that the WKKC Compensation Committee will review the impact of the Spin-Off and all aspects of compensation and make appropriate adjustments to our compensation programs and practices. Accordingly, because our pay practices are still being developed, the forms and amounts of compensation reported below in this CD&A are not necessarily indicative of the compensation our current NEOs, as defined immediately below, will receive following the Spin-Off.
We expect that our executive compensation program following the Spin-Off will generally be similar to Kellogg ParentCos executive compensation program. In connection with the Spin-Off, we expect to adopt short-term cash incentive plans and/or programs, a long-term incentive plan (under which various stock-based awards may be granted to our employees and directors), an employee stock purchase plan and nonqualified deferred compensation plans and policies, the terms of which will be substantially similar or comparable to those of such plans maintained by Kellogg ParentCo. See Certain Relationships and Related Party TransactionsAgreements with Kellogg ParentCoEmployee Matters Agreement for more information, including the allocation of liabilities with respect to compensation and benefit accruals prior to the Spin-Off. Additionally, we intend to review and adopt stock ownership guidelines appropriate for WK Kellogg Co as a newly established, stand-alone public company, which we expect will occur within 12 months of the Spin-Off.
In this Information Statement, we refer to our CEO, CFO, and our three next highest paid individuals as the NEOs or our NEOs.
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A. Key Decisions Summary
The C&T Committee took the following key actions:
Program Updates
The C&T Committee regularly reviews the design and effectiveness of Kellogg ParentCos compensation program. This includes engaging with a variety of stakeholders to gain feedback and input on Kellogg ParentCos compensation programs, including Kellogg ParentCos discussions with its shareholders (Shareowners) and on-going reviews with Kellogg ParentCos independent compensation consultant. The following updates were made to Kellogg ParentCos executive compensation programs for 2022:
| The three-year stock unit plan formerly known as Kellogg ParentCos Executive Performance Plan (or EPP) was renamed the Performance Stock Unit Plan (PSU Plan, or PSU) in 2022 to reflect the expansion of the plan beyond Kellogg ParentCos executives. |
| Stock options were eliminated from the mix of long-term incentives in 2022. |
2022 Annual Incentive Plan (AIP) Payouts (Pay for Performance)
2022 Corporate AIP Payout Factor of 137%
Mr. Pilnick and Ms. Brice are participants in the Kellogg ParentCo AIP and the associated AIP payout factor for 2022 was 137% of target, before consideration for individual performance. Mr. McKinstrays AIP payout is based on the performance of Kellogg ParentCos North American region, and the associated AIP payout factor for 2022 was 147% of target, before consideration for individual performance. Mr. VanDeVeldes AIP payout is based on Kellogg ParentCos North American region, with weighting on the U.S. cereal category, which he leads as General Manager, and the associated AIP payout factor for 2022 was 152% of target, before consideration for individual performance. Mr. Browns AIP payout is based on Kellogg ParentCos North American region with weighting on U.S. sales, which he serves on the functional leadership team, and the associated AIP payout factor for 2022 was 150% of target, before consideration for individual performance. For more information about the AIP and actual payouts for each NEO, including individual performance adjustments, see Annual Incentives beginning on page 128 of this Information Statement.
2020-2022 Executive Performance Plan (EPP) Payouts (Pay for Performance)
2020-2022 EPP Payout of 175% of target
For the 2020-2022 EPP, Kellogg ParentCo delivered EPP Net Sales growth of 6.9%, which is significantly above the 1 to 2% target range. EPP Cash Flow performance during the period was $3.8 billion, which is also significantly above the $2.8 billion to $3.1 billion target range. Under the Plan, this performance results in a payout of up to 200% of the share target amount, and the NEOs (other than Ms. Brice, who does not hold a 2020-2022 EPP award) received a payout of 175% of share target amount, which was appropriate for the Kellogg ParentCos performance during this period. For more information about the 2020-2022 EPP and actual payouts for each NEO, see Long-Term Incentives beginning on page 131 of this Information Statement.
B. Core Principles
Kellogg ParentCo operates in a robust and challenging industry, where competitive compensation is central to business performance. We believe that Kellogg ParentCos executive compensation program was designed to:
| provide a competitive level of total compensation necessary to attract and retain key talent to help deliver successful business performance; |
| appropriately motivate its named executive officers to contribute to Kellogg ParentCos near and long-term success; and |
| help drive long-term total return for Kellogg ParentCos Shareowners. |
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Accordingly, Kellogg ParentCos executive compensation program is based on the following core principles each of which is more fully described below.
| Pay for Performance; |
| Shareowner Alignment; |
| Values-Based; and |
| Mitigating Risk. |
Pay for Performance
The fundamental principle underlying Kellogg ParentCos executive compensation programs is pay for performance. That is, Kellogg ParentCo links the amount of actual pay to the performance of Kellogg ParentCo and each of its named executive officers. Kellogg ParentCo accomplishes this in several ways, including ensuring that target pay levels are market based, utilizing performance-based pay, and limiting perquisites (each of which is more fully described below).
Market Driven Compensation
All components of Kellogg ParentCos executive compensation program are targeted at the median of the market of Kellogg ParentCos Compensation Peer Group (as described below) to ensure that its executives are appropriately compensated, and Kellogg ParentCo is able to recruit and retain the right talent for the organization. Compensation opportunities vary based on time in position, criticality of retention, and sustained performance, as well as other factors. Annual incentive compensation targets may be above or below the median of Kellogg ParentCos Compensation Peer Group based on a variety of factors, including experience and tenure in the role. Actual incentive compensation payouts are based on performance against pre-determined goals that are designed to drive sustainable results and increase Kellogg ParentCos Shareowner value.
Performance-Based Compensation
A significant portion of Kellogg ParentCos senior executives target compensation is performance-based pay, tied to both short-term performance (AIP awards) and long-term performance (PSU Plan awards, formerly known as EPP awards). The annual compensation package for our CEO, Mr. Pilnick, has approximately 63% of target annual compensation (salary, annual incentives and long-term incentives) linked to performance-based incentives. The annual compensation package for our other NEOs averaged approximately 46% of target annual compensation linked to performance-based incentives.
Limited Perquisites
To further ensure pay for performance, executives receive limited perquisites, as shown on page 138 of this Information Statement. For additional information about perquisites, refer to footnote 6 in Summary Compensation Table.
Shareowner Alignment
Kellogg ParentCos compensation programs have been designed to align the interests of Kellogg ParentCo executives with its Shareowners as an important way to drive behaviors that generate long-term Shareowner value. Kellogg ParentCo aligns these interests by using equity awards that have a longer-term focus and by maintaining robust stock ownership guidelines (each of which is more fully described below). Equity-based incentives are an effective method of facilitating stock ownership and further aligning the interests of Kellogg ParentCo executives and senior management with those of Kellogg ParentCos Shareowners. Consequently, an appropriate portion of our NEOs total target compensation is comprised of equity-based incentives (approximately 55% of our CEOs annual target compensation, and an average of 30% of our other NEOs annual target compensation, is comprised of equity awards in the form of RSUs and PSUs).
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Longer-Term Focus
Kellogg ParentCo maintains a stock-based, pay for performance, multi-year incentive plan (which is referred to as the EPP for awards granted prior to 2022 and the PSU Plan or PSU for awards granted in 2022 and subsequent years) intended to focus senior management on achieving critical goals over three-year periods. This approach provides the right balance of focusing senior management on important operational and financial goals and providing a direct link to Shareowner interests. Specifically, for the 2020-2022 EPP, 2021-2023 EPP, and 2022-2024 PSU Plan, these goals were tied to organic net sales growth and aggregate operating cash flow of Kellogg ParentCo. Annual restricted stock unit awards granted in 2022 are subject to three-year cliff vesting.
Stock Ownership Guidelines
Kellogg ParentCo has established robust share ownership guidelines to strengthen the ongoing and continued link between the interests of Kellogg ParentCos named executive officers and Kellogg ParentCos Shareowners. Currently, Mr. Pilnick and Mr. VanDeVelde are subject to such share ownership guidelines. We intend to review and adopt stock ownership guidelines appropriate for WK Kellogg Co as a newly established, stand-alone public company, which we expect will occur within 12 months of the Spin-Off.
Values-Based
Kellogg ParentCos compensation program is designed to reward an executives performance and contribution to Kellogg ParentCos objectives. Each NEO is evaluated on their specific contributions (the what), as well as the behaviors they exhibit as they drive results (the how). The shared behaviors (what Kellogg ParentCo calls its K Values) that Kellogg ParentCo expects and believes are essential to achieving long-term dependable and sustainable growth and increased value for Kellogg ParentCos Shareowners are as follows:
| acting with integrity and showing respect; |
| being accountable for Kellogg ParentCos actions and results; |
| being passionate about Kellogg ParentCos business, brands and food; |
| having the humility and hunger to learn; |
| striving for simplicity; and |
| loving success. |
Mitigating Risk
The Kellogg ParentCo compensation program is designed so that it does not encourage taking unreasonable risks relating to Kellogg ParentCos business. Kellogg ParentCos compensation programs mitigate risk by balancing short-term and rolling multi-year incentives which use various financial metrics to encourage the business to grow in a balanced, sustainable manner. In addition, the use of clawback provisions further drives risk mitigation by creating appropriate remedies under certain circumstances.
In 2022, the Kellogg ParentCo Board and its C&T Committee reviewed its executive compensation program to identify any design features that could reasonably be considered to encourage excessive risk taking and Kellogg ParentCos approach to those features. As a result of this review, and together with input from the independent compensation consultant, the Kellogg ParentCo Board and its C&T Committee determined that the risks arising from Kellogg ParentCos compensation policies and practices for employees are not reasonably likely to have a material adverse effect on Kellogg ParentCo.
Clawback Policies
Kellogg ParentCo maintains clawback provisions in each of Kellogg ParentCos AIP, stock options, restricted stock units, and the EPP/PSU Plan which give Kellogg ParentCo the ability to recover (clawback) previously
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granted payments. These provisions allow Kellogg ParentCo to recoup performance-based gains by executive officers (and other program participants) for fraud or misconduct causing a financial restatement. Beginning in 2018, Kellogg ParentCo expanded its provisions in all equity awards to require clawback after vesting or exercise (and forfeiture of awards before vesting) if an executive violates the non-compete or non-solicitation provisions of the awards or an executive engages in any activity that is contrary or harmful to Kellogg ParentCos interest.
C. Compensation Approach
Kellogg ParentCos compensation approach is based on (a) driving independent decision-making, (b) utilizing Compensation Peer Group data to appropriately benchmark compensation, (c) following a consistent, rigorous compensation target setting process, and (d) utilizing verification tools to ensure appropriate decisions are being made. Each is described more fully below.
Once WK Kellogg Co is a separate public company, we anticipate the WKKC Compensation Committee will follow a similar process to determine the compensation for our NEOs, which we anticipate will include the WKKC Compensation Committee engaging an independent compensation consultant to perform services consistent with those described below and such other services as it deems necessary to reflect our position as a new, stand-alone public company.
Independent Decision Making
The C&T Committee is responsible for administering the compensation program for executive officers of Kellogg ParentCo. The members of the C&T Committee are fully independent, none of the C&T Committee members are current or former employees of Kellogg ParentCo, and they are not eligible to participate in any of Kellogg ParentCos executive compensation programs. In addition, the C&T Committee has utilized an independent compensation consultant for many years.
Semler Brossy Consulting Group (Semler Brossy), Kellogg ParentCos independent compensation consultant, works directly for the C&T Committee, and, pursuant to Kellogg ParentCo policy, is prohibited from providing any consulting or other services to Kellogg ParentCo or its executive officers other than the work performed on behalf of the C&T Committee or the Kellogg ParentCo Board. The C&T Committee has considered the independence of Semler Brossy in light of SEC rules and NYSE listing standards. In connection with this process, the C&T Committee has reviewed, among other items, a letter from Semler Brossy addressing the independence of Semler Brossy and the members of the consulting team serving the C&T Committee, including the following factors: (i) services provided to Kellogg ParentCo by Semler Brossy, (ii) fees paid by Kellogg ParentCo as a percentage of Semler Brossys total revenues, (iii) policies or procedures of Semler Brossy that are designed to prevent conflicts of interest, (iv) any business or personal relationships between the senior advisor of the consulting team with a member of the C&T Committee, (v) any Kellogg ParentCo stock owned by the senior advisor or any member of the senior advisors immediate family, and (vi) any business or personal relationships between its executive officers and the senior advisor. The C&T Committee discussed these considerations and concluded that the work performed by Semler Brossy and its senior advisors involved in the engagement did not raise any conflict of interest.
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Peer Groups and Competitive Positioning
Kellogg ParentCo uses peer groups to benchmark its named executive officers compensation against comparable companies and for different components of our overall compensation program to ensure they are competitive and delivering compensation in line with performance:
Peer Group |
Overview/Selection Criteria |
Primary Purpose | ||
Compensation Peer Group | Consists of companies which Kellogg ParentCo generally competes with for talent, including both food companies and companies in other relevant industries. This group is reviewed on a periodic basis for appropriateness. | Establish target compensation (base salary, AIP and long-term incentives). | ||
Performance Peer Group | Generally consists of the food companies in the broader Compensation Peer Group. This group is reviewed on a periodic basis for appropriateness. | Assess relative company performance and assess incentive payouts. |
The Compensation Peer Group is used to ensure that executive officer compensation is competitive in the marketplace. Consequently, Kellogg ParentCo benchmarks its executive compensation to that of the Compensation Peer Group. The C&T Committee uses peer group data to benchmark base salary, target annual and long-term incentives and total compensation. Kellogg ParentCos total compensation package is targeted at the median of its Compensation Peer Group. Actual incentive compensation payouts will depend largely upon Kellogg ParentCos performance versus its operating plan budgets and in part upon its performance relative to Kellogg ParentCos Performance Peer Group, as defined below. Again, the design drives pay for performance. We believe this approach allows Kellogg ParentCo to recruit the best talent for the organization and pay for performance.
The C&T Committee reviews at least annually the Compensation Peer Group to confirm that it continues to be an appropriate benchmark. The C&T Committee determines the Compensation Peer Group, taking into account input from the independent compensation consultant, which is based on objective screening criteria for a variety of factors and considers a variety of criteria, including companies that (i) are in the same or similar lines of business, (ii) compete for the same customers with similar products and services, (iii) have comparable financial characteristics that investors view similarly, (iv) consider Kellogg ParentCo a peer, (v) proxy advisory firms consider Kellogg ParentCos peers, and (vi) are within a reasonable range in terms of percentile rank of Kellogg ParentCo for key financial metrics such as revenue, pre-tax income, total employees, and market capitalization. Kellogg ParentCo believes that Kellogg ParentCos Compensation Peer Group is representative of the market in which it competes for talent.
The Performance Peer Group is used to assess incentive plan payouts and performance relative to the performance of these direct competitors. This group includes many of the food companies in the broader Compensation Peer Group. The Performance Peer Group companies were chosen because they most closely compete with Kellogg ParentCo in the consumer marketplace and for investors dollars and face similar business dynamics and challenges. Annual incentive compensation payouts will depend largely upon Kellogg ParentCos performance versus Kellogg ParentCos operating plan budgets and in part upon Kellogg ParentCos performance relative to the Performance Peer Group.
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As expected, there is meaningful overlap and differences between the Compensation Peer Group and Performance Peer Group. For 2022, Kellogg ParentCos Compensation Peer Group and Performance Peer Group are comprised of the following companies:
Compensation Peer Group |
||||
Church & Dwight
The Clorox Company
Colgate-Palmolive Co.
The Estee Lauder Cos., Inc.
Hormel Foods Corporation
Keurig Dr. Pepper Inc.
Kimberly-Clark Corporation
McDonalds Corporation
Starbucks
Whirlpool Corporation
YUM! Brands, Inc. |
Performance Peer Group | |||
Campbell Soup Co.
ConAgra Brands, Inc.
The Hershey Company
General Mills, Inc.
The J.M. Smucker Company
The Kraft Heinz Company
McCormick & Company, Inc.
Mondelēz International, Inc.
Post Holdings |
PepsiCo Inc. | |||
Consistent, Rigorous Process
Each year, the C&T Committee follows a consistent, rigorous process to determine compensation for named executive officers for Kellogg ParentCo, including Mr. Pilnick:
| The independent compensation consultant presents the C&T Committee with relevant compensation information such as a market assessment, Compensation Peer Group benchmarking data, information about other relevant market practices, and emerging trends. |
| This compensation information provides detailed information for both CEO compensation and the compensation for the other named executive officers of Kellogg ParentCo, including Mr. Pilnick. |
| The independent consultant makes recommendations to the C&T Committee regarding target levels for each pay element for the CEO of Kellogg ParentCo and provides oversight and guidance regarding the other named executive officers of Kellogg ParentCo. The Kellogg ParentCo CEO makes recommendations to the C&T Committee regarding the performance and compensation for each Kellogg ParentCo named executive officer (other than himself), including Mr. Pilnick. |
| Based on its review of performance versus Kellogg ParentCos operating plan, performance against the Performance Peer Group, individual performance, input from the independent compensation consultant and other factors, the C&T Committee makes recommendations to the independent members of the Kellogg ParentCo Board regarding the compensation for the CEO and the other named executive officers, including Mr. Pilnick. |
| The independent members of the Kellogg ParentCo Board determine the compensation of the CEO of Kellogg ParentCo and the other named executive officers of Kellogg ParentCo, including Mr. Pilnick. |
Verification Tools
The C&T Committee utilizes several tools to help verify that the design of Kellogg ParentCos program is consistent with Kellogg ParentCos core principles and that the amount of compensation is within appropriate competitive parameters. For example, each year, the C&T Committee reviews pay tallies, which include a detailed analysis of each of Kellogg ParentCo named executive officers target and actual annual cash
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compensation, equity awards, retirement benefits, perquisites, change-in-control and severance payments, and wealth accumulation. In connection with this review, no unintended consequences or other concerns of the compensation program design were discovered. In addition, the C&T Committee concluded that the total compensation of the Kellogg ParentCo named executive officers aligns pay with performance and is appropriate and reasonable. The C&T Committee also uses a key financial metric, total shareholder return, as an additional verification tool to verify Kellogg ParentCos pay for performance connection.
Prior to the Spin-Off, determinations were made by the C&T Committee for Mr. Pilnicks compensation given that he was serving as a Kellogg ParentCo named executive officer, and, for the other NEOs, in respect of their EPP payout. Following the Spin-Off, the WKKC Compensation Committee will be establishing a specific set of objectives or principles for all of our NEOs.
D. Compensation Plans and Design
NEO compensation includes a combination of annual cash and long-term incentive compensation. Annual cash compensation for NEOs is comprised of base salary and the AIP. Long-term incentives consist of three-year PSU Plan awards and restricted stock units.
Total Compensation
Key elements of Kellogg ParentCos 2022 compensation program for the Kellogg ParentCo named executive officers (including Mr. Pilnick) were as follows.
Element |
Performance / |
Purpose |
Characteristics | |||||
Fixed | Base Salaries | | Compensates executives for their level of responsibility and sustained individual performance. Also, helps attract and retain strong talent. | Fixed component; evaluated annually. | ||||
Performance Based |
Annual Incentives (AIP) | One Year | Promotes achieving Kellogg ParentCos annual corporate and business unit financial goals, as well as ESG objectives such as people safety, food safety/quality and equity, diversity and inclusion (or ED&I). | Performance-based cash opportunity; amount varies based on Kellogg ParentCo and business results, and individual performance. | ||||
Long-Term Incentives (PSU Plan) | Three Years |
Promotes achieving Kellogg ParentCos long-term corporate financial goals through the 3-year PSU Plan. |
Performance-based equity opportunity; amounts earned/realized will vary from the targeted grant-date fair value based on actual financial and stock price. |
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Element |
Performance / |
Purpose |
Characteristics | |||||
Stock Ownership | Long-Term Incentives (RSUs) | Three Years | Creates a balanced long-term incentive program, helping to manage equity utilization while aligning to market practice. | Cliff vesting provides meaningful retention value; improved stock price performance enhances overall value of awards. | ||||
Other | Post-Termination Compensation | | Facilitates attracting and retaining high caliber executives in a competitive labor market in which formal severance plans are common. | Contingent component; only payable if the executives employment is terminated under certain circumstances. | ||||
Retirement Plans | Long-Term | Kellogg ParentCo provides both matching and fixed company contributions based on employee deferrals and years of service, respectively. | Fixed component; however, contributions vary based on employee elections. |
Base Salaries
The C&T Committee considers a number of factors when determining the Kellogg ParentCo named executive officers (including Mr. Pilnicks) base salaries including experience, proficiency, individual contributions, job market conditions, sustained performance in role, and the individuals current base salary compared with those of persons in similar positions at other companies in the Compensation Peer Group. Annually, the C&T Committee evaluates whether to award base salary increases, including considering changes in a named executive officers role and/or responsibility. In 2022, Kellogg ParentCo increased the base salaries for each of our NEOs (other than Mr. Pilnick).
Annual Incentives
AIP awards to the NEOs are paid under the terms of the Kellogg Company 2022 Long-Term Incentive Plan (LTIP), which was approved by the Kellogg ParentCo Shareowners and is administered by the C&T Committee.
At the beginning of fiscal year 2022, annual incentive opportunities for NEOs were established as a percentage of the executives base salary (AIP Target). Each year, the C&T Committee sets performance ranges (which we refer to as bandwidths) around Kellogg ParentCos metrics for its named executive officers including Mr. Pilnick. Following the Spin-Off, the WKKC Compensation Committee will make compensation decisions and actions for all of our NEOs, including establishing applicable AIP performance targets. Mr. Pilnicks and Ms. Brices AIP Target consisted of (a) financial metrics (90% weighting) consisting of operating profit (AIP Operating Profit), net sales (AIP Net Sales), and cash flow (AIP Cash Flow) which are weighted at 50%, 30%, and 20% respectively and (b) ESG metrics (10% weighting) consisting of ED&I, people safety, and food safety/quality. For Mr. Pilnick and Ms. Brice, the financial and ESG metrics are based on Kellogg ParentCo Corporate targets, which are established by the C&T Committee. For our NEOs other than Mr. Pilnick and Ms. Brice, AIP performance targets include performance measurement metrics in lieu of or in addition to the
Kellogg ParentCo Corporate targets. Kellogg ParentCo senior management established the applicable AIP
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performance targets as described below. Mr. McKinstrays AIP target consisted of (a) North America regional financial metrics (90% weighting) consisting of North America AIP Operating Profit, North America AIP Net Sales, and North America AIP Cash Flow, which are weighted at 50%, 30%, and 20%, respectively, and (b) ESG metrics (10% weighting). Mr. VanDeVeldes and Mr. Browns AIP target consisted of (a) North America regional financial metrics (80% weighting) identical to those described with Mr. McKinstray above, (b) team financial metrics (10% weighting) and (c) North America regional ESG metrics (10% weighting) consisting of ED&I, people safety, and food safety/quality. For Mr. VanDeVelde, the team financial metrics are based on Kellogg ParentCos U.S. ready-to-eat cereal category (RTEC) targets consisting of (a) RTEC net sales value (40% weighting) and (b) RTEC operating profit (60% weighting). For Mr. Brown, the team financial metrics are based on Kellogg ParentCos total U.S. sales targets consisting of (a) total U.S. sales net sales value (40% weighting) and (b) total U.S. sales operating profit (60% weighting).
The C&T Committee and management of Kellogg ParentCo believe that by using the financial metrics of AIP Operating Profit, AIP Net Sales, and AIP Cash Flow, Kellogg ParentCo is encouraging top-line growth, as well as profitable growth and cash generation for its Shareowners. The C&T Committee and management of Kellogg ParentCo further believe that the financial metrics should measure comparable operating performance, as those measures provide a clearer view into Kellogg ParentCos underlying performance. The AIP Operating Profit excludes the effect of restructuring programs, mark-to-market adjustments for commodities, certain equity investments, and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, other costs impacting comparability, and foreign currency. AIP Net Sales excludes the impact of acquisitions, divestitures, foreign currency and differences in shipping days. Kellogg ParentCo measures AIP Cash Flow as net cash provided by operating activities reduced by capital expenditures. While Corporate AIP Cash Flow reflects Kellogg ParentCos combined results, North America AIP Cash Flow does not include allocated cash flows for interest, income taxes, and other activities included in Kellogg ParentCos corporate operations.
As a result of the budgeted assumptions, performance reported in Kellogg ParentCos financial statements may differ from performance against Kellogg ParentCos AIP performance targets. AIP Operating Profit, AIP Net Sales, and AIP Cash Flow are non-GAAP measures, which will differ from the GAAP measures of Net Sales growth, operating profit growth and cash provided by operating activities.
Targets and bandwidths are set at the beginning of each year through a robust, systematic process. A key element of the target-setting process is Kellogg ParentCos operating plan for the fiscal year, which is designed to achieve Kellogg ParentCos objectives for sustainable, dependable growth, and is approved by Kellogg ParentCos Board. Targets and bandwidths are developed through an iterative process, including reviewing actual and forecasted peer performance and business objectives. Targets are then set to ensure they are reasonable and challenging to drive the performance of the business. The actual percent of the AIP Target paid to our NEOs each year can range from 0% to 200 % of the target opportunity.
In addition to operating results, each NEO is held accountable for achieving annual goals set at the start of the fiscal year relating to driving the successful achievement of Kellogg ParentCos strategy and related business priorities. Consistent with Kellogg ParentCos commitment to a balanced approach between individual performance and adherence to Kellogg ParentCos core principles, the NEOs are assessed both against their level of individual achievement against these agreed upon goals and the alignment of their behavior in achieving those goals with Kellogg ParentCos core values.
2022 AIP Payouts
Our CEO, Gary Pilnick, and Ms. Brice are participants in the Kellogg ParentCo Corporate AIP, and the associated AIP payout factor for 2022 was 137% of target, before consideration for individual performance. For 2022, the financial performance against the performance goals for Corporate were Corporate AIP Operating Profit growth of 7.0% against a target of 2.3%, Corporate AIP Net Sales growth of 11.5% against a target of 3.8%, and Corporate AIP Cash Flow of $1.2 billion against a target of $1.2 billion. Overall, the AIP Net Sales
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and AIP Operating Profit were significantly above target, and AIP Cash Flow was at target for Corporate performance. This resulted in an AIP formulaic payout factor for the financial metrics of 160% of target for Corporate. After considering Kellogg ParentCos financial performance relative to its peers, including sales, operating profit, cash flow, earnings per share and total shareowner return, the Corporate AIP Plan performance payout factor was reduced from 160% to 141% of target for Corporate. In addition, the payout factor was combined with ESG performance of 103% of target for Corporate, resulting in the 137% of target payout factor for Kellogg ParentCo Corporate performance.
The C&T Committee considered the individual performance in 2022 for Mr. Pilnick and awarded his payout factor equal to 155%, consistent with the terms of the plan established at the beginning of the year. The C&T Committee considered a number of factors in assessing Mr. Pilnicks individual performance, including leading through the announcement and related efforts to the Spin-Off, while continuing to deliver strong business results.
Mr. McKinstrays AIP payout is based on the performance of the North American region. For 2022, the financial performance against the performance goals for North America was North America AIP Operating Profit growth of 6.4% against a target of 2.0%, North America AIP Net Sales growth of 9.9% against a target of 4.5%, and North America AIP Cash Flow of $1.3 billion against a target of $1.3 billion. For North America, the AIP Net Sales and AIP Operating Profit were significantly above expectations, while AIP Cash Flow was at target. In addition, the payout factor was combined with ESG performance of 95% of target for North America, resulting in the 147% payout factor.
Mr. VanDeVeldes AIP payout is based on the performance of the North American region (same as those described with respect to Mr. McKinstray above) and to a lesser extent, the U.S. cereal category, which he leads as General Manager. The financial performance for RTEC was RTEC AIP Net Sales growth of 12.0% against a target of 0.4%, and RTEC AIP Operating Profit growth of 35.8% against a target of -5.0%. In addition, the payout factor was combined with ESG performance of 95% of target for North America, resulting in the 152% payout factor.
Mr. Browns AIP payout is based on the performance of the North American region (same as those described with respect to Mr. McKinstray above) and to a lesser extent, total U.S. sales, for which he serves on the functional leadership team. The financial performance for U.S. total sales were U.S. AIP Net Sales growth of 10.4% against a target of 5.1%, and U.S. Operating Profit growth of 3.9% against a target of (1.3)%. In addition, the payout factor was combined with ESG performance of 95% of target for North America, resulting in the 150% payout factor.
Considering their individual performances, the AIP payouts for Mr. McKinstray, Mr. VanDeVelde, Mr. Brown, and Ms. Brice were determined to be 172%, 177%, 175%, and 162%, respectively, consistent with the terms of the plan established at the beginning of the year. A number of factors were considered in assessing Mr. McKinstrays, Mr. VanDeVeldes, Mr. Browns and Ms. Brices individual performances, including leading the North American cereal business through the announcement and related efforts of the Spin-Off, while contributing to strong business results for Kellogg ParentCo.
Corporate and North America AIP Operating Profit growth, AIP Net Sales growth, and AIP Cash Flow are non-GAAP financial measures defined in Annual Incentives on page 128 of this Information Statement. For the ESG metrics, objective and challenging performance targets were set at the beginning of the fiscal year for:
| ED&I. Kellogg ParentCo continues its focus on equity, diversity and inclusion as an important enabler to its business. In 2022, Kellogg ParentCo was at target for Corporate and near target for North America, based on its representation results for gender and racially underrepresented talent. |
| Food safety and quality. Kellogg ParentCo continues to drive strong programs across the network and was above target for Corporate and North America. |
| People safety. Kellogg ParentCo was at target for Corporate and North America on its people safety metric of total recordable incident rate. |
130 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
In determining the appropriate AIP payout for Kellogg ParentCos performance, the C&T Committee considered a number of factors, including:
| Kellogg ParentCos achievement of net sales and operating profit above the 2022 corporate AIP financial targets; and |
| Assessing, planning, and managing the separation of the North American cereal business. |
The chart below includes information about the 2022 AIP for each NEO.
AIP Target(1) | AIP Maximum |
2022 AIP Payout (Paid in March 2023) |
||||||||||||||||||
Name |
% of Base Salary |
Amount ($) | Amount ($) | % of AIP Target |
Amount ($) | |||||||||||||||
Gary Pilnick |
95 | % | 753,350 | 1,506,700 | 155 | % | 1,167,693 | |||||||||||||
David McKinstray |
50 | % | 181,000 | 362,000 | 172 | % | 311,320 | |||||||||||||
Doug VanDeVelde |
60 | % | 286,800 | 573,600 | 177 | % | 507,636 | |||||||||||||
Bruce Brown |
50 | % | 200,000 | 400,000 | 175 | % | 350,000 | |||||||||||||
Sherry Brice |
45 | % | 146,843 | 293,686 | 162 | % | 237,886 |
(1) | For AIP purposes, incentive opportunities are based on executives salary levels on the last day of the relevant calendar year. |
Long-Term Incentives
Long-term incentives are provided to Kellogg ParentCos executives under its 2022 LTIP, which was approved by its Shareowners. These incentives are intended to promote achieving Kellogg ParentCos long-term corporate financial goals and earnings growth. The 2022 LTIP allows for grants of stock options, stock appreciation rights, restricted shares and units and performance shares and units (such as PSUs). Stock options were eliminated from the mix awarded to Kellogg ParentCos executives in 2022.
The 2022 long-term incentive opportunity for the NEOs was provided through stock-based awards, which the C&T Committee believes best achieves several of the core principles, including pay for performance and Shareowner alignment. Long-term incentive awards for our NEOs are determined on a position-by-position basis using proxy and survey data for corresponding positions in the Compensation Peer Group. For 2022, the C&T Committee determined that Mr. Pilnick would receive approximately 75% of his long-term incentive opportunity in performance shares (granted under the PSU Plan) and 25% in Restricted Stock Units (RSUs). The other NEOs also received approximately 75% of their long-term incentive opportunity in performance shares (granted under the PSU Plan) and 25% in RSUs for 2022.
Individual awards at grant may vary from target levels based on the individuals performance, ability to impact financial performance and future potential.
Performance Stock Unit Plan
The PSU Plan is a stock-based, pay for performance, three-year incentive plan intended to focus senior management on achieving critical three-year operational goals. The PSU Plan was formerly known as Kellogg ParentCos Executive Performance Plan or EPP. In 2022, the EPP was renamed the PSU Plan to reflect the expansion of the plan beyond Kellogg ParentCos executives; however, there were no changes to the underlying plan itself. For performance periods that commenced prior to 2022, we refer to the Kellogg ParentCo stock-based, pay for performance, multi-year incentive plan as the EPP and for performance periods that commenced in 2022 or thereafter, we refer to such plan as the PSU Plan or PSU.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
The actual percent of the PSU Plan target paid to our NEOs each year can range from 0% to 200% of the target opportunity. The performance levels are based on Kellogg ParentCos long-range operating plan to be challenging and drive sustainable growth. The PSU Plan contemplates the use of various metrics, as determined by the C&T Committee from time to time (including with respect to Mr. Pilnick).
2020-2022 EPP. The NEOs, other than Ms. Brice, received a 2020-2022 EPP award. The payout for the 2020-2022 EPP is 175% of target. During the performance period, EPP Net Sales (as defined below) performance was significantly above target and EPP Cash Flow (as defined below) performance was also significantly above target. Vested EPP awards are paid in Kellogg ParentCos common stock. The 2020-2022 EPP performance period ended on December 31, 2022 (the last day of fiscal 2022). In February 2023, after Kellogg ParentCos 2022 annual financial statements were completed, the C&T Committee reviewed Kellogg ParentCos performance and used a judgement-based methodology in exercising its discretion, to determine the actual payout for the NEOs (other than Ms. Brice, who does not hold a 2020-2022 EPP award) to be 175% of target.
The goals for the 2020-2022 EPP were tied to organic net sales growth (EPP Net Sales) and aggregate operating flow (EPP Cash Flow) during the three-year performance period. These metrics were chosen to drive key business goals and increase Shareowner value. During the performance period, Kellogg ParentCo delivered EPP Net Sales of 6.9%, which is significantly above the 1 to 2% target range. Kellogg ParentCos EPP Cash Flow performance during the period was $3.8 billion, which is also significantly above the $2.8 billion to $3.1 billion target range. Under the Plan, this performance results in a payout of up to 200% of the share target amount, and the C&T Committee utilized its reasonable discretion to determine that our NEOs (other than Ms. Brice, who does not hold a 2020-2022 EPP award) should receive a payout of 175% of share target amount. The C&T Committee determined this as the appropriate payout for Kellogg ParentCos performance during this period after considering the financial performance as well as (i) market share; (ii) Return on Invested Capital over the performance period; and (iii) Total Shareholder Return relative to Kellogg ParentCos peers over the performance period.
The chart below includes information about 2020-2022 EPP opportunities and actual payouts:
2020-2022 EPP Payout(1) (Paid in February 2023) |
||||||||||||||||||||
Name |
EPP Target Share Amount (#) |
EPP Maximum Share Amount (#) |
% of EPP Target |
Share Amount (#) |
Pre-tax Value Realized ($)(1) |
|||||||||||||||
Gary Pilnick |
15,950 | 31,900 | 175% | 27,913 | $ | 2,123,199 | ||||||||||||||
David McKinstray |
855 | 1,710 | 175% | 1,496 | $ | 113,784 | ||||||||||||||
Doug VanDeVelde |
3,030 | 6,060 | 175% | 5,303 | $ | 403,374 | ||||||||||||||
Bruce Brown |
1,290 | 2,580 | 175% | 2,258 | $ | 171,702 | ||||||||||||||
Sherry Brice(2) |
| | | | |
(1) | The payout is calculated by multiplying the earned shares plus accrued dividend equivalent units by the closing price of Kellogg ParentCo common stock on February 17, 2023, which was $68.38 per share. |
(2) | Ms. Brice was not a holder of a 2020-2022 EPP award, so no shares were paid out to her in February 2023. |
2022-2024 PSU Plan. The C&T Committee reviews the PSU Plan metrics for Mr. Pilnick annually and receives input on the metrics from Kellogg ParentCos independent compensation consultant and through Kellogg ParentCos Shareowner outreach program. For the 2022-2024 PSU Plan, the metrics are organic net sales growth and aggregate operating cash flow. In 2022, the C&T Committee set Mr. Pilnicks PSU Plan target at 75% of his total long-term incentive opportunity. Each of the other NEOs also have a PSU Plan target at 75% of their total long-term incentive opportunity. Participants in the PSU Plan have the opportunity to earn between 0% and 200% of their PSU Plan target. Dividend equivalents accrue and vest in accordance with the underlying PSU Plan award. For the 2022-2024 PSU Plan, the performance targets are organic net sales growth (excluding acquisitions and divestitures during the performance period and foreign currency) and aggregate net cash provided by operating activities reduced by capital expenditures. The 2022-2024 PSU Plan cycle began on
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
January 2, 2022 (first day of fiscal 2022) and concludes on December 28, 2024 (last day of fiscal 2024). The 2022-2024 PSU Plan award opportunities, presented in number of potential shares that can be earned, are included in the Grant of Plan-Based Awards Table on page 140 of this Information Statement.
Restricted Stock Units
In 2022, Kellogg ParentCo also set each of our NEOs RSU target at 25% of their long-term incentive opportunity. Additionally, Kellogg ParentCo also awards RSUs from time to time to select employees for a variety of reasons including performance, recruiting and retention. The vesting period for such annual grants of RSUs made by Kellogg ParentCo to our NEOs is three years.
Retention Awards
Kellogg ParentCo grants retention awards from time to time in the form of RSUs (Retention RSUs). In 2022, among our NEOs, Mr. McKinstray received Retention RSUs in the ordinary course of business as part of Kellogg ParentCos efforts to retain key talent. In addition, due to Mr. VanDeVeldes knowledge and experience leading the North America cereal category, his retention through the closing of the Spin-Off is critical to the successful completion of the Spin-Off. To maintain continuity as we transition to a stand-alone company, Mr. VanDeVeldes retention for at least six months following the Spin-Off is also critical. For these reasons, Mr. VanDeVelde received a retention award in 2022, a portion of which is in the form of Retention RSUs and the remaining portion of which is in the form of cash (the Retention Cash Award), pursuant to a Retention Agreement and General Release (the Retention Agreement).
Retention RSUs
The Retention RSUs granted to Mr. McKinstray cliff vest on the third anniversary of the grant date, subject to his continued employment through the vesting date, but will receive the following treatment under certain circumstances: (a) pro-rata vesting upon a termination due to Mr. McKinstrays death or disability; (b) continued vesting in accordance with the original terms upon a termination without cause (as defined in the Kellogg Company Severance Benefit Plan (the Severance Benefit Plan)); (c) full accelerated vesting upon a change of control of Kellogg ParentCo (as defined in the Kellogg Company 2017 Long-Term Incentive Plan) if the Retention RSUs are not assumed or replaced with a qualifying substitute award; and (d) full accelerated vesting upon a termination without cause occurring within two years following a change of control if the Retention RSUs are assumed or replaced with a qualifying substitute award. The receipt of Mr. McKinstrays Retention RSUs is conditioned upon his continued compliance with certain restrictive covenants, including employee and customer non-solicitation and non-hire restrictions during employment and for two years thereafter and perpetual, non-disparagement and confidentiality obligations.
The Retention RSUs granted to Mr. VanDeVelde vest upon the earliest to occur of (i) the date of the Spin-Off, (ii) December 30, 2023 and (iii) a date of a Qualifying Termination (as defined in the Retention Agreement), subject to Mr. VanDeVeldes continued employment (unless he experiences a termination due to his death or disability, in which case, he will receive pro-rata vesting in any unvested Retention RSUs upon his termination date), execution and non-revocation of a general release of claims, compliance with the terms of the Retention Agreement, including the restrictive covenants, and performing his duties in accordance with the terms therein.
Retention Cash Award
The Retention Cash Award, in an amount of $239,000, will be paid within sixty days following the earliest to occur of (a) the six-month anniversary of the date of the Spin-Off, (b) June 30, 2024 and (c) a Qualifying Termination (as defined immediately below), subject to Mr. VanDeVeldes continued employment (unless he experiences a termination due to his death or disability, in which case, he will receive a pro-rata portion of his Retention Cash Award upon his termination date), execution and non-revocation of a general release of claims, compliance with the terms of the Retention Agreement, including the restrictive covenants, and performing his duties in accordance with the terms therein.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Qualifying Termination
Qualifying Termination for purposes of the Retention Agreement for Mr. VanDeVelde means a termination of Mr. VanDeVeldes employment by his employer for any reason other than: (a) a failure to comply with the performance obligations set forth in the Retention Agreement; (b) due to Mr. VanDeVeldes death or disability; or (c) any reason that would make Mr. VanDeVelde ineligible for benefits under the Severance Benefit Plan or, if the termination occurs after the date of the Spin-Off, under our severance benefit plan or such other severance benefit plan, program, policy or arrangement that Mr. VanDeVelde may be a participant or party to after the date of the Spin-Off.
Recognition Awards
In 2023, certain NEOs are expected to receive recognition awards in the form of a cash bonus (the Recognition Bonus) pursuant to a Recognition Award Agreement and General Release (the Recognition Award Agreement) for their significant contributions in connection with the Spin-Off. The Recognition Bonus will be paid on the earlier of the date of the Spin-Off and December 31, 2023, subject to the recipients continued employment and execution of a general release of claims. A recipient will remain eligible to receive the Recognition Bonus if they experience a Qualifying Termination, which, for purposes of the Recognition Award Agreements, means a termination of the participants employment for any reason other than any reason that would make the participant ineligible for benefits under the Severance Benefit Plan.
Other Compensation Elements
Post-Termination Compensation. The NEOs are covered by arrangements with Kellogg ParentCo which specify payments in the event the executives employment is terminated. These severance benefits, which are competitive with the Compensation Peer Group and general industry practices, are payable if and only if the executives employment is terminated by Kellogg ParentCo under certain circumstances, including that the termination was without cause. The Kellogg Severance Benefit Plan and the Change of Control Policy (as defined below) have been established primarily to attract and retain talented and experienced executives and further motivate them to contribute to Kellogg ParentCos short- and long-term success for the benefit of Shareowners. Kellogg ParentCos severance program is consistent with market practices, and cash severance for our NEOs is payable in the amount of two times current annual salary for Mr. Pilnick, one and a half times current annual salary for Mr. VanDeVelde, and, for the remaining NEOs, two weeks of current annual salary per year of service, subject to a minimum of 26 weeks and a maximum of 52 weeks. Mr. Pilnick is the only NEO that is eligible to participate in the Change of Control Policy (as defined below) that provides for payment of cash compensation following a change in control of Kellogg ParentCo in the amount of two times the current annual salary and the current target annual incentive award. For more information, please refer to Potential Post-Employment Payments, which begins on page 149 of this Information Statement.
Retirement Plans. All NEOs are eligible to participate in the Kellogg ParentCo-provided defined contribution plan alongside substantially all other U.S. employees, which provides for both matching and fixed Kellogg ParentCo contributions based on employee deferrals and years of service, respectively. Amounts earned under long-term incentive programs are not included when determining retirement benefits for any plan participants. In addition, we do not pay above-market interest rates on amounts deferred under either Kellogg ParentCos qualified or non-qualified savings and investment plans. For more information, please refer to Retirement and Non-Qualified Defined Contribution Plans, which begins on page 144 of this Information Statement.
Perquisites. Kellogg ParentCo provides limited perquisites to the NEOs. The Summary Compensation Table beginning on page 138 of this Information Statement contains itemized disclosure of all perquisites to our NEOs, regardless of amount.
Employee Stock Purchase Plan. Kellogg ParentCo has a tax-qualified employee stock purchase plan (the Employee Stock Purchase Plan) that is made available to substantially all U.S. employees, which allows
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
participants to acquire Kellogg ParentCo stock at a discounted price. The purpose of the plan is to encourage employees at all levels to purchase stock and become Shareowners. The plan allows participants to buy Kellogg ParentCo stock at a 15% discount to the market price. Under applicable tax law, a plan participant may purchase up to $25,000 in market value, as defined in the plan, of Kellogg ParentCo stock in any calendar year.
Post-Spin Compensation. Each of our NEOs is anticipated to have the following base salary rates, target AIP opportunity and target annual long-term incentive (LTI) opportunity, effective as of the Spin-Off: (i) for Mr. Pilnick, $1,000,000 annual base salary, $1,100,000 target AIP and $3,300,000 target annual LTI; (ii) for Mr. McKinstray, $500,000 annual base salary, $400,000 target AIP and $800,000 target annual LTI; (iii) for Mr. VanDeVelde, $550,000 annual base salary, $357,500 target AIP and $700,000 target annual LTI; (iv) for Mr. Brown, $455,000 annual base salary, $295,750 target AIP and $500,000 target annual LTI; and (v) for Ms. Brice, $400,000 annual base salary, $240,000 target AIP and $300,000 target annual LTI.
Employee Matters Agreement
Annual Incentives. Pursuant to our Employee Matters Agreement, the 2023 AIP for each of our named executives officers will, if earned, be paid in amounts no less than the amount that is earned based on performance through the Spin-Off, subject to their continued employment. Any 2023 AIP amount attributable to the period following the Spin-Off through the remaining portion of the performance period (if any) will be determined by the WKKC Compensation Committee.
Long-Term Incentives. Pursuant to the Employee Matters Agreement, upon consummation of the Spin-Off, all outstanding stock options to purchase Kellogg ParentCo common stock (Kellogg ParentCo Options) and Kellogg ParentCo PSUs and RSUs issued prior to June 21, 2022 and certain special RSUs (including those held by our NEOs) will remain at Kellogg ParentCo covering shares of Kellogg ParentCo common stock and subject to the same terms and conditions that existed prior to the Spin-Off, except that vesting will be based on the holders continued employment with the holders applicable employer following the Spin-Off, Kellogg ParentCo Options will expire on the earlier of the five-year anniversary of the Spin-Off and the original expiration date, and PSUs will be considered time-based awards for the duration of the performance periods and based on Kellogg ParentCo performance up to the Spin-Off. In respect of equity award holders that become an employee of WK Kellogg Co in connection with the Spin-Off, all outstanding Kellogg ParentCo RSUs and PSUs that were issued on or after June 21, 2022 will be converted into equity awards covering shares of our common stock and otherwise remain subject to the same terms and conditions that applied prior to the Spin-Off, except that vesting will be based on the holders continued employment with WK Kellogg Co following the Spin-Off and the WKKC Compensation Committee will determine whether the converted PSUs will continue to remain subject to performance vesting following the Spin-Off or have performance measured only through the Spin-Off and converted into RSUs. The foregoing treatment of equity awards upon the consummation of the Spin-Off is consistent with the treatment of equity awards held by our non-executive employees.
Employee Stock Purchase Plan. Pursuant to the Employee Matters Agreement, our employees that were eligible to participate in the Kellogg ParentCo employee stock purchase plan prior to the Spin-Off will remain eligible to participate in the WK Kellogg Co employee stock purchase plan that will be established by WK Kellogg Co and have comparable terms to the Kellogg ParentCo employee stock purchase plan.
E. PoliciesExecutive Stock Ownership Guidelines
In order to preserve the linkage between the interests of senior executives and those of Kellogg ParentCos Shareowners, certain Kellogg ParentCo senior executives are expected to establish and maintain a significant level of direct stock ownership. This can be achieved in a variety of ways, including by retaining stock received upon exercise of options or the vesting of stock awards (including EPP/PSU Plan awards), participating in the
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Employee Stock Purchase Plan and purchasing stock in the open market. Kellogg ParentCos current stock ownership guidelines (minimum requirements) are as follows:
Kellogg ParentCo Chief Executive Officer | 6x annual base salary | |
Other Kellogg ParentCo Named Executive Officers (including Mr. Pilnick) |
3x annual base salary | |
Other Kellogg ParentCo Senior Executives (including Mr. VanDeVelde) |
2x annual base salary |
These executives have five years from the date they first become subject to a particular level of the guidelines or from the date of a material increase in their base salary to meet them. For purposes of complying with Kellogg ParentCos guidelines, stock considered owned includes shares owned outright, shares acquired through the Employee Stock Purchase Plan, and 60% of unvested restricted stock and restricted stock units.
Kellogg ParentCo has a policy such that there is a holding period which requires that the executive officers subject thereto hold all shares received (net of tax) from option or stock awards (including EPP/PSU Plan awards) until their respective ownership guideline is met. The C&T Committee reviews compliance with the guidelines on an annual basis. Currently, Mr. Pilnick and Mr. VanDeVelde are subject to such share ownership guidelines and are in compliance with the ownership guideline for Kellogg ParentCo (three times the annual base salary and two times the annual base salary, respectively). Within 12 months of the Spin-Off, we intend to review and expect to adopt stock ownership guidelines appropriate for WK Kellogg Co as a newly established, stand-alone public company.
Practices Regarding the Grant of Equity Awards
Kellogg ParentCo has generally followed a practice of making all annual equity awards to executive officers on a single date each year.
The Kellogg ParentCo Board grants these annual awards at its regularly-scheduled meeting in February and all grants to the Kellogg ParentCos named executive officers (including Mr. Pilnick) are made by the Kellogg ParentCo Board itself and not pursuant to delegated authority. The February board meeting usually occurs within a few weeks following Kellogg ParentCos final earnings release for the previous fiscal year. Kellogg ParentCo believes it is appropriate for annual awards to be made shortly after the time when material information regarding its performance for the preceding year has been disclosed.
Kellogg ParentCo does not otherwise have any program, plan or practice to time its annual equity award grants to its executives or off-cycle awards in coordination with the release of material non-public information.
Securities Trading Policy
Kellogg ParentCos securities trading policy prohibits its directors, executives and other employees from engaging in any transaction in which they may profit from short-term speculative swings in the value of Kellogg ParentCos securities. This includes short sales (selling borrowed securities which the seller hopes can be purchased at a lower price in the future) or short sales against the box (selling owned, but not delivered securities), put and call options (publicly available rights to sell or buy securities within a certain period of time at a specified price or the like) and hedging transactions, such as zero-cost collars and forward sale contracts. Under this securities trading policy, Kellogg ParentCos named executive officers and other officers may not pledge shares or enter into any risk hedging arrangements with respect to Kellogg ParentCo stock. Kellogg ParentCos named executive officers may not hold Kellogg ParentCo stock in a margin account or pledge Kellogg ParentCo stock as collateral for a loan. In addition, this policy is designed to ensure compliance with relevant SEC regulations, including insider trading rules.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Clawback Policies
Kellogg ParentCo maintains clawback provisions relating to stock options, RSU and EPP/PSU Plan awards and the AIP. Under the clawback provisions for stock options, if an executive voluntarily leaves Kellogg ParentCos employment to work for a competitor within one year after any option exercise, then the executive would be required to repay to Kellogg ParentCo any gains realized from such exercise (but reduced by any tax withholding or tax obligations). In the event of fraud or misconduct causing a financial restatement, any gains realized from the exercise of stock options are subject to recoupment depending on the facts and circumstances of the event. Similarly, under Kellogg ParentCos AIP, RSU and EPP/PSU terms and conditions, in the event of fraud or misconduct causing a financial restatement, the AIP, RSU or EPP/PSU Plan awards for the plan year of the restatement are subject to recoupment depending on the facts and circumstances of the event. Beginning in 2018, Kellogg ParentCo expanded its provisions in all equity awards to require forfeiture of awards before vesting and clawback after vesting or exercise if an executive violates the non-compete or non-solicitation provisions of the awards or an executive engages in any activity that is contrary or harmful to Kellogg ParentCos interest.
Deductibility of Compensation and Other Related Issues
Section 162(m) of the Code generally imposes a $1 million limit on Kellogg ParentCos deductions for compensation paid to specified officers, including certain of our NEOs.
While Kellogg ParentCo considers tax deductibility as a factor in making compensation decisions, the C&T Committee retains the flexibility to provide compensation that is consistent with the objectives of Kellogg ParentCos executive compensation program, even if such compensation is not tax deductible. Further, the C&T Committee reserves the right to modify compensation that was initially intended to be exempt from Section 162(m) if it determines that such modifications are consistent with the objectives of Kellogg ParentCo and of its executive compensation program.
The C&T Committee also reviews projections of the estimated accounting (pro forma expense) and tax impact of all material elements of the executive compensation program. Generally, accounting expense is accrued over the requisite service period of the particular pay element (generally equal to the performance period) and Kellogg ParentCo realizes a tax deduction upon the approval of the payout or payment to the executive, subject to Section 162(m) limitations.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Executive Compensation Tables
Summary Compensation Table
The table below sets forth the annual and long-term compensation information awarded or paid by Kellogg ParentCo to our NEOs for services rendered to Kellogg ParentCo in all capacities during the 2022 fiscal year.
Name and |
Year | Salary ($)(1) |
Bonus | Stock Awards ($)(2)(3) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation ($)(4) |
Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($)(5) |
All Other Compensation ($)(6) |
Total ($) | |||||||||||||||||||||||||||
Gary Pilnick Chief Executive Officer |
2022 | 793,000 | | 1,900,173 | | 1,167,693 | | (7) | 161,775 | 4,022,641 | ||||||||||||||||||||||||||
David McKinstray Chief Financial Officer |
2022 | 360,385 | | 641,862 | | 311,320 | | 40,753 | 1,354,320 | |||||||||||||||||||||||||||
Doug VanDeVelde Chief Growth Officer |
2022 | 474,769 | | 663,197 | | 507,636 | | (7) | 81,624 | 1,727,226 | ||||||||||||||||||||||||||
Bruce Brown Chief Customer Officer |
2022 | 396,097 | | 258,995 | | 350,000 | | (7) | 59,892 | 1,064,984 | ||||||||||||||||||||||||||
Sherry Brice Chief Supply Chain Officer |
2022 | 323,842 | | 220,343 | | 237,886 | | 42,610 | 824,681 |
(1) | Kellogg ParentCos fiscal year normally ends on the Saturday closest to December 31 and as a result, a 53rd week is added approximately every sixth year. Kellogg ParentCos 2022 fiscal year contained 52 weeks. |
(2) | Reflects the aggregate grant-date fair value of stock awards calculated in accordance with FASB ASC Topic 718 for each NEO. Refer to Note 2 to our historical combined financial statements included in this Information Statement for a discussion of the relevant assumptions used in calculating the fair value. The table below presents separately the grant-date fair value for Kellogg ParentCos PSU Plan awards and restricted stock unit awards: |
Name |
Year | PSU Plan ($) | RSU ($) | Total ($) | ||||||||||||
Gary Pilnick |
2022 | 1,425,130 | 475,043 | 1,900,173 | ||||||||||||
David McKinstray |
2022 | 194,246 | 447,616 | 641,862 | ||||||||||||
Doug VanDeVelde |
2022 | 317,797 | 345,400 | 663,197 | ||||||||||||
Bruce Brown |
2022 | 194,246 | 64,749 | 258,995 | ||||||||||||
Sherry Brice |
2022 | 165,175 | 55,168 | 220,343 |
(3) | The actual PSU Plan payout can range from 0% to 200% of the target. If the highest level of performance conditions are achieved, then the grant-date fair value of the PSU Plan awards for each NEO is as follows: Mr. Pilnick: $2,850,260: Mr. McKinstray: $388,492; Mr. VanDeVelde: $635,594; Mr. Brown: $388,492; and Ms. Brice: $330,350. |
(4) | Represents the amounts of the 2022 AIP earned by each NEO. See Compensation Plans and DesignAnnual Incentives for additional information about the 2022 AIP. |
(5) | Represents the actuarial increase during 2022 in the pension value provided under the Pension Plans (as defined in Pension Plans) for each NEO. As of December 31, 2018, Kellogg ParentCos defined benefit pension plans were frozen so that impacted employees accrue no additional benefits under these plans after December 31, 2018. The calculation of actuarial present value is generally consistent with the methodology and assumptions outlined in the historical consolidated financial statements of Kellogg ParentCo, except |
138 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
that benefits are reflected as payable as of the date the executive is first entitled to full unreduced benefits (as opposed to the assumed retirement date) and without consideration of pre-retirement mortality. A variety of factors impact the actuarial increase in present value (pension value). In 2022, the primary factors impacting the pension value were changes in age, mortality assumption, and discount rate. Mr. McKinstray and Ms. Brice are not participants in the defined benefit pension plans. |
(6) | The table below presents an itemized account of All Other Compensation provided in 2022 to the NEOs. Consistent with Kellogg ParentCos emphasis on performance-based pay, perquisites and other compensation are limited in scope and are set forth below. |
Name |
Kellogg ParentCo Contributions to S&I and Restoration Plans(a)($) |
Company Paid Death Benefit(b) ($) |
Financial Planning Assistance(c) ($) |
Physical Exams(d) ($) |
Total | |||||||||||||||
Gary Pilnick |
117,665 | 26,663 | 10,200 | 7,247 | 161,775 | |||||||||||||||
David McKinstray |
39,549 | 1,204 | | | 40,753 | |||||||||||||||
Doug VanDeVelde |
63,890 | 9,302 | 8,432 | | 81,624 | |||||||||||||||
Bruce Brown |
52,752 | 7,140 | | | 59,892 | |||||||||||||||
Sherry Brice |
41,526 | 1,084 | | | 42,610 |
(a) | For information about the Savings & Investment Plan and Restoration Plan, refer to Retirement and Non-Qualified Defined Contribution Plans Defined Contribution Plans beginning on page 144 of this Information Statement. |
(b) | Annual cost for Kellogg ParentCo-paid life insurance, Kellogg ParentCo-paid accidental death and dismemberment, and, for Mr. Pilnick, Mr. VanDeVelde, and Mr. Brown, Executive Survivor Income Plan (Kellogg ParentCo funded death benefit provided to certain executive employees). |
(c) | Reflects reimbursement for financial and tax planning assistance. |
(d) | Actual cost of a physical health exam. |
(7) | The actual value of pension for Mr. Pilnick, Mr. VanDeVelde and Mr. Brown decreased by $1,684,000, $760,000 and $520,000, respectively, for 2022, primarily as a result of changes in discount rates. |
Grant of Plan-Based Awards Table
During 2022, Kellogg ParentCo granted the following plan-based awards to our NEOs:
| 2022 AIP grants (annual cash performance-based awards) paid in March 2023; |
| 2022-2024 PSU Plan grants (multi-year stock performance-based awards); |
| RSU grants; and |
| Retention RSUs (in the case of Mr. McKinstray and Mr. VanDeVelde). |
139 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Information with respect to each of these awards on a grant-by-grant basis is set forth in the table below. For a detailed discussion of each of these awards and their material terms, refer to Summary Compensation Table and Compensation Plans and Design above.
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1) |
Estimated Future Payouts Under Equity Incentive Plan Awards |
|||||||||||||||||||||||||||||||||||||||||||
Name |
Grant Date | Threshold ($) |
Target ($) |
Maximum ($) |
Threshold (#) |
Target (#) | Maximum (#) |
All Other Stock Awards: Number of Shares of Stock or Units (#) |
All Other Option Awards: Number of Securities Underlying Options (#) |
Exercise or Base Price of Option Awards ($/Sh) |
Grant-date Fair Value of Stock and Option Awards ($) |
|||||||||||||||||||||||||||||||||
Gary Pilnick 2022 AIP |
753,350 | 1,506,700 | ||||||||||||||||||||||||||||||||||||||||||
2022-2024 PSU |
02/18/2022 | | 21,570 | 43,140 | 1,425,130 | (2) | ||||||||||||||||||||||||||||||||||||||
2022 RSU(3) |
02/18/2022 | 7,190 | 475,043 | (4) | ||||||||||||||||||||||||||||||||||||||||
David McKinstray 2022 AIP |
181,000 | 362,000 | ||||||||||||||||||||||||||||||||||||||||||
2022-2024 PSU |
02/18/2022 | | 2,940 | 5,880 | 194,246 | (2) | ||||||||||||||||||||||||||||||||||||||
2022 RSU(3) |
02/18/2022 | 980 | 64,749 | (4) | ||||||||||||||||||||||||||||||||||||||||
2022 RSU(5) |
02/23/2022 | 5,760 | 382,867 | (4) | ||||||||||||||||||||||||||||||||||||||||
Doug VanDeVelde 2022 AIP |
286,800 | 573,600 | ||||||||||||||||||||||||||||||||||||||||||
2022-2024 PSU |
02/18/2022 | | 4,810 | 9.620 | 317,797 | (2) | ||||||||||||||||||||||||||||||||||||||
2022 RSU(3) |
02/18/2022 | 1,610 | 106,373 | (4) | ||||||||||||||||||||||||||||||||||||||||
2022 RSU(6) |
07/04/2022 | 3,330 | 239,027 | (4) | ||||||||||||||||||||||||||||||||||||||||
Bruce Brown 2022 AIP |
200,000 | 400,000 | ||||||||||||||||||||||||||||||||||||||||||
2022-2024 PSU |
02/18/2022 | | 2,940 | 5,880 | 194,246 | (2) | ||||||||||||||||||||||||||||||||||||||
2022 RSU(3) |
02/18/2022 | 980 | 64,749 | (4) | ||||||||||||||||||||||||||||||||||||||||
Sherry Brice 2022 AIP |
146,843 | 293,686 | ||||||||||||||||||||||||||||||||||||||||||
2022-2024 PSU |
02/18/2022 | | 2,500 | 5,000 | 165,175 | (2) | ||||||||||||||||||||||||||||||||||||||
2022 RSU(3) |
02/18/2022 | 835 | 55,168 | (4) |
(1) | Represents estimated possible payouts on the grant date for annual performance cash awards granted by Kellogg ParentCo in 2022 under the 2022 AIP for each of our NEOs. The actual amount of AIP paid can range from 0% to 200% of the target. The AIP is an annual cash incentive opportunity and, therefore, these awards are earned in the year of grant. See the column captioned Non-Equity Incentive Plan Compensation in the Summary Compensation Table for the actual payout amounts related to the 2022 AIP. See also Compensation Plans and DesignAnnual Incentives for additional information about the 2022 AIP. |
(2) | Represents the grant-date fair value calculated in accordance with FASB ASC Topic 718. Refer to Note 2 to our historical combined financial statements included in this Information Statement. This grant-date fair value assumes that each participant earns the target PSU Plan award (i.e., 100% of PSU target). The actual value the NEO receives will depend on the number of shares earned and the price of Kellogg ParentCo common stock when the shares vest. |
(3) | The restricted stock units will vest in full on February 18, 2025, the third anniversary of the grant date. |
(4) | Represents the grant-date fair value calculated in accordance with FASB ASC Topic 718. Refer to Note 2 to our historical combined financial statements included in this Information Statement. The grant-date fair value of the restricted stock units will likely vary from the actual value the NEO receives, which will depend on the value of the shares upon vesting. |
(5) | The restricted stock units will vest in full on February 23, 2025, the third anniversary of the grant date. |
(6) | The restricted stock units will vest in full upon the earliest to occur of (i) the date of the Spin-Off, (ii) December 30, 2023 and (iii) a date of a qualifying termination. For additional information with respect to these awards, refer to Compensation Plans and DesignRetention Awards. |
140 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Outstanding Equity Awards at Fiscal Year-End Table
The following equity awards granted from Kellogg ParentCo to our NEOs were outstanding as of the end of fiscal 2022:
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Name |
Number of Securities Underlying Unexercised Options (#) Exercisable(1) |
Number of Securities Underlying Unexercised Options (#) Unexercisable(2) |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Option Exercise Price ($)(3) |
Option Expiration Date(4) |
Number of Shares or Units of Stock That Have Not Vested (#)(5) |
Market Value of Shares or Units of Stock That Have Not Vested ($)(6) |
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(7) |
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(8) |
|||||||||||||||||||||||||||
Gary Pilnick Options |
49,300 | | 64.09 | 2/20/2025 | ||||||||||||||||||||||||||||||||
62,200 | | 75.52 | 2/19/2026 | |||||||||||||||||||||||||||||||||
54,100 | | 72.90 | 2/17/2027 | |||||||||||||||||||||||||||||||||
60,600 | | 69.66 | 2/16/2028 | |||||||||||||||||||||||||||||||||
73,660 | | 56.73 | 2/22/2029 | |||||||||||||||||||||||||||||||||
26,593 | 13,297 | (9) | 65.52 | 2/21/2030 | ||||||||||||||||||||||||||||||||
15,043 | 30,087 | (10) | 57.91 | 2/19/2031 | ||||||||||||||||||||||||||||||||
RSU(11) |
26,012 | 1,853,095 | ||||||||||||||||||||||||||||||||||
2020-22 EPP(12) |
35,486 | 2,528,023 | ||||||||||||||||||||||||||||||||||
2021-23 EPP |
38,752 | 2,760,692 | ||||||||||||||||||||||||||||||||||
2022-24 PSU |
44,650 | 3,180,866 | ||||||||||||||||||||||||||||||||||
David McKinstray Options |
2,300 | | 75.52 | 2/19/2026 | ||||||||||||||||||||||||||||||||
2,800 | | 72.90 | 2/17/2027 | |||||||||||||||||||||||||||||||||
3,410 | | 69.66 | 2/16/2028 | |||||||||||||||||||||||||||||||||
3,253 | 1,627 | (9) | 65.52 | 2/21/2030 | ||||||||||||||||||||||||||||||||
2,533 | 5,067 | (10) | 57.91 | 2/19/2031 | ||||||||||||||||||||||||||||||||
RSU(11) |
2,713 | 193,274 | ||||||||||||||||||||||||||||||||||
Retention RSU(13) |
5,962 | 424,733 | ||||||||||||||||||||||||||||||||||
2020-22 EPP(12) |
1,902 | 135,498 | ||||||||||||||||||||||||||||||||||
2021-23 EPP |
2,856 | 203,461 | ||||||||||||||||||||||||||||||||||
2022-24 PSU |
6,086 | 433,567 | ||||||||||||||||||||||||||||||||||
Doug VanDeVelde Options |
9,500 | | 64.09 | 2/20/2025 | ||||||||||||||||||||||||||||||||
11,500 | | 75.52 | 2/19/2026 | |||||||||||||||||||||||||||||||||
9,603 | | 72.90 | 2/17/2027 | |||||||||||||||||||||||||||||||||
13,700 | | 69.66 | 2/16/2028 | |||||||||||||||||||||||||||||||||
5,040 | 2,520 | (9) | 65.52 | 2/21/2030 | ||||||||||||||||||||||||||||||||
3,050 | 6,100 | (10) | 57.91 | 2/19/2031 | ||||||||||||||||||||||||||||||||
RSU(11) |
5,322 | 379,139 | ||||||||||||||||||||||||||||||||||
Retention RSU(13) |
8,706 | 620,215 | ||||||||||||||||||||||||||||||||||
Spin-Off Retention RSU(14) |
3,385 | 241,147 | ||||||||||||||||||||||||||||||||||
2020-22 EPP(12) |
6,742 | 480,300 | ||||||||||||||||||||||||||||||||||
2021-23 EPP |
7,858 | 559,804 | ||||||||||||||||||||||||||||||||||
2022-24 PSU |
9,956 | 709,265 |
141 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Name |
Number of Securities Underlying Unexercised Options (#) Exercisable(1) |
Number of Securities Underlying Unexercised Options (#) Unexercisable(2) |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Option Exercise Price ($)(3) |
Option Expiration Date(4) |
Number of Shares or Units of Stock That Have Not Vested (#)(5) |
Market Value of Shares or Units of Stock That Have Not Vested ($)(6) |
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(7) |
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(8) |
|||||||||||||||||||||||||||
Bruce Brown Options |
7,200 | | 75.52 | 2/19/2026 | ||||||||||||||||||||||||||||||||
5,900 | | 72.90 | 2/17/2027 | |||||||||||||||||||||||||||||||||
6,400 | | 69.66 | 2/16/2028 | |||||||||||||||||||||||||||||||||
4,886 | 2,444 | (9) | 65.52 | 2/21/2030 | ||||||||||||||||||||||||||||||||
2,766 | 5,534 | (10) | 57.91 | 2/19/2031 | ||||||||||||||||||||||||||||||||
RSU(11) |
3,154 | 224,691 | ||||||||||||||||||||||||||||||||||
Retention RSU(13) |
6,497 | 462,846 | ||||||||||||||||||||||||||||||||||
2020-22 EPP(12) |
2,870 | 204,459 | ||||||||||||||||||||||||||||||||||
2021-23 EPP |
3,134 | 223,266 | ||||||||||||||||||||||||||||||||||
2022-24 PSU |
6,086 | 433,567 | ||||||||||||||||||||||||||||||||||
Sherry Brice Options |
1,000 | | 75.52 | 2/19/2026 | ||||||||||||||||||||||||||||||||
540 | | 72.90 | 2/17/2027 | |||||||||||||||||||||||||||||||||
1,430 | | 69.66 | 2/16/2028 | |||||||||||||||||||||||||||||||||
2,000 | 1,000 | (9) | 65.52 | 2/21/2030 | ||||||||||||||||||||||||||||||||
0 | 5,534 | (10) | 57.91 | 2/19/2031 | ||||||||||||||||||||||||||||||||
RSU(11) |
2,982 | 212,438 | ||||||||||||||||||||||||||||||||||
Retention RSU(13) |
4,846 | 345,229 | ||||||||||||||||||||||||||||||||||
2021-23 EPP |
3,134 | 223,266 | ||||||||||||||||||||||||||||||||||
2022-24 PSU |
5,174 | 368,596 |
(1) | On an award-by-award basis, the number of securities underlying unexercised options that are exercisable and that are not reported in Column 3Number of Securities Underlying Unexercised Unearned Options. |
(2) | On an award-by-award basis, the number of securities underlying unexercised options that are unexercisable and that are not reported in Column 3Number of Securities Underlying Unexercised Unearned Options. |
(3) | The exercise price for each option reported in Columns 1 and 2Number of Securities Underlying Unexercised Options and Column 3Number of Securities Underlying Unexercised Unearned Options. |
(4) | The expiration date for each option reported in Columns 1 and 2Number of Securities Underlying Unexercised Options and Column 3Number of Securities Underlying Unexercised Unearned Options. |
(5) | The total number of shares of Kellogg ParentCo stock that have not vested and that are not reported in Column 8Number of Unearned Shares, Units or Other Rights That Have Not Vested. |
(6) | Market value is calculated by multiplying the number of unvested RSUs by $71.24, the closing price of Kellogg ParentCo common stock on December 30, 2022 (the last trading day of fiscal 2022). |
(7) | Represents the maximum number of shares that could be earned under outstanding EPP and PSU Plan awards, including dividend equivalent units accrued as of December 31, 2022. The ultimate number of shares issued under the EPP and PSU Plan awards will depend on the number of shares earned and the price of Kellogg ParentCo common stock on the actual vesting date. For additional information with respect to these awards, refer to Summary Compensation Table and Compensation Plans and Design. |
(8) | Represents the maximum number of shares that could be earned under outstanding EPP and PSU Plan awards multiplied by the closing price of Kellogg ParentCo common stock on December 30, 2022 (the last trading day of fiscal 2022). The ultimate value of the EPP and PSU Plan awards will depend on the number of Kellogg ParentCo shares earned and the price of Kellogg ParentCo common stock on the actual vesting date. |
142 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(9) | One-third of these options vested on February 21, 2021; one-third vested on February 21, 2022; and one-third vested on February 21, 2023. |
(10) | One-third of these options vested on February 19, 2022; one third-vested on February 19, 2023; and one-third will vest on February 19, 2024. |
(11) | Mr. Pilnicks RSUs vested on February 21, 2023 (8,877 units), and will vest on February 19, 2024 (9,693 units) and February 18, 2025 (7,442 units) Mr. McKinstrays RSUs vested on February 21, 2023 (679 units), and will vest on February 19, 2024 (1,020 units) and February 18, 2025 (1,014 units). Mr. VanDeVeldes RSUs vested on February 21, 2023 (1,691 units), and will vest on February 19, 2024 (1,965 units) and February 18, 2025 (1,666 units). Mr. Browns RSUs vested on February 21, 2023 (1,024 units), and will vest on February 19, 2024 (1,116 units) and February 18, 2025 (1,014 units). Ms. Brices RSUs vested on February 21, 2023 (1,001 units), and will vest on February 19, 2024 (1,116 units) and February 18, 2025 (865 units). Awards outstanding include accrued dividend equivalent units. |
(12) | Vested on February 17, 2023; for actual payout amounts see the 2020-2022 EPP table on page 132 of this Information Statement. |
(13) | Mr. McKinstrays RSUs will cliff vest on February 23, 2025 (5,962 units). Mr. VanDeVeldes RSUs vested on March 2, 2023 (8,706 units). Mr. Browns RSUs vested on May 28, 2023 (6,497 units). Ms. Brices RSUs will cliff vest on October 19, 2024 (4,846 units). Awards outstanding include accrued dividend equivalent units. |
(14) | The restricted stock units will vest in full upon the earliest to occur of (i) the date of the Spin-Off, (ii) December 30, 2023 and (iii) a date of a qualifying termination. Awards outstanding include accrued dividend equivalent units. For additional information with respect to these awards, refer to Compensation Plans and DesignRetention Awards. |
Option Exercises and Stock Vested Table
With respect to our NEOs, this table shows the Kellogg ParentCo stock options exercised by such officers during 2022 (disclosed under the Option Awards columns) and Kellogg ParentCo stock awards that vested during 2022 (disclosed under the Stock Awards columns).
The dollar value in the Option Awards column reflects the total pre-tax value realized by such officers (Kellogg ParentCo stock price at exercise minus the options exercise price), not the grant-date fair value disclosed elsewhere in this Information Statement.
Stock awards include Kellogg ParentCo RSUs and EPP awards that vested in 2022. The 2019-2021 EPP cycle began on December 30, 2018 (first day of fiscal 2019) and concluded on January 1, 2022 (last day of fiscal 2021). Although the performance period ended on January 1, 2022, each NEO had to be actively employed by Kellogg ParentCo on the date the awards vested (February 18, 2022) in order to be eligible to receive a payout.
Option Awards | Stock Awards(1) | |||||||||||||||
Name |
Number of Shares Acquired on Exercise (#) |
Value Realized on Exercise ($) |
Number of Shares Acquired on Vesting (#) |
Value Realized on Vesting ($) |
||||||||||||
Gary Pilnick |
115,000 | 1,714,453 | 24,687 | 1,631,276 | ||||||||||||
David McKinstray |
6,490 | 94,987 | 6,777 | 448,095 | ||||||||||||
Doug VanDeVelde |
24,130 | 357,533 | 3,940 | 260,349 | ||||||||||||
Bruce Brown |
6,910 | 118,782 | 2,322 | 153,531 | ||||||||||||
Sherry Brice |
5,496 | 84,338 | 1,161 | 76,765 |
(1) | Does not reflect the payout of 2020-2022 EPP awards. The 2020-2022 EPP cycle concluded on December 31, 2022 (last day of fiscal 2022). Each NEO had to be actively employed by Kellogg ParentCo on the date the awards vested (February 17, 2023) in order to be eligible to receive a payout. See Compensation Plans and DesignLong-Term IncentivesExecutive Performance Plan2020-2022 EPP and 2022 Outstanding Equity Awards Table for additional information. |
143 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Retirement and Non-Qualified Defined Contribution Plans
Our NEOs are eligible to receive retirement benefits from Kellogg ParentCo. The C&T Committee utilizes survey information for Fortune 500 companies and Kellogg ParentCos peer group compiled by Willis Towers Watson and Mercer to help determine the appropriate level of benefits. The C&T Committee uses the same survey information used by Kellogg ParentCo to set these benefits for all U.S. salaried employees. Our NEOs participate in the same plans as Kellogg ParentCos other eligible U.S. salaried employees. The total retirement benefit is provided through a combination of qualified and non-qualified defined contribution savings and investment plans, and qualified and non-qualified defined benefit pension plans. Eligibility for the different plans provided by Kellogg ParentCo varies by NEO.
Kellogg ParentCos U.S. savings and investment program includes a non-qualified restoration plan for its U.S. executives, including our NEOs, which allows Kellogg ParentCo to provide benefits comparable to those which would be available under its IRS qualified plans if the IRS regulations did not include limits on covered compensation and benefits. This plan is referred to as a restoration plan because it restores benefits that would otherwise be available under the plan. This plan uses the same benefit formulas as Kellogg ParentCos broad-based IRS qualified plans and uses the same type of compensation to determine benefit amounts.
Amounts earned under long-term incentive programs such as EPP/PSU Plans, gains from stock options and awards of restricted stock and RSUs are not included when determining retirement benefits for any Kellogg ParentCo employee, including our NEOs. Kellogg ParentCo does not pay above-market interest rates on amounts deferred under its savings and investment plans.
The amount of an employees compensation is an integral component of determining the benefits provided under pension and savings plan formulas, thus, an individuals performance over time will influence the level of his or her retirement benefits.
Defined Contribution Plans
Kellogg ParentCo offers both qualified and non-qualified defined contribution plans for its employees to elect voluntary deferrals of salary and annual incentive awards. Kellogg ParentCos principal defined contribution plans are composed of (1) the Kellogg Savings & Investment Plan (Kellogg S&I Plan) (which is a qualified plan available to substantially all of its U.S. salaried employees) and (2) the Kellogg Supplemental Savings & Investment Plan (Restoration Plan), which is a non-qualified plan as described below. All of our NEOs are participants in both of these plans.
Kellogg S&I Plan
Under this plan, Kellogg ParentCo employees can defer up to 50% of base salary plus annual incentives. Distributions are generally made after termination (directly to employee or rolled over to another account) or when an employee reaches age 59 and a half. In order to assist employees with saving for retirement, Kellogg ParentCo provides matching contributions on employee deferrals. Under the Kellogg S&I Plan, Kellogg ParentCo matches 100% of employee deferral contributions up to 3% of eligible compensation (i.e., base salary plus annual incentives), and 50% of employee deferral contributions between 3% and 5% of eligible compensation. No Kellogg ParentCo matching contributions are provided above 5% of eligible compensation deferred by an employee. Any amount of employee deferrals or matching contributions in excess of IRS limits will be made to the Restoration Plan. Additionally, Kellogg ParentCo provides a fixed Retirement Contribution to the Kellogg S&I Plan (the Retirement Contribution). The Retirement Contribution is a fixed 3%, 5% or 7% of base salary, for employees with up to 10 years of service, between 10 and 20 years of service or greater than 20 years of service, respectively. For employees who have less than three years of service, the Retirement Contribution vests upon the third anniversary of employment.
144 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Non-Qualified Deferred Contribution Plan (Restoration Plan)
Effective on January 1, 2005, the Kellogg ParentCo Restoration Plan was renamed the Grandfathered Restoration Plan and, to preserve certain distribution options previously available in the Restoration Plan, it was amended in accordance with IRS regulations issued under Section 409A of the Code to no longer allow for deferrals after December 31, 2004. Deferrals after December 31, 2004 are included in a new Restoration Plan which complies with IRS regulations under Section 409A.
Under this plan, eligible employees can defer up to 50% of base salary plus annual incentives. Payouts are generally made after retirement or termination of employment with Kellogg ParentCo, either as annual installments or as a lump sum, based on the distribution option elected under the plan. Participants in the Restoration Plan may not make withdrawals during their employment. Participants in the Grandfathered Restoration Plan may make withdrawals during employment but must pay a 10% penalty on any in-service withdrawal.
The Restoration Plan is a non-qualified, unfunded plan Kellogg ParentCo offers to its employees who are impacted by the statutory limits of the Code on contributions under its qualified plans. The Restoration Plan allows Kellogg ParentCo to provide the same matching contribution and fixed Retirement Contribution, as a percentage of eligible compensation, to impacted employees as other employees who participate in the Kellogg S&I Plan. As an unfunded plan, no money is actually invested in the Restoration Plan; contributions and earnings/losses are tracked in a book-entry account and all account balances are general Kellogg ParentCo obligations.
The following table provides information with respect to Kellogg ParentCos non-qualified deferred compensation plans, as applicable to each of our NEOs. This table excludes information with respect to the Kellogg S&I Plan, which is a qualified plan available to U.S. salaried Kellogg ParentCos employees as described above.
Non-Qualified Deferred Compensation
Name |
Executive Contributions in Last FY ($)(1) |
Company Contributions in Last FY ($)(2) |
Aggregate Earnings in Last FY ($)(3) |
Aggregate Withdrawals Distributions ($) |
Aggregate Balance at Last FYE ($)(4)(5) |
|||||||||||||||
Gary Pilnick |
62,444 | 84,115 | 57,763 | | 3,011,331 | |||||||||||||||
David McKinstray |
23,369 | 14,454 | (30,687 | ) | | 153,447 | ||||||||||||||
Doug VanDeVelde |
27,672 | 30,340 | 16,940 | | 977,209 | |||||||||||||||
Bruce Brown |
32,243 | 22,589 | (30,955 | ) | | 452,767 | ||||||||||||||
Sherry Brice |
6,761 | 8,080 | 829 | | 53,068 |
(1) | Amounts in this column are included in the Salary and Non-Equity Incentive Plan Compensation columns in the Summary Compensation Table. |
(2) | Amounts in this column are Kellogg ParentCo contributions and are included in the All Other Compensation column of the Summary Compensation Table. |
(3) | Represents at-market/non-preferential earnings that are credited on the accumulated balance in 2022. |
(4) | Aggregate balance as of December 31, 2022 is the total market value of the deferred compensation account, including executive contributions, Kellogg ParentCo contributions and any earnings, including contributions and earnings from past fiscal years. |
145 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
(5) | The amounts in the table below are also being reported in the Salary, Non-Equity Incentive Plan Compensation and All Other Compensation columns in the Summary Compensation Table in the years indicated. |
Name |
Fiscal Year | Reported Amounts ($) |
||||||
Gary Pilnick |
2022 | 146,559 | ||||||
David McKinstray |
2022 | 37,823 | ||||||
Doug VanDeVelde |
2022 | 58,012 | ||||||
Bruce Brown |
2022 | 54,832 | ||||||
Sherry Brice |
2022 | 14,841 |
Pension Plans
In September 2017, Kellogg ParentCo amended certain defined benefit pension plans and associated restoration plans in the United States, Canada, United Kingdom and the Republic of Ireland for salaried employees. As of December 31, 2018, the amendment froze the compensation and service periods used to calculate pension benefits for active salaried employees who participate in the affected pension plans. Beginning January 1, 2019, impacted employees no longer accrued additional benefits under these plans for future service and eligible compensation received under these plans, and began participating in the same defined contribution plans as all other salaried employees.
Kellogg ParentCos U.S. pension plans are composed of the Kellogg Company Pension Plan and the non-qualified restoration plans, which include the Kellogg Company Executive Excess Plan for accruals after December 31, 2004, and the Kellogg Company Excess Benefit Retirement Plan for accruals on or before December 31, 2004 (collectively, the Pension Plans). Mr. Pilnick, Mr. VanDeVelde, and Mr. Brown are participants in the Pension Plans. Since 2008, Mr. Pilnick has been treated as a grandfathered participant.
Below is an overview of Kellogg ParentCos current Pension Plans in which Mr. Pilnick, Mr. VanDeVelde, and Mr. Brown participate.
Qualified Pension Plan (Grandfathered Heritage Plan) |
Qualified Pension
Plan |
Non-Qualified Plans | ||||
Reason for Plan | Provide eligible employees with a competitive level of retirement benefits based on pay and years of service. Benefit accruals were frozen for salaried employees as of the close of December 31, 2018. |
Provide eligible employees with a competitive level of retirement benefits by restoring the benefits limited by the Code based on the formula used in the qualified pension plan. Benefit accruals were frozen for salaried employees as of the close of December 31, 2018. | ||||
Eligibility | Salaried employees and certain hourly employees. Pension Plans closed to new participants beginning January 1, 2010. |
Eligible employees impacted under the Code by statutory limits on the level of compensation and |
146 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Qualified Pension Plan (Grandfathered Heritage Plan) |
Qualified Pension
Plan |
Non-Qualified Plans | ||||
benefits that can be considered in determining Kellogg ParentCo-provided retirement benefits. | ||||||
Payment Form | Monthly annuity or lump sum at the choice of the executive. | |||||
Participation, as of January 1, 2003 | Active Kellogg ParentCo heritage employees who were hired prior to August 1, 2002 and who were 40 years of age or older or had 10 or more years of service as of January 1, 2003. | Active Kellogg ParentCo heritage employees who were hired prior to August 1, 2002 and who were neither 40 years of age or older nor had 10 or more years of service as of January 1, 2003. | Active Kellogg ParentCo heritage employees who were hired before January 1, 2010, attained a certain level in the organization, and exceeded the compensation limits as set out in the qualified pension plan. | |||
Retirement Eligibility | Full Unreduced Benefit: Normal retirement age 65 Age 55 with 30 or more years of service Age 62 with 5 years of service
Reduced Benefit: Age 55 with 20 years of service Any age with 30 years of service |
Full Unreduced Benefit: Normal retirement age 65
Reduced Benefit: Age 55 with 20 years of service Any age with 30 years of service Age 62 with 5 years of service |
Full Unreduced Benefit: Normal retirement age 65 Age 55 with 30 or more years of service for those who participate in the Grandfathered Heritage Plan Age 62 with 5 years of service for those who participate in the Grandfathered Heritage Plan
Reduced Benefit: Age 55 with 20 years of service Any age with 30 years of service Age 62 with 5 years of service for those who participate in the Non-Grandfathered Heritage Plan |
147 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Qualified Pension Plan (Grandfathered Heritage Plan) |
Qualified Pension
Plan |
Non-Qualified Plans | ||||
Pension Formula | Single Life Annuity = 1.5% x (years of service) x (final average pay based on the average of highest three consecutive years)(Social Security offset) | Single Life Annuity = 1.5% x (years of service) x (final average pay based on the average of highest five consecutive years)(Social Security offset) | Single Life Annuity = 1.5% x (years of service) x (final average pay based on the average of highest three consecutive years or, for those who participate in the Non-Grandfathered Heritage Plan, the average of highest five consecutive years)(Social Security offset) | |||
Pensionable Earnings | Includes only base pay and annual incentive payments. Kellogg ParentCo does not include any other compensation, such as restricted stock grants, RSU grants, EPP/PSU Plan payouts, gains from stock option exercises and any other form of stock- or option-based compensation in calculating pensionable earnings. |
The estimated actuarial present value of the retirement benefit accrued through December 31, 2022 appears in the following table. The calculation of actuarial present value is generally consistent with the methodology and assumptions outlined in our historical combined financial statements, except that benefits are reflected as payable as of the date the executive is first entitled to full unreduced benefits (as opposed to the assumed retirement date) and without consideration of pre-retirement mortality. Specifically, present value amounts were determined based on the financial accounting discount rate of 5.54% for the qualified pension plan and 5.50% for the non-qualified pension plan. Benefits subject to lump-sum distributions were determined using an interest rate of 5.54% for the qualified pension plan, 5.50% for the non-qualified pension plan, and current statutory mortality under the Pension Protection Act for the NEOs participating in the Pension Plans. For further information on the accounting for pension plans, refer to Notes 2 and 7 to our historical combined financial statements included in this Information Statement. The actuarial increase in 2022 of the projected retirement benefits can be found in the Summary Compensation Table under the heading Change in Pension Value and Non-Qualified Deferred Compensation Earnings. No payments were made to our NEOs under the Pension Plans during 2022. The number of years of credited service disclosed below equals an executives length of service with Kellogg ParentCo. All of Mr. Pilnicks years of service are reflected in the 2005 and After plan because he had not yet vested in the earlier plan at the time the new plan was established to comply with IRS regulations. Mr. VanDeVeldes and Mr. Browns years of service are reflected in both the 2005 and After plan and the 2004 and Earlier plan because they were vested in their benefits prior to 2005.
148 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Pension Benefits Table
Name(1) |
Plan Name |
Number of Years Credited Service (#) |
Present Value of Accumulated Benefit ($) |
Payments During Last Fiscal Year ($) |
||||||||||
Gary Pilnick |
U.S. Qualified Pension Plan | 18.33 | 501,000 | | ||||||||||
Non-Qualified Plan (2005 and after) | 18.33 | 3,890,000 | | |||||||||||
TOTAL | 4,391,000 | | ||||||||||||
Doug VanDeVelde |
U.S. Qualified Pension Plan | 21.08 | 502,000 | | ||||||||||
Non-Qualified Plan (2004 and earlier) | 7.08 | 172,000 | | |||||||||||
Non-Qualified Plan (2005 and after) | 14.00 | 859,000 | | |||||||||||
TOTAL | 1,533,000 | | ||||||||||||
Bruce Brown |
U.S. Qualified Pension Plan | 21.33 | 547,000 | | ||||||||||
Non-Qualified Plan (2004 and earlier) | 7.33 | 6,000 | | |||||||||||
Non-Qualified Plan (2005 and after) | 14.00 | 617,000 | | |||||||||||
TOTAL | 1,170,000 | |
(1) | Information regarding Mr. McKinstray and Ms. Brice is not presented in this table because these individuals are not participants in Kellogg ParentCos defined benefit pension plans. |
Potential Post-Employment Payments
Generally, our NEOs are eligible to receive benefits if their employment is terminated (1) by Kellogg ParentCo without cause, (2) upon their retirement, disability or death or (3) in certain circumstances following a change of control. The amount of benefits will vary based on the reason for the termination.
The table at the end of this section reflects calculations, as of December 31, 2022, of the estimated benefits our NEOs would receive in these situations. Although the calculations below are intended to provide reasonable estimates of the potential benefits, they are based on numerous assumptions and may not represent the actual amount an executive would receive if an eligible termination event were to occur.
Severance Benefits
Our NEOs are covered by arrangements that specify payments in the event the executives employment is terminated. These severance benefits are intended to be competitive with Kellogg ParentCos Compensation Peer Group and general industry practices. The Severance Benefit Plan and the Kellogg Company Change of Control Severance Policy for Key Executives (Change of Control Policy) have been established primarily to attract and retain talented and experienced executives and further motivate them to contribute to Kellogg ParentCos short- and long-term success for the benefit of Kellogg ParentCos Shareowners, particularly during uncertain times.
The Severance Benefit Plan provides severance benefits to employees who are terminated by Kellogg ParentCo under certain circumstances. Kellogg ParentCo has the right to receive a general release, non-compete, non-solicitation and non-disparagement agreement from separated employees in exchange for the benefits provided under the program.
The Change of Control Policy provides benefits to executives in connection with a change of control in the event an executive is terminated without cause or the executive terminates employment for good reason. The Change of
149 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Control Policy is intended to protect Kellogg ParentCo Shareowner interests by enhancing employee focus during rumored or actual change of control activity by providing incentives to executives to remain with Kellogg ParentCo despite uncertainties while a transaction is under consideration or pending. Mr. Pilnick is the only NEO that is eligible to participate in the Change of Control Policy.
Involuntary TerminationNo Change of Control
If the employment of an eligible Kellogg ParentCo executive (including our NEOs) is terminated due to a reduction in the work force, the relocation of a company facility or component within a company facility, the closing or sale of a company facility, lack of work, elimination of the executives position or any other reason approved in the sole discretion of Kellogg ParentCos ERISA Administrative Committee, the executive will generally be entitled to receive benefits under the Severance Benefit Plan. Benefits under the Severance Benefit Plan are not available if an executive (a) refuses to accept an offer of reasonable alternative employment from Kellogg ParentCo, (b) accepts any offer of employment with Kellogg ParentCo (regardless of whether the offer is deemed to be an offer of reasonable alternative employment), (c) is involved in activities such as a theft of Kellogg ParentCos property, workplace violence or intentional falsification of Kellogg ParentCos records, (d) is terminated for cause, (e) is offered employment by a buyer in the case of a sale or divestiture by Kellogg ParentCo (regardless of whether the executive accepts or rejects the employment offer or whether the offer is deemed to be an offer of reasonable alternative employment), (f) voluntarily terminates employment or retires, (g) enters into a consultative arrangement with Kellogg ParentCo which provides for compensation during the consulting period or (h) is deemed ineligible for any other reason in the sole discretion of Kellogg ParentCos ERISA Administrative Committee.
Cause is defined under the Severance Benefit Plan as (1) the employees willful engagement in conduct relating to the employees employment with Kellogg ParentCo for which either criminal or civil penalties may be sought; (2) the employees deliberate disregard of any Kellogg ParentCo policy, including Kellogg ParentCos insider trading policy, or Kellogg ParentCos code of conduct; (3) the employees acceptance of employment with or service as a consultant or advisor to an entity or person that is in competition with or acting against the interests of Kellogg ParentCo; (4) the employees disclosure or misuse of confidential information or material concerning Kellogg ParentCo; (5) the employees willful engagement in gross misconduct pursuant to which Kellogg ParentCo has suffered a loss; or (6) the employees willful and continued refusal to substantially perform the employees then current duties at Kellogg ParentCo in any material respect.
Under the Severance Benefit Plan:
| The executive is entitled to receive cash compensation equal to two times annual base salary (in the case of Mr. Pilnick), one and a half times annual base salary (in the case of Mr. VanDeVelde), or two weeks of base salary for each year of service, subject to a minimum of 26 weeks and a maximum of 52 weeks (in the case of Mr. McKinstray, Mr. Brown, and Ms. Brice), in each case payable in installments over the applicable severance leave of absence period (SLOA). |
| Kellogg ParentCo has the discretion to pay the executive an annual incentive award for the year in which the SLOA begins in accordance with the terms of the applicable annual incentive plan, prorated for the number of calendar days in the year before the date on which the SLOA begins. |
| Previously-granted stock option, restricted stock awards and RSU awards continue to vest during the SLOA. EPP/PSU Plan awards will be forfeited at the beginning of the SLOA except as provided in the EPP/PSU Plan terms and conditions or the executives severance agreement (if any). |
| The executive is entitled to continue to participate in certain welfare and insurance benefits during the SLOA, including continued Consolidated Omnibus Budget Reconciliation Act coverage at active employee rates. However, executives do not earn any additional vacation days or service credit for purposes of any retirement plan during the SLOA, and severance payments are not eligible compensation for purposes of any retirement plan. |
150 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
| The executive is entitled to receive outplacement assistance for 12 months (in the case of Mr. Pilnick) or nine months (in the case of Mr. McKinstray, Mr. VanDeVelde, Mr. Brown, and Ms. Brice). |
Severance-related benefits are provided only if the executive (i) executes a separation agreement prepared by Kellogg ParentCo, which includes a general release, non-competition, employee and customer non-solicitation, non-disparagement and/or other covenants as determined by Kellogg ParentCo in its sole discretion, (ii) remains an active employee until the ultimate date established by Kellogg ParentCo as the commencement date of the SLOA, (iii) assists with the transition of his or her duties and responsibilities (if requested by Kellogg ParentCo), (iv) complies with all policies and procedures of Kellogg ParentCo through the date of termination including the SLOA, (v) assigns to Kellogg ParentCo any patent applications filed during the executives employment with Kellogg ParentCo and (vi) does not experience a disqualifying event (as defined in the Severance Benefit Plan).
Retirement, Disability and Death
Retirement. In the event of retirement, an NEO is eligible to receive (1) the benefits payable under Kellogg ParentCos retirement plans and (2) prorated vesting of (a) stock options (depending on the terms and conditions of the award), (b) prorated awards under Kellogg ParentCos outstanding EPP/PSU Plans (the amount of which will be based on Kellogg ParentCos actual performance during the relevant periods and paid after the end of the performance periods) and (c) prorated RSUs (depending on the terms and conditions of the award). In addition, under the AIP, Kellogg ParentCo has the discretion to pay an NEO the actual annual incentive award for the current year, prorated as of the date of retirement. Retirement generally is defined as meeting Kellogg ParentCos age and/or service requirements for retirement eligibility.
Death or Disability. In the event of an NEOs disability, the executive would receive disability benefits starting six months following the onset of the disability with no reductions or penalty for early retirement. Disability generally is defined as inability to perform all the material duties of regular occupation because of injury or sickness. In addition, under the AIP, Kellogg ParentCo has the discretion to pay an NEO the actual annual incentive award for the current year, prorated as of the date of a termination due to disability. In the event of a NEOs death, the NEOs beneficiary would receive payouts under Kellogg ParentCo-funded life insurance policies and, in the case of Mr. Pilnick, Mr. VanDeVelde, and Mr. Brown, Kellogg ParentCos Executive Survivor Income Plan. However, the deceased NEOs defined benefit pension benefits would be converted to a joint survivor annuity, resulting in a decrease in the cost of these benefits. Under the AIP, Kellogg ParentCo has the discretion to pay an NEO the target annual incentive award for the current year, prorated as of the date of death.
Potential Change of Control Payments
Kellogg ParentCos 2009 LTIP, 2013 LTIP, 2017 LTIP and 2022 LTIP specify the treatment of outstanding, unvested equity awards granted under each respective plan to employees, including our NEOs, upon the occurrence of a change of control. Under the LTIPs and Change of Control Policy, the severance and other benefits payable to NEOs are subject to a double trigger. The first trigger is the occurrence of a change of control. The second trigger for Kellogg ParentCos Change of Control Policy, of which only Mr. Pilnick is eligible to participate, occurs if Kellogg ParentCo terminates a NEOs employment unrelated to cause, or a NEO terminates the NEOs employment for good reason, in each case within two years following the change of control. The second trigger for Kellogg ParentCos LTIPs occurs if (1) awards are not assumed or replaced by a substitute award, or (2) Kellogg ParentCo terminates a NEOs employment unrelated to cause or a NEO terminates the NEOs employment for good reason, in each case, within two years following the change of control. For these purposes, cause, good reason, and substitute awards are defined in Kellogg ParentCos LTIP and Change of Control Policy.
A change of control generally is defined in the arrangements to include a change in a majority of the Kellogg ParentCo Board, consummation of certain mergers, the sale of all or substantially all of Kellogg ParentCos
151 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
assets and Kellogg ParentCos Shareowner approval of a complete liquidation or dissolution. The change of control definition also includes an acquisition by a party of 20% or 30% of Kellogg ParentCo common stock, depending on the post-acquisition ownership of the Kellogg Foundation and Gund Family Trusts (the Trusts). The applicable percentage is 20% or more if the Trusts do not collectively own more than 35% of the common stock of Kellogg ParentCo. The applicable percentage is 30% or more if the Trusts collectively own more than 35% of the common stock of Kellogg ParentCo.
The change of control related severance payments consist of the following:
Payments Triggered Upon a Change of Control Without Termination. EPP/PSU Plan awards, RSUs, and stock options will retain their original vesting schedules and will not automatically vest upon a change of control (and only vest if there is no assumption, continuation or substitution of the outstanding awards with substitute awards that are, in the judgment of the C&T Committee, of equivalent value).
Payments to Mr. Pilnick Triggered Upon a Change of Control With Termination. Under the Change of Control Policy, cash severance is payable in the amount of two times Mr. Pilnicks current annual salary plus two times the current target annual incentive award. In addition, executives eligible to participate in the Change of Control Policy are entitled to receive the annual incentive award for the current year at the target award level, prorated as of the date of termination. This amount is payable as a lump sum within 90 days after termination.
Additional retirement benefits under the Change of Control Policy would equal the actuarial equivalent of the benefit the executive would have received for two years of additional participation under Kellogg ParentCos retirement plans. The executive will continue to participate in health and welfare benefit plans for a two-year period following termination and will also receive outplacement assistance.
In the case of Mr. Pilnick, if he becomes entitled to separation benefits following a change of control and those separation benefits would otherwise be subject to the excise tax under Section 4999 of the Internal Revenue Code, then the separation benefits will be reduced to $1.00 less than the amount which would trigger the excise tax if such reduction would result in Mr. Pilnick receiving an equal or greater after-tax benefit than he would have received if the full separation benefits were paid.
The following table reflects calculations, as of December 31, 2022, of the estimated benefits our NEOs would have received (1) if their employment was terminated by Kellogg ParentCo without cause or upon their retirement, disability or death or (2) in certain circumstances following a change of control. Amounts shown in the following table are calculated by assuming that the relevant employment termination event and/or change of control occurred on December 31, 2022.
Potential Post Employment Table
Name and Benefits |
Involuntary Termination - No Change of Control ($) |
Change of Control W/ Involuntary Termination ($) |
Retirement ($)(1) |
Death ($) | Disability ($) |
|||||||||||||||
Gary Pilnick |
||||||||||||||||||||
Two Times Base Salary |
1,586,000 | 1,586,000 | | | | |||||||||||||||
280G Reduction |
| | | | | |||||||||||||||
Two Times Target Annual Incentive(2) |
| 1,506,700 | | | | |||||||||||||||
2022 Annual Incentive |
1,167,693 | 1,167,693 | 1,167,693 | 1,167,693 | 1,167,693 | |||||||||||||||
Stock Options |
477,112 | (3) | 477,112 | (4) | 238,280 | (5) | 238,280 | (6) | 238,280 | (6) | ||||||||||
EPP/PSU Plan Awards |
2,714,386 | (7) | 4,234,791 | (8) | 2,714,386 | (9) | 2,714,386 | (10) | 2,714,386 | (10) | ||||||||||
Restricted Stock Units |
1,886,745 | (11) | 1,853,076 | (12) | 1,182,992 | (13) | 1,182,992 | (13) | 1,182,992 | (13) | ||||||||||
Outplacement |
11,138 | 11,138 | | | | |||||||||||||||
Health and Welfare Benefits(15) |
31,000 | 31,000 | | | | |||||||||||||||
Other Benefits and Perquisites(16) |
| 93,326 | | | |
152 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Name and Benefits |
Involuntary Termination - No Change of Control ($) |
Change of Control W/ Involuntary Termination ($) |
Retirement ($)(1) |
Death ($) | Disability ($) |
|||||||||||||||
Life Insurance and Executive Survivor Income Plan Benefits(17) |
| | | 6,752,000 | | |||||||||||||||
Change to Retirement Benefits |
638,000 | (18) | 854,000 | (19) | | (2,025,000 | )(20) | 638,000 | (21) | |||||||||||
Total |
8,512,074 | 11,814,836 | 5,303,351 | 10,030,351 | 5,941,351 | |||||||||||||||
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David McKinstray |
||||||||||||||||||||
Two Weeks Base Salary per Year of Service (minimum 26 weeks, maximum 52 weeks) |
181,000 | 181,000 | | | | |||||||||||||||
2022 Annual Incentive. |
311,320 | 311,320 | | 311,320 | 311,320 | |||||||||||||||
Stock Options |
43,074 | (3) | 76,843 | (4) | | 37,122 | (6) | 37,122 | (6) | |||||||||||
EPP/PSU Plan Awards |
67,757 | (7) | 386,238 | (8) | | 207,820 | (10) | 207,820 | (10) | |||||||||||
Restricted Stock Units |
48,341 | (11) | 617,947 | (12) | | 232,406 | (13) | 232,406 | (13) | |||||||||||
Outplacement |
8,354 | 8,354 | | | | |||||||||||||||
Health and Welfare Benefits(15) |
7,500 | 7,500 | | | | |||||||||||||||
Other Benefits and Perquisites(16) |
| | | | | |||||||||||||||
Life Insurance and Executive Survivor Income Plan Benefits(17) |
| | | 362,000 | | |||||||||||||||
Total |
667,346 | 1,589,202 | | 1,150,668 | 788,668 | |||||||||||||||
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Doug VanDeVelde |
||||||||||||||||||||
One And a Half Times Base Salary |
717,000 | 717,000 | | | | |||||||||||||||
2022 Annual Incentive. |
507,636 | 507,636 | 507,636 | 507,636 | 507,636 | |||||||||||||||
Stock Options |
95,727 | (3) | 95,727 | (4) | 47,448 | (5) | 47,448 | (6) | 47,448 | (6) | ||||||||||
EPP/PSU Plan Awards |
544,930 | (7) | 874,661 | (8) | 544,930 | (9) | 544,930 | (10) | 544,930 | (10) | ||||||||||
Restricted Stock Units |
983,387 | (11) | 1,240,465 | (12) | 235,658 | (14) | 883,821 | (13) | 883,821 | (13) | ||||||||||
Outplacement |
8,354 | 8,354 | | | | |||||||||||||||
Health and Welfare Benefits(15) |
23,200 | 23,200 | | | | |||||||||||||||
Other Benefits and Perquisites(16) |
| | | | | |||||||||||||||
Life Insurance and Executive Survivor Income Plan Benefits(17) |
| | | 2,391,000 | | |||||||||||||||
Change to Retirement Benefits |
165,000 | (18) | 165,000 | (19) | | (709,000 | )(20) | 165,000 | (21) | |||||||||||
Retention Cash Award |
239,000 | 239,000 | | 59,415 | 59,415 | |||||||||||||||
Total |
3,284,234 | 3,871,043 | 1,335,672 | 3,725,250 | 2,208,250 | |||||||||||||||
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Bruce Brown |
||||||||||||||||||||
Two Weeks Base Salary per Year of Service (minimum 26 weeks, maximum 52 weeks) |
389,926 | 389,926 | | | | |||||||||||||||
2022 Annual Incentive |
350,000 | 350,000 | 350,000 | 350,000 | 350,000 | |||||||||||||||
Stock Options |
50,856 | (3) | 87,735 | (4) | 43,812 | (5) | 43,812 | (6) | 43,812 | (6) | ||||||||||
EPP/PSU Plan Awards |
248,920 | (7) | 430,652 | (8) | 248,920 | (9) | 248,920 | (10) | 248,920 | (10) | ||||||||||
Restricted Stock Units |
660,472 | (11) | 687,546 | (12) | 139,544 | (14) | 508,556 | (13) | 508,556 | (13) | ||||||||||
Outplacement |
8,354 | 8,354 | | | | |||||||||||||||
Health and Welfare Benefits(15) |
10,300 | 10,300 | | | | |||||||||||||||
Other Benefits and Perquisites(16) |
| | | | | |||||||||||||||
Life Insurance and Executive Survivor Income Plan Benefits(17) |
| | | 1,841,000 | | |||||||||||||||
Change to Retirement Benefits |
94,000 | (18) | 94,000 | (19) | | (535,000 | )(20) | 94,000 | (21) | |||||||||||
Total |
1,812,828 | 2,058,513 | 782,276 | 2,457,288 | 1,245,288 | |||||||||||||||
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Sherry Brice |
||||||||||||||||||||
Two Weeks Base Salary per Year of Service (minimum 26 weeks, maximum 52 weeks) |
313,801 | 313,801 | | | | |||||||||||||||
2022 Annual Incentive |
237,886 | 237,886 | | 237,886 | 237,886 |
153 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Name and Benefits |
Involuntary Termination - No Change of Control ($) |
Change of Control W/ Involuntary Termination ($) |
Retirement ($)(1) |
Death ($) | Disability ($) |
|||||||||||||||
Stock Options |
42,600 | (3) | 79,479 | (4) | | 36,733 | (6) | 36,733 | (6) | |||||||||||
EPP/PSU Plan Awards |
| 295,981 | (8) | | 135,877 | (10) | 135,877 | (10) | ||||||||||||
Restricted Stock Units |
71,323 | (11) | 557,664 | (12) | | 272,927 | (13) | 272,927 | (13) | |||||||||||
Outplacement |
8,354 | 8,354 | | | | |||||||||||||||
Health and Welfare Benefits(15) |
5,300 | 5,300 | | | | |||||||||||||||
Other Benefits and Perquisites(16) |
| | | | | |||||||||||||||
Life Insurance and Executive Survivor Income Plan Benefits(17) |
| | | 326,000 | | |||||||||||||||
Total |
679,264 | 1,498,465 | | 1,009,423 | 683,423 | |||||||||||||||
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(1) | Information regarding Mr. McKinstray and Ms. Brice is not presented in this column because these individuals were not retirement-eligible as of December 31, 2022. Information for Mr. Pilnick, Mr. VanDeVelde and Mr. Brown is hypothetical and based upon retirement as of December 31, 2022. |
(2) | Represents two times the target annual incentive award for 2022, payable under Kellogg ParentCos Change in Control Policy. |
(3) | Represents the intrinsic value of unvested stock options that would vest in connection with a termination as of December 31, 2022, based on a stock price of $71.24. |
(4) | Represents the intrinsic value of unvested stock options that would vest upon a change of control as of December 31, 2022, based on a stock price of $71.24. |
(5) | Represents the intrinsic value of unvested stock options that would vest upon retirement as of December 31, 2022, (prorated for time worked during the performance period), based on a stock price of $71.24. |
(6) | Represents the intrinsic value of unvested stock options that would vest upon death or disability as of December 31, 2022 (prorated for time worked during the performance period), based on a stock price of $71.24. |
(7) | Represents the value based on the actual number of shares paid out under the 2020-2022 EPP, which would be payable at Kellogg ParentCos discretion, and a stock price of $71.24. For Mr. Pilnick, Mr. VanDeVelde and Mr. Brown, who are retirement-eligible, includes the 2021-2023 EPP and 2022-2024 PSU prorated for the time worked during the performance period at a stock price of $71.24. Because our other NEOs are not retirement-eligible as of December 31, 2022, their 2021-2023 EPP and 2022-2024 PSU awards would be forfeited. |
(8) | Valued based on the target number of shares under the 2020-2022 EPP, the 2021-2023 EPP and the 2022-2024 PSU and, in each case, a stock price of $71.24. |
(9) | Valued based on the actual number of shares paid out under the 2020-2022 EPP and the prorated target number of shares under the 2021-2023 EPP and 2022-2024 PSU and, in each case, a stock price of $71.24. |
(10) | Represents the value of outstanding target EPP awards payable based on Kellogg ParentCos actual performance during the relevant periods and paid following the end of the performance periods (prorated for time worked during the performance period) and, in each case, based on a stock price of $71.24. |
(11) | Represents the value of unvested restricted stock units that would vest in connection with a termination as of December 31, 2022, based on a stock price of $71.24. |
(12) | Represents the value of unvested restricted stock units that would vest upon a change of control as of December 31, 2022, based on a stock price of $71.24. |
(13) | Represents the value of unvested restricted stock units that would vest upon retirement, death or disability as of December 31, 2022 (prorated for time worked during the performance period), based on a stock price of $71.24. |
(14) | Represents the value of unvested restricted stock units that would vest upon retirement as of December 31, 2022, based on a stock price of $71.24. |
(15) | Represents the estimated costs to Kellogg ParentCo of continued participation in medical, dental and life insurance benefits during the severance period. |
(16) | Consists of Kellogg ParentCo-paid death benefits, financial planning and physical exams. |
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Pursuant to 17 C.F.R. Section 200.83
(17) | Payment of death benefits for Kellogg ParentCo-paid life insurance and Executive Survivor Income Plan (for NEOs eligible to participate in the Plan prior to January 1, 2011). |
(18) | Represents the increase (decrease) to the estimated actuarial present value of retirement benefit accrued through December 31, 2022 for each NEO associated with terminating an NEOs employment without cause. The estimated actuarial present value of retirement benefit accrued through December 31, 2022 appears in the Pension Benefits Table on page 149 of this Information Statement. For each NEO, changes to retirement benefits upon severance vary depending on age, service and pension formula at the time of termination. For Mr. Pilnick, Mr. VanDeVelde and Mr. Brown, the change to the retirement benefit is positive because the present value reflects the greater of age 65 commencement and earliest commencement. |
(19) | Represents the increase (decrease) to the estimated actuarial present value of retirement benefit accrued through December 31, 2022 for each NEO associated with terminating an NEOs employment without cause following a change of control. The estimated actuarial present value of retirement benefit accrued through December 31, 2022 appears in the Pension Benefits Table on page 149 of this Information Statement. For each NEO, changes to retirement benefits upon change of control vary depending on age, service and pension formula at the time of termination. For Mr. Pilnick, Mr. VanDeVelde and Mr. Brown, the change to their retirement benefit is positive because the present value reflects the greater of age 65 commencement and earliest commencement. For Mr. Pilnick, the change to the retirement benefit also includes two additional years of age and service for retirement eligibility purposes. |
(20) | Represents the increase (decrease) to the estimated actuarial present value of retirement benefits accrued through December 31, 2022 for each NEO associated with a NEOs retirement benefits being converted to a survivor annuity upon the NEOs death. The estimated actuarial present value of retirement benefits accrued through December 31, 2022 appears in the Pension Benefits Table on page 149 of this Information Statement. For Mr. Pilnick, Mr. VanDeVelde and Mr. Brown, the change to the retirement benefit is negative because the survivor annuity upon death is reduced to less than 50% of the benefit provided upon early or normal retirement. |
(21) | For Mr. Pilnick, Mr. VanDeVelde and Mr. Brown, the change to the retirement benefit is positive because the present value reflects the greater of age 65 commencement and earliest commencement. |
155 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
BENEFICIAL OWNERS AND MANAGEMENT
As of the date of this Information Statement, Kellogg ParentCo beneficially owns all of the outstanding shares of our common stock. After the Spin-Off, Kellogg ParentCo will not own any shares of our common stock. The following table provides information regarding the anticipated beneficial ownership of our common stock at the time of the Distribution by:
| each of our shareholders who we believe, based on the assumptions described below, will beneficially own more than 5% of our outstanding common stock at the time of the Distribution; |
| each of our directors following the Spin-Off; |
| each NEO; and |
| all of our directors and executive officers following the Spin-Off as a group. |
Except as otherwise noted below, we based the share amounts on each person or entitys beneficial ownership of Kellogg ParentCo common stock on , 2023, giving effect to a distribution ratio of shares of our common stock for every shares of Kellogg ParentCo common stock he, she or it held.
To the extent our directors and executive officers own Kellogg ParentCo common stock on the Record Date, they will participate in the Distribution on the same terms as other holders of Kellogg ParentCo common stock.
Except as otherwise noted in the footnotes below, each person or entity identified in the table has sole voting and investment power with respect to the securities he, she or it holds.
Immediately following the Spin-Off, we estimate that shares of our common stock will be issued and outstanding, based on the approximately shares of Kellogg ParentCo common stock outstanding on , 2023. The actual number of shares of our common stock to be outstanding following the Spin-Off will be determined on , 2023, the Record Date.
Name of Beneficial Owner |
Amount and Nature of Beneficial Ownership |
Percentage of Class |
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Directors: |
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Named Executive Officers(1): |
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Gary Pilnick |
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David McKinstray |
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Bruce Brown |
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Sherry Brice |
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Doug VanDeVelde |
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All directors and executive officers as a group (persons)(2) |
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Principal Shareholders: |
(1) | These officers were our named executive officers in 2022. |
(2) | Includes only the persons listed in the table of our directors and executive officers following the Spin-Off in the section entitled Management in this Information Statement. |
156 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Agreements with Kellogg ParentCo
Prior to the Spin-Off, WK Kellogg Co and Kellogg ParentCo will enter into a Separation and Distribution Agreement and other agreements that will outline the terms and conditions of the Internal Reorganization and Distribution and provide a framework for WK Kellogg Cos relationship with Kellogg ParentCo after the Spin-Off. Following the Spin-Off, WK Kellogg Co and Kellogg ParentCo will operate independently, and neither will have any ownership interest in the other.
The material agreements described below will be filed as exhibits to the Registration Statement of which this Information Statement is a part. The summaries of each of these agreements set forth below are qualified in their entireties by reference to the full text of the applicable agreements, forms of which will be filed as exhibits to the Registration Statement of which this Information Statement is a part and which will be incorporated by reference into this Information Statement.
Separation and Distribution Agreement
We intend to enter into a Separation and Distribution Agreement with Kellogg ParentCo that will set forth our agreements with Kellogg ParentCo regarding the principal actions to be taken in connection with the Spin-Off. It will also set forth other agreements that govern aspects of our relationship with Kellogg ParentCo following the Spin-Off.
Transfer of Assets and Assumption of Liabilities
The Separation and Distribution Agreement will identify the assets to be transferred to, and the liabilities to be assumed by, WK Kellogg Co in advance of the Distribution so that Kellogg ParentCo and we each retain the assets of, and the liabilities associated with, the Kellogg ParentCo Business and the Cereal Business, respectively, and will provide for when and how these transfers and assumptions will occur. We are currently a wholly owned subsidiary of Kellogg ParentCo, and Kellogg ParentCo, directly or through its subsidiaries, holds both the Kellogg ParentCo Business and the Cereal Business. In connection with the Spin-Off, we will undertake a series of internal reorganization transactions so that we hold the Cereal Business assets, liabilities and entities directly and separately from the Kellogg ParentCo Business assets, liabilities and entities, including the Contribution. Following these steps, we will hold only the Cereal Business assets, liabilities and entities. We refer to these steps collectively as the Internal Reorganization.
In particular, the Separation and Distribution Agreement will provide that, among other things, subject to the terms and conditions contained therein:
| certain assets and entities related to the Cereal Business, which this Information Statement refers to as the WK Kellogg Co Assets, will be retained by or transferred to WK Kellogg Co or one of its subsidiaries; |
| certain liabilities related to the Cereal Business or the WK Kellogg Co Assets, which this Information Statement refers to as the WK Kellogg Co Liabilities, will be retained by or transferred to WK Kellogg Co or one of its subsidiaries; and |
| all of the assets and liabilities (including whether accrued, contingent or otherwise) other than the WK Kellogg Co Assets and the WK Kellogg Co Liabilities (such assets and liabilities, other than the WK Kellogg Co Assets and the WK Kellogg Co Liabilities, being referred to in this Information Statement as the Kellogg ParentCo Assets and Kellogg ParentCo Liabilities, respectively) will be retained by or transferred to Kellogg ParentCo. |
Except as expressly set forth in the Separation and Distribution Agreement or any ancillary agreement, neither Kellogg ParentCo nor WK Kellogg Co will make any representation or warranty as to (i) the assets, business or
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
liabilities transferred or assumed as part of the Internal Reorganization, (ii) any approvals or consents required in connection with the transfers, (iii) the value of or the freedom from any security interests of any of the assets transferred, (iv) the absence or presence of any defenses or right of setoff or freedom from counterclaim with respect to any claim or other asset of either of WK Kellogg Co or Kellogg ParentCo, or (v) the legal sufficiency of any document or instrument delivered to convey title to any asset or thing of value to be transferred in connection with the Internal Reorganization. All assets will be transferred on an as is, where is basis, and the respective transferees will bear the economic and legal risks that any conveyance will prove to be insufficient to vest in the transferee good and marketable title, free and clear of all security interests, that any necessary consents or governmental approvals are not obtained, or that any requirements of law or judgments are not complied with.
Information in this Information Statement with respect to the assets and liabilities of the parties following the Distribution is presented based on the allocation of such assets and liabilities pursuant to the Separation and Distribution Agreement unless the context otherwise requires. The Separation and Distribution Agreement will provide that in the event that the transfer of certain assets and liabilities (or a portion thereof) to WK Kellogg Co or Kellogg ParentCo, as applicable, does not occur prior to the Distribution, then until such assets or liabilities (or a portion thereof) are able to be transferred, WK Kellogg Co or Kellogg ParentCo, as applicable, will hold such assets on behalf and for the benefit of the transferee, and will pay, perform and discharge such liabilities, for which the transferee will reimburse WK Kellogg Co or Kellogg ParentCo, as applicable, for all reasonable payments made in connection with the performance and discharge of such liabilities.
The Distribution
The Separation and Distribution Agreement will also govern the rights and obligations of the parties regarding the Distribution following the completion of the Internal Reorganization. Prior to the Distribution, Kellogg ParentCo will deliver all of the issued and outstanding shares of our common stock to the distribution agent. Following the Distribution Date, the distribution agent will electronically deliver the shares of our common stock to Kellogg ParentCo shareholders based on the distribution ratio. Shareholders will receive cash in lieu of any fractional shares.
Conditions to the Distribution
The Separation and Distribution Agreement will provide that the Distribution is subject to the satisfaction (or waiver by Kellogg ParentCo in its sole and absolute discretion) of certain conditions. These conditions are described under The Separation and DistributionConditions to the Distribution. Kellogg ParentCo will have the sole and absolute discretion to determine (and change) the terms of, and to determine whether to proceed with, the Distribution and, to the extent that it determines to proceed, to determine the Record Date, the Distribution Date and the distribution ratio.
Indemnification
We and Kellogg ParentCo will each agree to indemnify the other and each of the others current, former and future directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of them, against certain liabilities incurred in connection with the Spin-Off and our and Kellogg ParentCos respective businesses. The amount of either Kellogg ParentCos or our indemnification obligations will be reduced by any insurance proceeds the party being indemnified receives. The Separation and Distribution Agreement will also specify procedures regarding claims subject to indemnification and related matters.
Indemnification with respect to taxes, and the procedures related thereto, will be governed by the Tax Matters Agreement.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Further Assurances
In addition to the actions specifically provided for in the Separation and Distribution Agreement, except as otherwise set forth therein or in any ancillary agreement, WK Kellogg Co and Kellogg ParentCo will agree in the Separation and Distribution Agreement to use reasonable best efforts, prior to, on and after the Distribution Date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions contemplated by the Separation and Distribution Agreement and the ancillary agreements.
Expenses
Except as expressly set forth in the Separation and Distribution Agreement or in any ancillary agreement, the party incurring the expense will be responsible for all fees, costs and expenses incurred in connection with the Spin-Off.
Real Property Matters
The Separation and Distribution Agreement will also govern the allocation, transfer and leasing of real estate between us and Kellogg ParentCo following the Spin-Off. Kellogg ParentCos current corporate headquarters located in Battle Creek, Michigan and manufacturing plants related to the Cereal Business will be transferred to WK Kellogg Co. Leased distribution centers will be occupied by both WK Kellogg Co and Kellogg ParentCo employees following the Spin-Off pursuant to the Transition Services Agreement, and after the termination of the Transition Services Agreement, will be fully or partially subleased from Kellogg ParentCo to WK Kellogg Co.
Other Matters
Other matters governed by the Separation and Distribution Agreement will include, among others, approvals and notifications of transfer, termination of intercompany agreements and outstanding guarantees, treatment of shared contracts, confidentiality, access to and provision of records, privacy and data protection, production of witnesses, privileged matters, financing arrangements, dispute resolution, release of claims and liabilities, and treatment of and access to insurance policies.
Amendment and Termination
The Separation and Distribution Agreement will provide that it may be terminated, amended or modified at any time prior to the Distribution Date in the sole and absolute discretion of Kellogg ParentCo without the approval of any person, including WK Kellogg Co.
The Separation and Distribution Agreement will provide that, after the Distribution Date, no provision of the Separation and Distribution Agreement or any ancillary agreement may be waived, amended, supplemented or modified by a party without the written consent of the party against whom it is sought to enforce such waiver, amendment, supplement or modification.
After the Distribution Date, the Separation and Distribution Agreement may not be terminated, except by an agreement in writing signed by both WK Kellogg Co and Kellogg ParentCo.
In the event of a termination of the Separation and Distribution Agreement, no party, nor any of its directors, officers or employees, will have any liability of any kind to the other parties or any other person.
Transition Services Agreement
We intend to enter into a Transition Services Agreement pursuant to which Kellogg ParentCo will provide specified services on a transitional basis to help ensure an orderly transition following the Spin-Off. These
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
services may include information technology, procurement, contract manufacturing, distribution, logistics and order to delivery, engineering, research and development, accounting, finance, compliance and administrative activities. The Transition Services Agreement will specify the calculation of our costs for these services.
Supply Agreement
We intend to enter into a Supply Agreement with Kellogg ParentCo pursuant to which Kellogg ParentCo will supply us with certain products.
Management Services Agreement
We intend to enter into a Management Services Agreement pursuant to which Kellogg ParentCo will grant us the right to use its pilot plant located in Battle Creek, Michigan for a specified number of days each year in order for us to conduct research and development and product trials on specified equipment.
Tax Matters Agreement
The Tax Matters Agreement will govern the respective rights, responsibilities and obligations of Kellogg ParentCo and WK Kellogg Co after the Spin-Off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local and foreign income taxes, other tax matters and related tax returns. WK Kellogg Co and certain of its subsidiaries have (and will continue to have following the Spin-Off) joint and several liability with Kellogg ParentCo to the IRS for the combined U.S. federal income taxes of the Kellogg ParentCo combined group relating to the taxable periods in which WK Kellogg Co and its applicable subsidiaries were part of that group. The Tax Matters Agreement will also provide special rules for allocating tax liabilities in the event that the Spin-Off is not tax-free. In general, if a partys actions cause the Spin-Off not to be tax-free, that party will be responsible for the payment of any resulting tax liabilities (and will indemnify the other party with respect thereto). The Tax Matters Agreement will provide for certain covenants that may restrict our ability to pursue strategic or other transactions that otherwise could maximize the value of our business. Finally, the Tax Matters Agreement will also provide for procedures for any audits and examinations and the rights of each party with respect to such audits and examinations. Although enforceable as between the parties, the Tax Matters Agreement will not be binding on the IRS.
Employee Matters Agreement
The Employee Matters Agreement will address certain post-Spin-Off employee matters issues between Kellogg ParentCo and WK Kellogg Co, including transitions of employment for employees; allocation of and reimbursement and indemnification for employment-related liabilities; collective bargaining agreement matters; termination and severance benefits; employee benefits matters, including participation in benefit plans, assumption of certain employee benefit plans by WK Kellogg Co, service recognition, health and welfare and retirement plan matters; employee compensation matters, including equity and cash-based incentive compensation, retention and nonqualified deferred compensation matters; payroll reporting and withholding; access to employees; employee records; employment transition matters; mutual one-year salaried employee no-hire and two-year employee non-solicitation provisions (with customary exceptions); and other related employee matters. For example, the Employee Matters Agreement identifies employees that will transfer to us before and after the Distribution Date and, with some limited exceptions, Kellogg ParentCo will generally bear liabilities associated with its employees and we will generally bear liabilities associated with our employees. Any historical workers compensation liabilities will remain with Kellogg ParentCo.
Additionally, for at least 12 months after the Spin-Off (or earlier termination date), we have committed to provide our employees (subject to certain exceptions) with at least the same salary or wage rate as well as comparable target annual or short-term cash incentive compensation opportunities and no less favorable
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
long-term equity-based incentive compensation opportunities than those in effect immediately prior to the Spin-Off. During that period, we will also continue to offer employee benefits that are comparable in the aggregate, and comparable severance benefits, to those in effect immediately prior to the Spin-Off.
Except as specifically provided in the Employee Matters Agreement, we will generally be responsible for all employment, employee compensation, and employee benefits-related liabilities relating to employees, former employees, and other individuals allocated to us, which we expect will be on substantially similar terms to the corresponding Kellogg ParentCo plans. We will also assume certain assets and liabilities with respect to Kellogg ParentCos U.S. benefit plans and trusts relating to certain provisions for post-retirement welfare benefits.
The treatment of annual bonuses and outstanding equity awards for all employees under the Employee Matters Agreement is consistent with the description set forth in the section titled Employee Matters Agreement in the Compensation Discussion and Analysis. In respect of an equity award holder that remains an employee of Kellogg ParentCo, all outstanding Kellogg ParentCo RSUs and PSUs that were issued on or after June 21, 2022 will remain at Kellogg ParentCo covering shares of Kellogg ParentCo common stock and subject to the same terms and conditions that existed prior to the Spin-Off, unless the C&T Committee makes any adjustments. Additionally, all outstanding equity awards will be equitably adjusted in accordance with the terms of the Employee Matters Agreement.
Intellectual Property Agreements
We intend to enter into the following Intellectual Property Agreements with Kellogg ParentCo that will provide for intellectual property use and selling rights: Master License Agreement Regarding Trademarks and Related Intellectual Property and Master License Agreement Regarding Patents, Trade Secrets and Know-How.
The Master License Agreement Regarding Trademarks and Related Intellectual Property will allocate ownership, use and selling rights between Kellogg ParentCo and us of all trademarks, domain names and certain copyrights that Kellogg ParentCo or we owned immediately prior to the Distribution Date. We will own the trademarks rights to Apple Jacks, Bear Naked, Kashi, Frosted Mini-Wheats, among others, in North America, and Kellogg ParentCo will own the rights to these trademarks in all other jurisdictions, as well as other trademarks, including the Kelloggs trademark globally.
Under this agreement, Kellogg ParentCo and we will each grant the other party various perpetual, irrevocable, exclusive, and royalty-free licenses to use certain of its and our respective trademarks in connection with specific food and beverage categories in specified jurisdictions. The licenses granted by Kellogg ParentCo to us will include a perpetual, irrevocable, exclusive, royalty-free license to use the Kelloggs house brand, along with other key brands such as Tony the Tiger, Frosted Flakes, Toucan Sam, Froot Loops, Special K, Rice Krispies and Snap, Crackle and Pop, in connection with the Cereal Business in North America.
The agreement will contain usage guidelines, quality control, enforcement and maintenance provisions governing the trademarks that Kellogg ParentCo and we will license to each other. In addition, the agreement will include diversion provisions under which Kellogg ParentCo and we will agree that neither we nor any of our affiliates will authorize or encourage the sale of branded products in jurisdictions where trademark ownership or license rights do not extend.
In addition, the Master License Agreement Regarding Patents, Trade Secrets and Know-How will allocate ownership of patents, trade secrets and know-how to Kellogg ParentCo. Kellogg ParentCo will grant to us a perpetual, irrevocable, exclusive and royalty-free license to use certain food-related patents, trade secrets and know-how in specific categories in North America. Kellogg ParentCo will also grant to us a perpetual, irrevocable, and royalty-free license to use certain non-food related patents, trade secrets and know-how, and other intellectual property rights applicable generally to business process and information technology systems, in WK Kellogg Cos business.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Policy and Procedures Governing Related Person Transactions
Prior to the completion of the Spin-Off, we intend to adopt a policy with respect to the review, approval and ratification of related party transactions. Under the policy, our Nominating and Governance Committee is responsible for reviewing and approving related person transactions. In the course of its review and approval of related person transactions, our Nominating and Governance Committee will consider the relevant facts and circumstances to decide whether to approve such transactions. In particular, our policy requires our Nominating and Governance Committee to consider, among other factors it deems appropriate:
| the related persons relationship to us and interest in the transaction; |
| the material facts of the proposed transaction, including the proposed aggregate value of the transaction; |
| the impact on a directors independence in the event the related person is a director or an immediate family member of the director; |
| the benefits to us of the proposed transaction; |
| if applicable, the availability of other sources of comparable products or services; and |
| an assessment of whether the proposed transaction is on terms that are comparable to the terms available to an unrelated third party or to employees generally. |
The Nominating and Governance Committee may only approve those transactions that are in, or are not inconsistent with, our best interests and those of our shareholders, as the Nominating and Governance Committee determines in good faith.
In addition, under our code of business conduct and ethics, which will be adopted prior to the completion of the Spin-Off, our employees and directors will have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest.
All of the transactions described herein were entered into prior to the adoption of WK Kellogg Cos written related party transactions policy (which policy will be adopted prior to the consummation of this offering), but all were approved by our Board considering similar factors to those described above.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
DESCRIPTION OF OUR CAPITAL STOCK
General
Immediately following the Spin-Off, our authorized capital stock will consist of 1,000,000,000 shares of common stock, $0.0001 par value, and 50,000,000 shares of preferred stock, $0.0001 par value. Immediately following the Spin-Off, we estimate that approximately shares of our common stock will be issued and outstanding, based on the approximately shares of Kellogg ParentCo common stock outstanding as of , 2023. The actual number of shares of our common stock outstanding immediately following the Spin-Off will depend on the actual number of shares of Kellogg ParentCo common stock outstanding on the Record Date and will reflect any issuance of new shares or exercise of outstanding options pursuant to Kellogg ParentCos equity plans. The issued and outstanding shares of our common stock are fully paid and non-assessable, and the shares of common stock to be issued upon completion of the Distribution will be fully paid and non-assessable.
In connection with the Distribution, we will amend and restate our certificate of incorporation and bylaws. The following summary describes certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws relating to our capital stock. This summary is qualified in its entirety by reference to our amended and restated certificate of incorporation and amended and restated bylaws, the forms of which will be filed as exhibits to a subsequent amendment to the Registration Statement of which this Information Statement is a part.
Common Stock
Voting Rights
Each shareholder shall be entitled to one (1) vote for each share of our common stock held on all matters to be voted upon. Our amended and restated bylaws will contain a majority voting standard for the election of directors in an uncontested election (that is, an election where the number of nominees is equal to the number of seats open). In an uncontested election, each nominee must be elected by the vote of a majority of the votes cast. A majority of the votes cast means the number of votes cast for a directors election must exceed the number of votes cast against (excluding abstentions). However, if there are more nominees for election than the number of directors to be elected, directors will be elected by a plurality of the votes cast on the election of directors at a shareholder meeting at which a quorum is present.
Dividends
Subject to preferences that may apply to shares of preferred stock outstanding at that time, holders of outstanding shares of common stock will be entitled to receive dividends out of assets legally available at the times and in the amounts as our Board may determine from time to time.
Preemptive Rights
Our common stock will not be entitled to preemptive or other similar subscription rights to purchase any of our securities.
Conversion or Redemption Rights
Our common stock will be neither convertible nor redeemable.
Liquidation Rights
Upon our liquidation, the holders of our common stock will be entitled to receive pro rata our assets that are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding.
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Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Preferred Stock
Our Board may, without further action by our shareholders, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the designations, powers, preferences, privileges, and relative participating, optional or special rights as well as the qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. Satisfaction of any dividend preferences of outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of our common stock. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of our liquidation before any payment is made to the holders of shares of our common stock. Under certain circumstances, the issuance of shares of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of our securities or the removal of incumbent management. Upon the affirmative vote of a majority of the total number of directors then in office, our Board, without shareholder approval, may issue shares of preferred stock with voting and conversion rights which could adversely affect the holders of shares of our common stock and the market value of our common stock.
Anti-Takeover Effects of Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws and Delaware Law
Our certificate of incorporation, bylaws and the DGCL will contain provisions, which are summarized in the following paragraphs, that are intended to enhance the likelihood of continuity and stability in the composition of our Board. These provisions are intended to avoid costly takeover battles, reduce our vulnerability to a hostile change of control and enhance the ability of our Board to maximize shareholder value in connection with any unsolicited offer to acquire us. However, these provisions may have an anti-takeover effect and may delay, deter or prevent a merger or acquisition of WK Kellogg Co by means of a tender offer, a proxy contest or other takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the prevailing market price for the shares of common stock held by shareholders.
These provisions include:
Classified Board and Removal of Directors
Upon completion of the Spin-Off, our Board will initially be divided into three classes, with the classes as nearly equal in number as possible. The directors designated as Class I directors will have terms expiring at the first annual meeting of shareholders following the Distribution, which we expect to hold in 2024. The directors designated as Class II directors will have terms expiring at the following years annual meeting of shareholders, which we expect to hold in 2025, and the directors designated as Class III directors will have terms expiring at the following years annual meeting of shareholders, which we expect to hold in 2026. Commencing with the first annual meeting of shareholders following the Distribution, directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third annual meeting of shareholders. Beginning at the third annual meeting of the shareholders following the Distribution, which we expect to hold in 2026, all of our directors will stand for election each year for one-year terms, and our Board will therefore no longer be divided into three classes.
Subject to the rights of the holders of any particular class or series of equity securities, any director may be removed only for cause and only by the affirmative vote of the holders of not less than a majority of the voting power of all shares of voting stock, voting together as a single class, at any regular or special meeting of the shareholders, subject to any requirement for a larger vote contained in the DGCL.
164 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Size of Board of Directors and Vacancies
Our amended and restated bylaws will provide that the number of directors shall be not less than six nor more than fifteen, the exact number of directors to be fixed from time-to-time by a resolution adopted by not less than
two-thirds of the Board. Subject to the rights of the holders of any particular class or series of equity securities,
any newly created directorship on our Board that results from an increase in the number of directors and any vacancies on our Board will be filled only by the affirmative vote of a majority of the remaining directors, even if less than a quorum, by a sole remaining director or by the shareholders. If the Board is classified, any director elected to fill a vacancy described in clause (ii) shall be of the same class as his or her predecessor.
No Shareholder Action by Written Consent
Our amended and restated certificate of incorporation will provide that any shareholder action may be effected only at a duly called annual or special meeting of shareholders and may not be effected by a written consent or consents by shareholders in lieu of such a meeting.
Amendment of Our Amended and Restated Bylaws
Except to the extent otherwise provided in our amended and restated certificate of incorporation, our amended and restated bylaws may only by amended (i) by the affirmative vote of the holders of not less than a majority of the voting power of all shares of the voting stock, voting together as a single class, at any regular or special meeting of the shareholders (but only if notice of the proposed change be contained in the notice to the shareholders of the proposed action) or (ii) by the affirmative vote of not less than a majority of the members of the Board at any meeting of the Board at which there is a quorum present and voting.
Amendment of Our Amended and Restated Certificate of Incorporation
The amended and restated certificate of incorporation shall be subject to alteration, amendment or repeal and new provisions thereof may be adopted by the affirmative vote of the holders of not less than a majority of the outstanding shares of voting stock, voting together as a single class, at any regular or special meeting of the shareholders (but only if notice of the proposed change be contained in the notice to the shareholders of the proposed meeting).
Shareholder Meetings
Our amended and restated certificate of incorporation and amended and restated bylaws will provide that, except as otherwise required by law, if any, a special meeting of our shareholders may be called only (i) by such number of directors constituting not less than two-thirds of the full Board, (ii) by the Chairman of our Board or (iii) by the Chairman of the Board, at the written request of one or more shareholders that collectively own at least 20% of the outstanding shares of capital stock of WK Kellogg Co entitled to vote on the matter for which such meeting is to be called.
No business other than that stated in the notice of a special meeting of shareholders shall be transacted at such special meeting.
Requirements for Advance Notification of Shareholder Nominations and Proposals
Our amended and restated bylaws will establish an advance notice procedure for shareholder proposals to be brought before an annual meeting of our shareholders, including proposed nominations of persons for election to our Board. Shareholders at an annual meeting will only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our Board or by a shareholder who was a shareholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given our corporate secretary timely written notice, in proper form, of the shareholders intention to bring that
165 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
business before the meeting. Although the amended and restated bylaws will not give our Board the power to approve or disapprove shareholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, the amended and restated bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of WK Kellogg Co.
Only such persons who are nominated in accordance with the procedures set forth in our amended and restated bylaws shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures that will be set forth in our amended and restated bylaws. Except as otherwise required by our governing documents, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed in accordance with the procedures that will be set forth in our amended and restated bylaws and, if any proposed nomination or business is not in compliance with our amended and restated bylaws, to declare that such defective proposal or nomination shall be disregarded.
Authorized but Unissued Shares
Our authorized but unissued shares of common stock and preferred stock will be available for future issuance without shareholder approval, subject to stock exchange rules. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. One of the effects of the existence of authorized but unissued common stock or preferred stock may be to enable our Board to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of WK Kellogg Co by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive our shareholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices.
Delaware Anti-Takeover Law
Our amended and restated certificate of incorporation will subject us to Section 203 of the DGCL.
In general, Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested shareholder for a period of three years following the date the person became an interested shareholder, unless the business combination or the transaction in which the person became an interested shareholder is approved in a prescribed manner. Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested shareholder. Generally, an interested shareholder is a person that together with affiliates and associates owns or within three years prior to the determination of interested shareholder status did own 15% or more of a corporations voting stock. This may have an anti-takeover effect with respect to transactions not approved in advance by our Board, including discouraging attempts that might result in a premium over the market price for the shares of our common stock.
Dissenters Rights of Appraisal and Payment
Under the DGCL, with certain exceptions, our shareholders will have appraisal rights in connection with a merger or consolidation of us. Pursuant to the DGCL, shareholders who properly request and perfect appraisal rights in connection with such merger or consolidation will have the right to receive payment of the fair value of their shares as determined by the Delaware Court of Chancery.
166 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Shareholders Derivative Actions
Under the DGCL, any of our shareholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the shareholder bringing the action is a holder of our shares at the time of the transaction to which the action relates or such shareholders stock thereafter devolved by operation of law.
Exclusive Forum
Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any state court action for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our shareholders, (3) any action asserting a claim against WK Kellogg Co or any director or officer of WK Kellogg Co arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or (4) any other action asserting a claim against WK Kellogg Co or any director or officer of WK Kellogg Co that is governed by the internal affairs doctrine; provided that for the avoidance of doubt, the forum selection provision that identifies the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation, including any derivative action, will not apply to suits to enforce a duty or liability created by the Securities Act, the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above. Although we believe these provisions benefit us by providing increased consistency in the application of Delaware law for the specified types of actions and proceedings, the provisions may have the effect of discouraging lawsuits against us or our directors and officers.
Limitations on Liability and Indemnification of Officers and Directors
The DGCL authorizes corporations to limit or eliminate the personal liability of directors and officers to corporations and their shareholders for monetary damages for breaches of fiduciary duties as a director or officer, subject to certain exceptions. Our amended and restated certificate of incorporation will include a provision that eliminates the personal liability of directors or officers for monetary damages for any breach of fiduciary duty as a director or officer, as applicable, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as presently in effect or as the same may be amended. The effect of these provisions will be to eliminate the rights of us and our shareholders, through shareholders derivative suits on our behalf, to recover monetary damages from a director for breach of fiduciary duty as a director or from an officer for breach of fiduciary duty as an officer, including breaches resulting from grossly negligent behavior. However, exculpation will not apply to any director or officer if the director or officer has acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper benefit from his or her actions as a director or officer, as applicable.
Our amended and restated bylaws will provide that we must indemnify and advance expenses to our directors and officers to the fullest extent authorized by the DGCL. We also will be expressly authorized to carry directors and officers liability insurance providing indemnification for our directors, officers and certain employees for some liabilities. We believe that these indemnification and advancement provisions and insurance will be useful to attract and retain qualified directors and officers.
The limitation of liability, indemnification and advancement provisions that will be included in our amended and restated certificate of incorporation and amended and restated bylaws may discourage shareholders from bringing a lawsuit against directors and officers for breaches of their fiduciary duty. These provisions also may have the
167 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our shareholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be .
Listing
We intend to list our common stock on the NYSE under the symbol .
168 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
DESCRIPTION OF MATERIAL INDEBTEDNESS
We intend to enter into certain financing arrangements prior to or concurrently with the Spin-Off. A description of such financing arrangements will be included in an amendment to the Registration Statement of which this Information Statement is a part.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement with the SEC with respect to the shares of our common stock that Kellogg ParentCos shareholders will receive in the Distribution as contemplated by this Information Statement. This Information Statement is a part of and does not contain all of the information set forth in the Registration Statement and the other exhibits and schedules to the Registration Statement. For further information with respect to us and our common stock, please refer to the Registration Statement, including its other exhibits and schedules. Statements we make in this Information Statement relating to any contract or other document are not necessarily complete, and you should refer to the exhibits attached to the Registration Statement for copies of the actual contract or document. You may review a copy of the Registration Statement, including its exhibits and schedules, on the Internet Web site maintained by the SEC at www.sec.gov. Information contained on any Web site we refer to in this Information Statement does not and will not constitute a part of this Information Statement or the Registration Statement of which this Information Statement is a part.
As a result of the Spin-Off, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, we will file periodic reports, proxy statements and other information with the SEC.
You may request a copy of any of our filings with the SEC at no cost by writing or telephoning us at the following address:
Investor Relations
WK Kellogg Co
One Kellogg Square
Battle Creek, Michigan 49016
169 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
PAGE | ||||
Years Ended January 2, 2021, January 1, 2022 and December 31, 2022: |
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Combined Balance Sheet as of January 1, 2022 and December 31, 2022 |
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Fiscal Quarters ended April 1, 2023 and April 2, 2022 (unaudited): |
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Combined Statement of Operations for the fiscal quarters ended April 1, 2023 and April 2, 2022 |
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Combined Balance Sheet as of April 1, 2023 and April 2, 2022 |
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Combined Statement of Equity for the fiscal quarters ended April 1, 2023 and April 2, 2022 |
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Combined Statement of Cash Flows for the fiscal quarters ended April 1, 2023 and April 2, 2022 |
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F-35 |
F-1 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Kellogg Company
Opinion on the Financial Statements
We have audited the accompanying combined balance sheets of North American Cereal Business of Kellogg Company (the Company) as of December 31, 2022 and January 1, 2022, and the related combined statements of operations, comprehensive (loss) income, equity and cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the combined financial statements). In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These combined financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these combined financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the combined financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the combined financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the combined financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue RecognitionTrade Promotions
As described in Note 2 to the combined financial statements, the Company offers various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Where applicable, future provisions are estimated by management based on a combination of historical patterns and future expectations regarding specific in-market product performance. The
F-2 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
costs of the promotional activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. Management classifies promotional expenditures, which includes trade promotions, to its customers in net sales, which was approximately $2,695 million for the year ended December 31, 2022. The liability associated with these trade promotions makes up a significant portion of accrued advertising and promotion, which was $103 million as of December 31, 2022.
The principal considerations for our determination that performing procedures relating to revenue recognition - trade promotions is a critical audit matter are a high degree of auditor effort in performing procedures and evaluating audit evidence related to the trade promotions and accrued trade promotion transactions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the combined financial statements. These procedures included testing the effectiveness of controls relating to the trade promotions and accrued trade promotions. These procedures also included, among others, evaluating a sample of trade promotions and accrued trade promotion transactions by obtaining and inspecting source documents, including subsequent cash receipts from customers, invoices and invoice credits related to promotional programs, and customer arrangements or promotional practices, where applicable.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
June 16, 2023
We have served as the Companys auditor since 2022.
F-3 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
COMBINED STATEMENT OF OPERATIONS
(millions) |
2022 | 2021 | 2020 | |||||||||
Net sales |
$ | 2,695 | $ | 2,460 | $ | 2,867 | ||||||
Cost of goods sold |
2,064 | 1,884 | 2,032 | |||||||||
Selling, general and administrative expense |
556 | 539 | 639 | |||||||||
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Operating profit |
$ | 75 | $ | 37 | $ | 196 | ||||||
Other income (expense), net |
(101 | ) | 177 | 46 | ||||||||
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(Loss) income before income taxes |
$ | (26 | ) | $ | 214 | $ | 242 | |||||
Income tax expense (benefit) |
(1 | ) | 52 | 60 | ||||||||
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Net (loss) income |
$ | (25 | ) | $ | 162 | $ | 182 | |||||
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COMBINED STATEMENT OF COMPREHENSIVE (LOSS) INCOME
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Pre-tax amount |
Tax (expense) benefit |
After-tax amount |
Pre-tax amount |
Tax (expense) benefit |
After-tax amount |
Pre-tax amount |
Tax (expense) benefit |
After-tax amount |
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Net (loss) income |
$ | (26 | ) | $ | 1 | $ | (25 | ) | $ | 214 | $ | (52 | ) | $ | 162 | $ | 242 | $ | (60 | ) | $ | 182 | ||||||||||||||
Other comprehensive (loss) income: |
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Foreign currency translation |
$ | (1 | ) | $ | | $ | (1 | ) | $ | | $ | 1 | $ | 1 | $ | (1 | ) | $ | (1 | ) | $ | (2 | ) | |||||||||||||
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Comprehensive (loss) income |
$ | (27 | ) | $ | 1 | $ | (26 | ) | $ | 214 | $ | (51 | ) | $ | 163 | $ | 241 | $ | (61 | ) | $ | 180 | ||||||||||||||
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Refer to Notes to Combined Financial Statements.
F-4 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
(millions) |
2022 | 2021 | ||||||
Current assets |
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Cash and cash equivalents |
$ | | $ | | ||||
Accounts receivable, net |
229 | 155 | ||||||
Inventories, net |
431 | 330 | ||||||
Other current assets |
10 | 16 | ||||||
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Total current assets |
$ | 670 | $ | 501 | ||||
Property, net |
645 | 619 | ||||||
Goodwill |
53 | 53 | ||||||
Other intangibles |
57 | 57 | ||||||
Other assets |
11 | 14 | ||||||
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Total assets |
$ | 1,436 | $ | 1,244 | ||||
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Current liabilities |
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Accounts payable |
473 | $ | 373 | |||||
Due to related parties |
11 | 11 | ||||||
Accrued advertising and promotion |
103 | 82 | ||||||
Accrued salaries and wages |
32 | 21 | ||||||
Other current liabilities |
47 | 73 | ||||||
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Total current liabilities |
$ | 666 | $ | 560 | ||||
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Deferred income taxes |
63 | 83 | ||||||
Non-pension postretirement liability |
15 | 21 | ||||||
Other liabilities |
5 | 10 | ||||||
Commitments and contingencies (Note 12) |
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Equity |
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Net parent investment |
725 | 607 | ||||||
Accumulated other comprehensive (loss) income |
(38 | ) | (37 | ) | ||||
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Total equity |
$ | 687 | $ | 570 | ||||
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Total liabilities and equity |
$ | 1,436 | $ | 1,244 | ||||
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F-5 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
(millions) |
Net parent investment | Accumulated other comprehensive (loss) income |
Total equity | |||||||||
Balance, December 28, 2019 |
$ | 595 | $ | (36 | ) | $ | 559 | |||||
Net (loss) income |
182 | | 182 | |||||||||
Net transfer (to)/from parent |
(245 | ) | | (245 | ) | |||||||
Other comprehensive (loss) income, net of tax |
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Balance, January 2, 2021 |
$ | 532 | $ | (38 | ) | $ | 494 | |||||
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Net (loss) income |
162 | | 162 | |||||||||
Net transfer (to)/from parent |
(87 | ) | | (87 | ) | |||||||
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Balance, January 1, 2022 |
$ | 607 | $ | (37 | ) | $ | 570 | |||||
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(25 | ) | | (25 | ) | |||||||
Net transfer (to)/from parent |
143 | | 143 | |||||||||
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Balance, December 31, 2022 |
$ | 725 | $ | (38 | ) | $ | 687 | |||||
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F-6 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
COMBINED STATEMENT OF CASH FLOWS
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2022 | 2021 | 2020 | |||||||||
OPERATING ACTIVITIES |
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Net (loss) income |
$ | (25 | ) | $ | 162 | $ | 182 | |||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
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Depreciation |
68 | 68 | 69 | |||||||||
Deferred income taxes |
(15 | ) | 13 | 4 | ||||||||
Stock compensation |
3 | 2 | 2 | |||||||||
Pension and postretirement plan expense (benefit) |
112 | (157 | ) | (31 | ) | |||||||
Other |
1 | | 3 | |||||||||
Postretirement benefit plan contributions |
(1 | ) | (1 | ) | (1 | ) | ||||||
Changes in operating assets and liabilities |
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Trade receivables |
(74 | ) | 61 | 25 | ||||||||
Inventories |
(102 | ) | (50 | ) | 22 | |||||||
Accounts payable |
77 | (53 | ) | 2 | ||||||||
Due to / from related parties |
| (3 | ) | 4 | ||||||||
Accrued advertising and promotion |
23 | (40 | ) | 16 | ||||||||
Accrued salaries and wages |
7 | (4 | ) | 3 | ||||||||
Other current assets and liabilities |
(21 | ) | 9 | 3 | ||||||||
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Net cash provided by operating activities |
$ | 53 | $ | 7 | $ | 303 | ||||||
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INVESTING ACTIVITIES |
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Additions to properties |
$ | (71 | ) | $ | (75 | ) | $ | (87 | ) | |||
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Net cash (used in) investing activities |
$ | (71 | ) | $ | (75 | ) | $ | (87 | ) | |||
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FINANCING ACTIVITIES: |
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Net transfers from (to) parent |
$ | 18 | $ | 68 | $ | (216 | ) | |||||
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Net cash provided by (used in) financing activities |
$ | 18 | $ | 68 | $ | (216 | ) | |||||
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Effect of exchange rate changes on cash and cash equivalents |
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Increase (decrease) in cash and cash equivalents |
$ | | $ | | $ | | ||||||
Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ | | $ | | $ | | ||||||
Supplemental cash flow disclosures of non-cash investing activities |
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Additions to properties included in accounts payable |
$ | 38 | $ | 13 | $ | 34 |
Refer to Notes to Combined Financial Statements.
F-7 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1
DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
Description of the Company
On June 21, 2022, Kellogg Company (Kellogg ParentCo) announced its intent to separate its North American Cereal Business (Cereal Business) via a tax-free spin-off, resulting in the creation of a new independent public company. The Cereal Business consists of the business and operations conducted by Kellogg ParentCo in North America prior to Kellogg ParentCos distribution of the shares of our common stock to its shareholders relating to (i) the development, production, packaging, distribution, marketing, licensing or sale of ready-to-eat cereal, hot cereal, muesli, and granola (other than RXBAR-branded granola), cereal-based snacks and cookies (other than Rice Krispies-branded snacks and Special K-branded cookies) and other food and beverage products produced under certain cereal brands and (ii) the licensing of certain brands and related trademarks within North America to unaffiliated third parties for non-food and beverage applications. Our products are manufactured by us in the United States, Mexico and Canada and marketed in the United States, Canada and the Caribbean.
To effect the separation, Kellogg ParentCo intends to execute a tax-free spinoff of the Cereal Business by way of a pro-rata distribution of common stock of WK Kellogg Co, a newly formed Delaware corporation incorporated in November 2022, to Kellogg ParentCos shareholders of record as of the spin-off transaction record date (the Spin-off). Kellogg ParentCo, directly or through its subsidiaries, holds both the Kellogg ParentCo Business, the Cereal Business and WK Kellogg Co. In connection with the Spin-off, Kellogg ParentCo will undertake a series of internal reorganization transactions so that WK Kellogg Co will hold the Cereal Business assets, liabilities and operations directly and separately from the Kellogg ParentCo Business assets, liabilities and operations. Following these steps, WK Kellogg Co will hold only the Cereal Business assets, liabilities and operations. WK Kellogg Co will be the reporting entity and will ultimately serve as the parent company for the business to be divested by Kellogg ParentCo.
The accompanying Combined Financial Statements represent the assets, liabilities and operations related to the Cereal Business to be transferred to WK Kellogg Co as well as the assets, liabilities and operations of WK Kellogg Co. The Cereal Business to be transferred from Kellogg ParentCo to WK Kellogg Co and the results of WK Kellogg Co are referred to throughout these Combined Financial Statements as WK Kellogg Co, the Company, we, us or our.
WK Kellogg Co is a leader in cereal in the U.S., Canada, and Caribbean, with beloved brands, a heritage of innovation, and more than a century of operational success. The business is focused on ready-to-eat cereal in the U.S., Canada, and Caribbean. Iconic brands used in our business include Frosted Flakes, Special K, Froot Loops, Raisin Bran, Frosted Mini-Wheats, Rice Krispies, Kashi, Corn Flakes and Apple Jacks, among many others.
The Companys fiscal year normally ends on the Saturday closest to December 31 and as a result, a 53rd week is added approximately every sixth year. The Companys 2022 and 2021 fiscal years each contained 52 weeks and ended on December 31, 2022, and January 1, 2022 respectively. The Companys 2020 fiscal year ended on January 2, 2021 and included a 53rd week. While quarters normally consist of 13-week periods, the fourth quarter of fiscal 2020 included a 14th week.
Our cash is managed centrally at the Kellogg ParentCo level and as such, cash management decisions by Kellogg ParentCo have an impact on our Combined Financial Statements. The cash and cash equivalents held by Kellogg ParentCo at the corporate level are not specifically identifiable to us and, therefore, have not been reflected in our Combined Financial Statements. As a result of our participation in Kellogg ParentCos cash management arrangement, we do not hold our own cash and do not have access to any of Kellogg ParentCos credit facilities as a source of additional liquidity. Accordingly, these events and conditions can result in a net working capital
F-8 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
deficit (i.e., total current liabilities in excess of total current assets) at the end of certain reporting periods. To alleviate such conditions, Kellogg ParentCo has committed that it will provide financial assistance to WK Kellogg Co, as determined by Kellogg ParentCo, to enable the Company to continue its operations and fulfill all of its financial obligations, expiring at the earlier of the consummation of the Spin-off or December 2024. Accordingly, management believes that the financial support from Kellogg ParentCo will provide sufficient liquidity to meet the Companys projected obligations for at least twelve months.
Basis of presentation
These Combined Financial Statements were prepared on a stand-alone basis derived from the consolidated financial statements and accounting records of Kellogg ParentCo. These statements reflect the combined historical results of operations, financial position and cash flows of the Cereal Business in accordance with accounting principles generally accepted in the United States of America (GAAP).
These Combined Financial Statements are presented as if WK Kellogg Co had been carved out of Kellogg ParentCo and had been combined for all periods presented. The Combined Financial Statements include the attribution of certain assets and liabilities that have been held at Kellogg ParentCo but which are specifically identifiable or attributable to the business being transferred to WK Kellogg Co. The assets and liabilities in the carve-out financial statements have been presented on a historical cost basis.
All significant intercompany transactions within WK Kellogg Co have been eliminated. All transactions between WK Kellogg Co and Kellogg ParentCo are considered to be effectively settled in the Combined Financial Statements at the time the transaction is recorded, other than transactions stemming from commercial operations described in Note 10. The total net effect of the settlement of these intercompany transactions is reflected in the Combined Statement of Cash Flows as a financing activity and in the Combined Balance Sheets as net parent investment.
These Combined Financial Statements include expense allocations for: (1) co-manufacturing, product warehousing and distribution; (2) a combined sales force and management; (3) certain support functions that are provided on a centralized basis within Kellogg ParentCo, including, but not limited to executive oversight, treasury, finance, internal audit, legal, information technology, human resources, communications, facilities, and compliance; and (4) employee benefits and compensation, including stock based compensation. These expenses have been allocated to WK Kellogg Co on the basis of direct usage where identifiable, with the remainder allocated on a basis of gross sales value, production pounds, headcount or other applicable measures. For an additional discussion and quantification of expense allocations, see Note 10 of the Notes to the Combined Financial Statements.
Management believes the assumptions underlying these Combined Financial Statements, including the assumptions regarding allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by WK Kellogg Co during the periods presented. Nevertheless, the Combined Financial Statements may not reflect the results of operations, financial position and cash flows had WK Kellogg Co been a standalone company during the periods presented. Actual costs that WK Kellogg Co may have incurred had it been a standalone company would depend on a number of factors, including the chosen organization structure, whether functions were outsourced or performed by our employees and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure.
Debt obligations and related financing costs of Kellogg ParentCo have not been included in the Combined Financial Statements of WK Kellogg Co, because WK Kellogg Co is not a party to the obligations between Kellogg ParentCo and the debt holders.
The income tax provision in the Combined Statement of Operations has been calculated as if WK Kellogg Co was operating on a standalone basis and filed separate tax returns in the jurisdiction in which it operates. Therefore, cash tax payments and items of current and deferred taxes may not be reflective of WK Kellogg Cos actual tax balances prior to or subsequent to the carve-out.
F-9 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Kellogg ParentCo maintains various benefit and combined stock-based compensation plans at a corporate level and other benefit plans at a country level. Our employees participate in such programs and the portion of the cost of those plans related to our employees is included in our financial statements. However, the Combined Balance Sheets do not include any equity issued related to stock-based compensation plans or any net benefit plan obligations unless the benefit plan covers only our dedicated employees or where the entire legal obligation associated with the benefit plan will transfer to WK Kellogg Co. Further, where WK Kellogg Co employees participate in defined benefit plans sponsored by Kellogg ParentCo that include participants of Kellogg ParentCos other businesses, such plans are accounted for as multiemployer plans in these Combined Financial Statements.
The equity balance in these Combined Financial Statements represents the excess of total assets over total liabilities, including intercompany balances between us and Kellogg ParentCo (net parent company investment) and accumulated other comprehensive loss. Net parent company investment is primarily impacted by distributions to Kellogg ParentCo which are the result of net funding provided by or distributed to Kellogg ParentCo and treasury activity. See Note 10 for further information.
WK Kellogg Co manages its business and reports its operations in one operating and reporting segment.
NOTE 2
ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates.
Cash and cash equivalents
Highly liquid investments with remaining stated maturities of three months or less when purchased are considered cash equivalents and recorded at cost. Cash is managed centrally at the Kellogg ParentCo level with certain net earnings reinvested locally and working capital requirements met from existing liquid funds. Accordingly, the cash and cash equivalents held by Kellogg ParentCo at the corporate level were not attributed to WK Kellogg Co for any of the periods presented. Only cash amounts specifically attributable to WK Kellogg Co are reflected in the Combined Balance Sheet. Such amounts were less than $1 million for all periods. Transfers of cash, both to and from Kellogg ParentCos centralized cash management system, are reflected as a component of Kellogg ParentCos investment in WK Kellogg Cos Combined Balance Sheet and as a financing activity on the accompanying Combined Statement of Cash Flows.
Accounts receivable
Accounts receivable consists principally of trade receivables, which are recorded at the invoiced amount, net of allowances for expected credit losses and prompt payment discounts. Trade receivables do not bear interest. The allowance for expected credit losses represents managements estimate of the amount of probable credit losses in existing accounts receivable, as determined from a review of past due balances, historical loss information, and an evaluation of customer accounts for potential future losses. Account balances are written off against the allowance when management determines the receivable is uncollectible. For fiscal years 2022 and 2021, WK Kellogg Co did not have off-balance sheet credit exposure related to its customers. Refer to Note 3 for information on sales of accounts receivable.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined on an average cost basis.
F-10 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Property
WK Kellogg Cos property consists mainly of plants and equipment used for manufacturing activities. These assets are recorded at cost and depreciated over estimated useful lives using straight-line methods for financial reporting and accelerated methods, where permitted, for tax reporting. Major property categories are depreciated over various periods as follows (in years): buildings 10-50; manufacturing machinery and equipment 15-30; vehicles 4-7; office furniture and fixtures 5.
Plant and equipment are reviewed for impairment when conditions indicate that the carrying value may not be recoverable. Such conditions include an extended period of idleness or a plan of disposal. Assets to be disposed of at a future date are depreciated over the remaining period of use. Assets to be sold are written down to fair value at the time the assets are being actively marketed for sale and a sale is expected to occur within one year. There were no material assets held for sale at the fiscal year-end 2022 or 2021.
Goodwill and other intangible assets
Goodwill and indefinite-lived intangibles are not amortized, but are evaluated for impairment as part of Kellogg ParentCos annual business planning cycle in the fourth quarter of each year, or when impairment indicators are present. In preparing the Combined Financial Statements, WK Kellogg Cos goodwill and indefinite-life intangible assets were evaluated for potential impairment on a standalone basis.
Annually during the fourth quarter, WK Kellogg Co may perform qualitative testing, or depending on factors such as prior-year test results, current year developments, current risk evaluations, and other practical considerations, WK Kellogg Co may instead perform a quantitative impairment test. In our quantitative testing, WK Kellogg Co compares a reporting units estimated fair value with its carrying value with a reporting units fair value being estimated using market multiples. This approach employs market multiples based on either sales or earnings before interest, taxes, depreciation and amortization for companies that are comparable to WK Kellogg Cos reporting unit. The assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations. These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables. If the carrying value of the reporting unit exceeds its fair value, WK Kellogg Co considers the reporting unit impaired and reduces its carrying value of goodwill such that the reporting units new carrying value is the estimated fair value.
Similarly, WK Kellogg Co assesses indefinite-life intangible assets impairment risk throughout the year by performing a qualitative review and assessing events and circumstances that could affect the fair value or carrying value of these intangible assets. In the event a quantitative test is performed, WK Kellogg Co compares an intangible assets estimated fair value, determined using a relief from royalty approach, with its carrying value, with the intangible assets fair value being determined using estimates of future cash flows to be generated from that asset based on estimates of future sales, as well as assumptions surrounding earnings growth rates, royalty rates and discount rates consistent with rates used by market participants. These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables. If the carrying value of the asset exceeds its fair value, we consider the asset impaired and reduce its carrying value to the estimated fair value.
WK Kellogg Co does not have any definite-life intangible assets.
Accounts payable
Kellogg ParentCo has agreements with third parties to provide accounts payable tracking systems which facilitate participating suppliers ability to monitor and, if elected, sell payment obligations from Kellogg ParentCo to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to
F-11 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
sell one or more payment obligations of Kellogg ParentCo prior to their scheduled due dates at a discounted price to participating financial institutions. Kellogg ParentCo has no economic interest in the sale of these suppliers receivables and no direct financial relationship with the financial institutions concerning these services. Kellogg ParentCos obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers decisions to sell amounts under the arrangements. However, Kellogg ParentCos right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers. As our suppliers also had the ability to participate in this program during the periods presented, the impact of this program has been included in these Combined Financial Statements.
The payment of these obligations by WK Kellogg Co is included in cash used in operating activities in the Combined Statement of Cash Flows. As of December 31, 2022, and January 1, 2022, $138 million and $108 million, respectively, of WK Kellogg Cos outstanding payment obligations had been placed in the accounts payable tracking system.
Revenue recognition
WK Kellogg Co recognizes sales upon delivery of its products to customers. Revenue, which includes shipping and handling charges billed to the customer, is reported net of applicable discounts, returns, allowances, and various government withholding taxes. Methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to reimbursement based on actual occurrence or performance. Where applicable, future reimbursements are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance.
WK Kellogg Co recognizes revenue from the sale of food products which are sold to retailers through direct sales forces, broker and distributor arrangements. WK Kellogg Co also recognizes revenue from the license of our trademarks granted to third parties who use these trademarks on their merchandise. Revenue from these licenses is not material to WK Kellogg Co for any of the periods presented.
Contract balances recognized in the current period that are not the result of current period performance are not material to WK Kellogg Co. WK Kellogg Co also does not incur costs to obtain or fulfill contracts.
WK Kellogg Co does not adjust the promised amount of consideration for the effects of significant financing components as WK Kellogg Co expects, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
WK Kellogg Co accounts for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities recorded as an expense within cost of goods sold rather than as a promised service.
WK Kellogg Co excludes from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by WK Kellogg Co from a customer for sales taxes.
Performance obligations
WK Kellogg Co recognizes revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. The customer is invoiced with payment terms which are commensurate with the customers credit profile. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.
F-12 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
WK Kellogg Co assesses the goods and services promised in its customers purchase orders and identifies a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, WK Kellogg Co considers all the goods or services promised, whether explicitly stated or implied based on customary business practices. For a purchase order that has more than one performance obligation, WK Kellogg Co allocates the total consideration to each distinct performance obligation on a relative standalone selling price basis.
Significant Judgments
WK Kellogg Co offers various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Where applicable, future provisions are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance.
WK Kellogg Cos promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in-store displays and events, feature price discounts, consumer coupons, contests and loyalty programs. The costs of these activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are normally immaterial in relation to net sales and recognized as a change in management estimate in a subsequent period. The liability associated with these promotions was recorded within accrued advertising and promotion and amounted to $103 million as of December 31, 2022 and $82 million as of January 1, 2022.
WK Kellogg Co classifies promotional expenditures to its customers, the cost of consumer coupons, and other cash redemption offers in net sales.
Advertising and promotion
WK Kellogg Co expenses production costs of advertising the first time the advertising takes place. Advertising expense is classified in selling, general and administrative (SGA) expense.
WK Kellogg Co also classifies consumer promotional expenditures in SGA expense. These promotional expenses are estimated using various techniques including historical cash expenditure and redemption experience and patterns. Differences between estimated expense and actual redemptions are normally immaterial and recognized as a change in management estimate in a subsequent period. The liability associated with these advertising and promotional activities is recorded in other current liabilities. The cost of promotional package inserts is recorded in cost of goods sold (COGS).
Research and development
The costs of research and development (R&D) are expensed as incurred and are classified in SGA expense. R&D includes expenditures for new product and process innovation, as well as significant technological improvements to existing products and processes. The Companys R&D expenditures primarily consist of internal salaries, wages, consulting, and supplies attributable to time spent on R&D activities. Other costs include depreciation and maintenance of research facilities and equipment, including assets at manufacturing locations that are temporarily engaged in pilot plant activities.
Stock-based compensation
Kellogg ParentCo uses stock-based compensation, including stock options, restricted stock, restricted stock units, and executive performance shares, to provide long-term performance incentives for its global workforce. As we
F-13 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
receive the employee services in consideration for the participation of WK Kellogg Cos employees in these plans, stock-based compensation expense for the awards granted to our employees has been reflected in the Combined Statement of Operations.
The stock-based compensation expense has been derived from the equity awards granted by Kellogg ParentCo to our employees. Kellogg ParentCo estimates the fair value of each annual stock option award on the date of grant using a lattice-based option valuation model. The compensation expense for stock option awards that have a graded vesting schedule is recognized on a straight-line basis over the requisite service period for the entire award.
Kellogg ParentCo also grants restricted stock units, typically with a three-year cliff vesting, with fair value based on the market price of the underlying stock on the date of grant. The compensation expense for restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.
As the stock-based compensation plans are Kellogg ParentCos plans and the awards are settled by Kellogg ParentCo, the offset to the expense has been recognized through net parent investment on the Combined Balance Sheets.
Income taxes
WK Kellogg Co accounts for income taxes in accordance with the required asset and liability approach for financial accounting and reporting for income taxes. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are established when management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. Deferred taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries to the extent amounts are expected to be reinvested indefinitely.
WK Kellogg Co has historically been included in the consolidated U.S. federal, foreign and certain state income tax returns of Kellogg ParentCo, where applicable. The income tax expense in our consolidated financial statements has been determined on a stand-alone return basis in accordance with ASC Topic 740, Income Taxes, which requires the recognition of income taxes using the liability method. The tax provision and current and deferred tax balances have been prepared on a separate-return basis as if the Company were a separate filer.
Derivative Instruments
Kellogg ParentCo uses financial instruments in the management of foreign currency and commodity price risks that are inherent to its business operations. Such instruments are not held or issued for trading purposes.
WK Kellogg Co is exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases and intercompany transactions. Additionally, WK Kellogg Co is exposed to volatility in the translation of foreign currency denominated earnings to U.S. dollars. Kellogg ParentCo assesses foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contracts, options, and currency swaps to reduce fluctuations in long or short currency positions. Forward contracts and options are generally less than 18 months in duration.
Gains and losses representing either hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or hedges of translational exposure are recorded in the Combined Statement of Operations on the same line as the underlying hedged transaction.
WK Kellogg Co is exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials, fuel, and energy. Kellogg ParentCo has historically used the combination of long-term contracts with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted raw material purchases over a duration of generally less than 18 months.
F-14 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
WK Kellogg Co has received an allocation of an appropriate share of the gains and losses of foreign currency contracts and commodity contracts that are applicable to its business operations. For the allocation of WK Kellogg Cos pro rata share of the estimated fair values of financial instruments and corresponding gains and losses, see Note 11 of the Notes to the Combined Financial Statements.
Pension benefits, non-pension postretirement and postemployment benefits
Kellogg ParentCo sponsors a number of U.S., Canadian and Mexican plans to provide pension, health care, and other welfare benefits to retired employees, as well as salary continuance, severance, and long-term disability to former or inactive employees. Certain WK Kellogg Co employees participate in defined benefit pension and postretirement plans sponsored by Kellogg ParentCo, which include participants of other Kellogg ParentCo businesses. For purposes of these Combined Financial Statements, these plans are accounted for as multiemployer plans. Accordingly, WK Kellogg Co does not record an asset or liability to recognize the funded status of these plans. However, the related pension and postretirement expenses allocated to WK Kellogg Co are based primarily on the proportion of the liabilities related to WK Kellogg Co employees in these plans.
There are also certain defined benefit pension plans that our employees participate in that are either dedicated to our employees or where the plan assets and liabilities that relate to our employees are legally required to transfer to WK Kellogg Co at the time of our separation from Kellogg ParentCo. An asset or liability is included on the Combined Balance Sheet for the funded status of such plans and the appropriate pension expense is recorded in the Combined Statement of Operations.
The recognition of benefit expense is based on actuarial assumptions, such as discount rate, long-term rate of compensation increase, long-term rate of return on plan assets and health care cost trend rate. Service cost is reported in COGS and SGA expense on the Combined Statement of Operations. All other components of net periodic pension cost are included in other income (expense), net.
Leases
WK Kellogg Co leases certain buildings and equipment primarily through operating lease agreements. WK Kellogg Co does not have any finance lease obligations. Lease obligations are primarily for manufacturing and distribution related equipment. Leases with an initial term of 12 months or less are not recorded on the combined balance sheet. Right of use assets are recorded as part of other assets and lease liabilities are recorded as part of other current liabilities and other liabilities.
Our leases have remaining terms which range from less than 3 years to 5 years and one of the leases provides WK Kellogg Co with the option to exercise one or more renewal terms. The length of the lease term used in recording lease assets and lease liabilities is based on the contractually required lease term adjusted for any options to renew or early terminate the lease that are reasonably certain of being executed.
WK Kellogg Co combines lease and non-lease components together in determining the minimum lease payments for the majority of leases. WK Kellogg Co has elected to not combine lease and non-lease components for assets controlled indirectly through third party service-related agreements that include significant production related costs. WK Kellogg Co has evaluated these agreements to ensure any embedded costs related to the securing of the leased asset are properly segregated and accounted for in measuring the lease assets and liabilities.
The majority of the leases do not include a stated interest rate, and therefore Kellogg ParentCos periodic incremental borrowing rate is used to determine the present value of lease payments.
Foreign currency translation
Our operations outside of the United States (U.S.) are recorded in the functional currency of each foreign entity which is determined by a review of the environment where each foreign entity primarily generates and expends
F-15 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
cash. The results of operations for our foreign entities are translated from functional currencies into U.S. dollars using the weighted average currency rate for the period. Assets and liabilities are translated using the period end exchange rates. The U.S. dollar effects that arise from translating the net assets of these foreign entities are recorded in Accumulated other comprehensive (loss) income.
Comprehensive (loss) income
Comprehensive (loss) income includes net (loss) income and all other changes in equity during a period except those resulting from investments by or distributions to Kellogg ParentCo.
Other comprehensive (loss) income consists of foreign currency translation adjustments, the impact of which was approximately $1 million for the year ended December 31, 2022 and immaterial for the year ended January 1, 2022.
Recent accounting pronouncements
Supplier Finance Programs: Disclosure of Supplier Finance Program Obligations. In September 2022, the FASB issued an ASU to improve the disclosures of supplier finance programs. Specifically, the ASU requires disclosure of key terms of the supplier finance programs and a rollforward of the related obligations. The amendments in this ASU do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Combined Financial Statements have historically presented information regarding the nature and amount of outstanding Accounts Payable obligations confirmed into supplier finance programs within the Accounting Policies note. WK Kellogg Co plans to include the required rollforward information in the first quarter of 2024.
NOTE 3
SALE OF ACCOUNTS RECEIVABLE
Kellogg ParentCo has a program in which a discrete group of customers are allowed to extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).
Kellogg ParentCo has two Receivable Sales Agreements (Monetization Programs) described below, which are intended to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of Kellogg ParentCos accounts receivable balance and overall working capital. The Monetization Programs are designed to effectively offset the impact on working capital of the Extended Terms Program. The Monetization Programs sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the Combined Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum receivables that may be sold by Kellogg ParentCo at any time is $920 million. During 2022 Kellogg ParentCo amended the agreements to decrease the previous maximum receivables sold limit from approximately $1.1 billion as of January 1, 2022. As WK Kellogg Co receivables were a part of Kellogg ParentCos accounts receivable balance, the impact of this program has been included in the Combined Financial Statements.
Kellogg ParentCo, and consequently WK Kellogg Co, has no retained interest in the receivables sold, however Kellogg ParentCo does have collection and administrative responsibilities for the sold receivables. Kellogg ParentCo, and consequently WK Kellogg Co, has not recorded any servicing assets or liabilities as of December 31, 2022, and January 1, 2022 for these agreements as the fair value of these servicing arrangements, as well as the fees earned, were not material to the financial statements.
F-16 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
For WK Kellogg Co, accounts receivable sold of $256 million and $150 million remained outstanding under these arrangements as of December 31, 2022, and January 1, 2022, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Combined Statement of Cash Flows. The allocated recorded net loss on sale of receivables, based on the proportion of monetized receivables, was $7 million, $2 million and $5 million for the years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively. The recorded loss is included in other income (expense), net.
NOTE 4
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Intangible Assets
The carrying amounts of Goodwill and Other intangible assets are presented in the following tables:
Goodwill
(millions) |
2022 | 2021 | ||||||
Goodwill |
$ | 53 | $ | 53 | ||||
|
|
|
|
Other intangible assets
(millions) |
2022 | 2021 | ||||||
Trademarks |
$ | 57 | $ | 57 | ||||
|
|
|
|
The Other intangible assets are indefinite in nature and are related to the Kashi and Bear Naked trademarks.
Annual impairment testing
Goodwill and intangible assets deemed to have an indefinite life are not amortized, but reviewed annually for impairment of value or when indicators of a potential impairment are present. In preparing the Combined Financial Statements, our goodwill and other intangible assets were re-evaluated for potential impairment on a standalone basis. WK Kellogg Cos impairment testing performed through the fourth quarter of 2022 consisted of qualitative testing for all goodwill and all indefinite-lived intangible assets. No heightened risk of impairment of individual intangible assets or reporting units was identified. WK Kellogg Co currently believes the fair value of goodwill and other intangible assets exceeds their carrying value and that those intangibles so classified will contribute indefinitely to cash flows.
NOTE 5
RESTRUCTURING PROGRAMS
Kellogg ParentCo has instituted restructuring programs that directly relate to WK Kellogg Co, and accordingly, certain of such costs have been allocated to WK Kellogg Co. Kellogg ParentCo views its restructuring programs as part of its operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a 3 to 5-year period subsequent to completion. Completion (or as each major stage is completed in the case of multi-year programs), is when the project begins to deliver cash savings and/or reduced depreciation.
During 2021, Kellogg ParentCo announced a reconfiguration of the North America reportable segment supply chain network, designed to drive increased productivity. The overall project, which will continue into 2023, is expected to result in cumulative pretax charges of approximately $45 million, which include employee-related costs of
F-17 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
$4 million, other cash costs of $21 million and non-cash costs, primarily consisting of accelerated depreciation and asset write-offs, of $20 million. Charges incurred related to this restructuring program were approximately $6 million during 2022 and $7 million during 2021. These charges primarily related to severance costs and asset related charges and were recorded in COGS. This initiative was directly related to WK Kellogg Co.
Kellogg ParentCo also had several other restructuring programs in place, some of which had an impact on WK Kellogg Co. An allocation of these costs was made to WK Kellogg Co as applicable.
The tables below provide the details for the charges incurred by WK Kellogg Co during 2022, 2021 and 2020 and program costs to date for all programs related to WK Kellogg Co currently active as of December 31, 2022:
(millions) |
2022 | 2021 | 2020 | |||||||||
Employee related costs |
$ | | $ | 4 | $ | | ||||||
Asset related |
6 | 1 | | |||||||||
Other allocated costs |
| 2 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 6 | $ | 7 | $ | 1 |
Employee related costs consisted of severance and pension charges. Asset related costs consist primarily of accelerated depreciation.
During 2022, WK Kellogg Co recorded total charges of $6 million across all restructuring programs. The charges were comprised of $6 million, substantially all of which was recorded in COGS.
During 2021, WK Kellogg Co recorded total charges of $7 million across all restructuring programs. The charges were comprised of $5 million recorded in COGS and $2 million recorded in SGA expense.
During 2020, WK Kellogg Co recorded total charges of $1 million across all restructuring programs, the entirety of which was recorded in SGA expense.
At December 31, 2022 total project reserves were $4 million, related to severance payments, which are expected to be paid in 2023. The following table provides details for exit cost reserves.
(millions) |
Employee Related Costs |
Asset Related Costs | Total | |||||||||
Liability as of December 28, 2019 |
$ | 1 | $ | | $ | 1 | ||||||
2020 restructuring charges |
| | | |||||||||
Cash payments |
(1 | ) | | (1 | ) | |||||||
Non-cash charges and other |
| | | |||||||||
|
|
|
|
|
|
|||||||
Liability as of January 2, 2021 |
$ | | $ | | $ | | ||||||
2021 restructuring charges |
4 | 1 | 5 | |||||||||
Cash payments |
| | | |||||||||
Non-cash charges and other |
| (1 | ) | (1 | ) | |||||||
|
|
|
|
|
|
|||||||
Liability as of January 1, 2022 |
$ | 4 | $ | | $ | 4 | ||||||
2022 restructuring charges |
| 6 | 6 | |||||||||
Cash payments |
| (2 | ) | (2 | ) | |||||||
Non-cash charges and other |
| (4 | ) | (4 | ) | |||||||
|
|
|
|
|
|
|||||||
Liability as of December 31, 2022 |
$ | 4 | $ | | $ | 4 | ||||||
|
|
|
|
|
|
NOTE 6
STOCK COMPENSATION
Kellogg ParentCo uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted
F-18 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
stock units and executive performance shares. Kellogg ParentCo also sponsors a discounted stock purchase plan in the United States. These awards are administered through several plans, as described within this Note.
The 2022 Long-Term Incentive Plan (2022 Plan), approved by shareholders in April 2022, permits awards to employees and officers in the form of incentive and non-qualified stock options, performance units, restricted stock or restricted stock units, and stock appreciation rights. The 2017 Long-Term Incentive Plan (2017) had a remaining 12.2 million remaining authorized by unissued shares which was replaced by the 2022 Plan. The 2022 Plan authorizes the issuance of a total of 12.4 million shares. At December 31, 2022, there were 12.2 million remaining authorized, but unissued, shares under the 2022 Plan.
In April 2020, the Amended and Restated Kellogg ParentCo Company 2002 Employee Stock Purchase Plan was approved by shareholders, effective July 1, 2020. The plan is a tax-qualified employee stock purchase plan made available to substantially all U.S. employees, which allows participants to acquire Kellogg ParentCo stock at a discounted price. The purpose of the plan is to encourage employees at all levels to purchase stock and become shareholders.
Until the Spin-off is effective, WK Kellogg Cos employees will participate in Kellogg ParentCos equity-based compensation programs. The non-cash stock compensation expense related to WK Kellogg Cos dedicated employees was: 2022 $3 million; 2021 $2 million, 2020 $2 million, which was specifically identified based on awards received under Kellogg ParentCos plans. Stock compensation expense for corporate or shared employees was allocated to WK Kellogg Co primarily based on gross sales value and totaled $17 million, $11 million and $15 million for the years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively:
(millions) |
2022 | 2021 | 2020 | |||||||||
Pre-tax compensation expense direct |
$ | 3 | $ | 2 | $ | 2 | ||||||
Pre-tax compensation expense allocated |
17 | 11 | 15 | |||||||||
|
|
|
|
|
|
|||||||
Pre-tax compensation expense direct and allocated |
$ | 20 | $ | 13 | $ | 17 | ||||||
Related income tax benefit |
$ | 5 | $ | 3 | $ | 4 |
The amounts presented are not necessarily indicative of future awards and do not necessarily reflect the costs that WK Kellogg Co would have incurred as an independent company for the periods presented.
NOTE 7
PENSION BENEFITS
Kellogg ParentCo sponsors a number of U.S. and foreign pension plans to provide retirement benefits for its employees. WK Kellogg Co employees participate in defined benefit plans sponsored by Kellogg ParentCo, which include participants of Kellogg ParentCos other businesses. Such plans are accounted for as multiemployer plans in these Combined Financial Statements and as a result, no asset or liability was recorded by WK Kellogg Co to recognize the funded status of these plans.
The funded status of the pension plans that will be restructured and partially spun-off to WK Kellogg Co as part of the transaction are presented below. These assets and liabilities are not currently recorded by WK Kellogg Co as the plans are commingled with employees from other Kellogg ParentCo businesses.
(millions) |
2022 | 2021 | ||||||
Projected benefit obligation |
$ | (650 | ) | $ | (866 | ) | ||
Fair value of plan assets |
518 | 784 | ||||||
|
|
|
|
|||||
Funded Status |
$ | (132 | ) | $ | (82 | ) | ||
|
|
|
|
We recorded expense of $38 million, income of $23 million and expense of $24 million for the years ended December 31, 2022, January 1, 2022 and January 2, 2021 respectively, relating to our employees participation in
F-19 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
these Kellogg ParentCo sponsored plans. For the year ended December 31, 2022, $11 million of expense related to service costs was allocated to COGS and $27 million of expense related to all other elements of benefit expense was allocated to other income (expense), net. For the year ended January 1, 2022, $12 million of expense related to service costs was allocated to COGS and $35 million of income was allocated to other income (expense), net. For the year ended January 2, 2021, $11 million of expense related to service costs was allocated to COGS and $13 million of expense was allocated to other income (expense), net. No contributions have been recognized in the Combined Financial Statements as we are not required to make contributions to these plans.
There are also certain defined benefit pension plans that our employees participate in that are either dedicated to our employees or where the plan assets and liabilities that relate to our employees will legally transfer to WK Kellogg Co at the time of separation from Kellogg ParentCo. Defined benefits for salaried employees are generally based on salary and years of service, while union employee benefits are generally a negotiated amount for each year of service. WK Kellogg Co uses a December 31 measurement date for these plans and, when necessary, adjusts for plan contributions and significant events between December 31 and its fiscal year-end.
For these dedicated defined benefit pension plans, the aggregate plan assets and funded status was $2 million for the period ending December 31, 2022 and $3 million for the period ending January 1, 2022. This balance is comprised of investments in cash and cash equivalents and limited partnerships and is recorded in other assets.
Expense
Service cost is recorded in COGS and SGA expense. All other components of net periodic benefit cost are included in other income (expense), net. An immaterial amount of expense was recognized related to the pension plans that are directly attributable to WK Kellogg Co.
Kellogg ParentCo and certain of its subsidiaries also sponsor 401(k) or similar savings plans for active employees. Our employees participate in such plans. Expense related to these plans as allocated to WK Kellogg Co was immaterial for all years.
NOTE 8
NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement
Kellogg ParentCo sponsors a number of plans to provide health care and other welfare benefits to retired employees in the United States and Canada, who have met certain age and service requirements. Kellogg ParentCo contributes to voluntary employee benefit association (VEBA) trusts to fund certain U.S. retiree health and welfare benefit obligations.
The Companys employees participate in these other postretirement plans sponsored by Kellogg ParentCo, which include participants of Kellogg ParentCos other businesses. Such plans are accounted for as multiemployer plans in these Combined Financial Statements and as a result, no asset or liability was recorded by the Company to recognize the funded status of these plans.
The funded status of the postretirement plans that will be restructured and partially spun-off to WK Kellogg Co as part of the transaction are presented below. These assets and liabilities are not currently recorded by the Company as the plans are commingled with employees from other Kellogg ParentCo businesses.
(millions) |
2022 | 2021 | ||||||
Projected benefit obligation |
$ | (789 | ) | $ | (1,031 | ) | ||
Fair value of plan assets |
1,226 | 1,608 | ||||||
|
|
|
|
|||||
Funded status |
$ | 437 | $ | 577 | ||||
|
|
|
|
F-20 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
We recorded expense of $78 million, income of $134 million and income of $55 million for the years ended December 31, 2022, January 1, 2022, and January 2, 2021 respectively, relating to our employees participation in Kellogg ParentCo sponsored postretirement plans. These amounts were recorded in the Combined Statement of Operations as follows: for the year ended December 31, 2022, $7 million of expense related to service costs was allocated to COGS, $1 million was allocated to SGA expense and $70 million of expense related to all other elements of benefit expense was allocated to other income (expense), net; for the year ended January 1, 2022, $7 million of expense related to service costs was allocated to COGS, $2 million to SGA expense and $143 million of income was allocated to other income (expense), net; for the year ended January 2, 2021, $6 million of expense related to service costs was allocated to COGS, $2 million was allocated to SGA expense and $63 million of income was allocated to other income (expense), net. No contributions have been recognized in the Combined Financial Statements as we are not required to make contributions to these plans.
There are also certain postretirement plans that our employees participate in that are either dedicated to our employees or where the plan assets and liabilities that relate to our employees will legally transfer to our Company at the time of separation from Kellogg ParentCo. The Company uses a December 31 measurement date for these plans and, when necessary, adjusts for plan contributions and significant events between December 31 and its fiscal year-end.
Obligations and funded status
The aggregate change in accumulated postretirement benefit obligation, plan assets, and funded status is presented in the following tables.
(millions) |
2022 | 2021 | ||||||
Change in accumulated benefit obligation |
||||||||
Beginning of year |
$ | 22 | $ | 24 | ||||
Service cost |
| | ||||||
Interest cost |
1 | | ||||||
Actuarial (gain) loss |
(5 | ) | (1 | ) | ||||
Benefits paid |
(1 | ) | (1 | ) | ||||
Currency Impact |
(1 | ) | | |||||
|
|
|
|
|||||
End of year |
$ | 16 | $ | 22 | ||||
|
|
|
|
|||||
Change in plan assets |
||||||||
Fair value beginning of year |
$ | | $ | | ||||
Actual return on plan assets |
| | ||||||
Employer contributions |
| | ||||||
Benefits paid |
| | ||||||
|
|
|
|
|||||
Fair value end of year |
$ | | $ | | ||||
|
|
|
|
|||||
Funded status |
$ | (16 | ) | $ | (22 | ) | ||
|
|
|
|
|||||
Amounts recognized in the Combined Balance Sheet consist of |
||||||||
Other assets |
$ | | $ | | ||||
Other current liabilities |
(1 | ) | (1 | ) | ||||
Non-pension postretirement liability |
(15 | ) | (21 | ) | ||||
|
|
|
|
|||||
Net amount recognized |
$ | (16 | ) | $ | (22 | ) | ||
|
|
|
|
Information for postretirement benefit plans with accumulated benefit obligations in excess of plan assets were:
(millions) |
2022 | 2021 | ||||||
Accumulated benefit obligation |
$ | 16 | $ | 22 | ||||
Fair value of plan assets |
$ | | $ | | ||||
|
|
|
|
F-21 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Expense
Components of postretirement benefit expense (income) were:
(millions) |
2022 | 2021 | 2020 | |||||||||
Service cost |
$ | | $ | | $ | | ||||||
Interest cost |
1 | | 1 | |||||||||
Expected return on plan assets |
| | | |||||||||
Amortization of net loss (gain) |
(5 | ) | (1 | ) | (1 | ) | ||||||
|
|
|
|
|
|
|||||||
Net periodic benefit expense (income) |
$ | (4 | ) | $ | (1 | ) | $ | | ||||
|
|
|
|
|
|
Assumptions
The weighted-average actuarial assumptions used to determine benefit obligations were:
2022 | 2021 | 2020 | ||||||||||
Discount rate |
5.2 | % | 2.9 | % | 2.5 | % | ||||||
|
|
|
|
|
|
The weighted-average actuarial assumptions used to determine annual net periodic benefit cost were:
2022 | 2021 | 2020 | ||||||||||
Discount rate |
2.9 | % | 2.5 | % | 3.0 | % |
WK Kellogg Co may experience material actuarial gains or losses due to differences between assumed and actual experience and due to changing economic conditions. During 2022, WK Kellogg Co recognized a net actuarial gain of approximately $5 million driven by a gain related to assumption changes, primarily due to increase in discount rate.
Projected benefit payments, which reflect expected future service as appropriate, are expected to be paid at $1 million per year for 2023 through to 2027 and $5 million thereafter.
Postemployment
Under certain conditions, Kellogg ParentCo provides benefits to former or inactive employees, including salary continuance, severance, and long-term disability, in the United States and several foreign locations. As these benefits have been provided to our employees as well, a reasonable allocation of costs has been made to the Combined Statement of Operations. As postemployment benefit plans are Kellogg ParentCos plans and the benefits are settled by Kellogg ParentCo, the offset to the expense has been recognized through net parent investment on the Combined Balance Sheet. The total expense allocated for the years ended December 31, 2022, January 1, 2022 and January 2, 2021 was immaterial.
NOTE 9
INCOME TAXES
WK Kellogg Cos operations have historically been included in the consolidated U.S. federal, certain state and local tax returns filed by Kellogg ParentCo. We also file certain separate U.S. state and local and foreign income tax returns. WK Kellogg Co has calculated its provision for income taxes using a separate return method as if the Company was a separate group of companies under common ownership. Under this method, WK Kellogg Co is assumed to file hypothetical separate returns with the tax authorities, thereby reporting its taxable income or loss and paying the applicable tax to or receiving the appropriate refund from Kellogg ParentCo. Current income tax liabilities are assumed to be immediately settled with Kellogg ParentCo against net parent investment. WK
F-22 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Kellogg Co reports deferred taxes on its temporary differences and on any carryforwards that it could claim on its hypothetical returns. Cash tax payments, current and deferred tax balances and unremitted foreign earnings may not be reflective of WK Kellogg Cos actual tax balances prior to or subsequent to the distribution.
The components of (loss) income before income taxes and the provision for income taxes were as follows:
(millions) | 2022 | 2021 | 2020 | |||||||||
(Loss) income before income taxes |
||||||||||||
United States |
$ | (59 | ) | $ | 166 | $ | 217 | |||||
Foreign |
33 | 48 | 25 | |||||||||
$ | (26 | ) | $ | 214 | $ | 242 | ||||||
Income taxes |
||||||||||||
Currently payable |
||||||||||||
United States-Federal |
$ | | $ | 23 | $ | 36 | ||||||
State |
4 | 6 | 10 | |||||||||
Foreign |
10 | 10 | 10 | |||||||||
$ | 14 | $ | 39 | $ | 56 | |||||||
Deferred |
||||||||||||
United States-Federal |
$ | (14 | ) | $ | 8 | $ | 6 | |||||
State |
(1 | ) | 1 | 1 | ||||||||
Foreign |
| 4 | (3 | ) | ||||||||
$ | (15 | ) | $ | 13 | $ | 4 | ||||||
|
|
|
|
|
|
|||||||
Total income tax expense (benefit) |
$ | (1 | ) | $ | 52 | $ | 60 | |||||
|
|
|
|
|
|
The difference between the U.S. federal statutory tax rate and WK Kellogg Cos effective income tax rate was:
2022 | % | 2021 | % | 2020 | % | |||||||||||||||||||
U.S. statutory income tax rate |
$ | (6 | ) | 21.0 | % | $ | 45 | 21.0 | % | $ | 51 | 21.0 | % | |||||||||||
Foreign rates varying from U.S. statutory rate |
2 | (9.5 | )% | 3 | 1.6 | % | 2 | 0.8 | % | |||||||||||||||
State income taxes, net of federal benefit |
2 | (7.2 | )% | 7 | 3.2 | % | 9 | 3.6 | % | |||||||||||||||
Nondeductible Permanent Items |
2 | (8.1 | )% | 1 | 0.5 | % | 1 | 0.4 | % | |||||||||||||||
Inventory Donations (Sec. 170 (A)) |
(1 | ) | 4.6 | % | (1 | ) | (0.4 | )% | (1 | ) | (0.3 | )% | ||||||||||||
Stock Options Excess Benefit / Shortfall |
(1 | ) | 3.1 | % | | 0.0 | % | | (0.1 | )% | ||||||||||||||
Credits |
(1 | ) | 5.2 | % | (1 | ) | (0.6 | )% | (1 | ) | (0.5 | )% | ||||||||||||
APB 23 |
1 | (1.8 | )% | | 0.2 | % | | 0.0 | % | |||||||||||||||
Other, net |
1 | (1.6 | )% | (2 | ) | (1.1 | )% | (1 | ) | (0.2 | )% | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Effective income tax rate |
$ | (1 | ) | 5.7 | % | $ | 52 | 24.4 | % | $ | 60 | 24.7 | % | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As presented in the preceding table, WK Kellogg Cos 2022 combined effective tax rate was 5.7%, as compared to 24.4% in 2021 and 24.7% in 2020.
The effective tax rate for 2022, 2021 and 2020 was impacted by state and local income taxes and the differential of WK Kellogg Cos foreign statutory tax rates from the U.S. federal statutory tax rate. The effective tax rate for fiscal year 2022 decreased as compared to the prior year as a result of a change in the jurisdictional mix of pre-tax earnings, most notably a decrease in U.S. pre-tax earnings.
Unremitted earnings in Canada of approximately $76 million as of December 31, 2022, $60 million as of January 1, 2022 and $32 million as of January 2, 2021 were considered indefinitely reinvested. The unrecognized deferred tax liability for these earnings is approximately $4 million, $3 million and $2 million, respectively. However, this estimate could change based on the manner in which the outside basis difference associated with these earnings reverses.
F-23 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Management monitors WK Kellogg Cos ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration. Changes resulting from managements assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate.
The following table provides an analysis of WK Kellogg Cos deferred tax assets and liabilities as of year-end December 31, 2022 and January 1, 2022:
Deferred tax asset | Deferred tax liability | |||||||||||||||
(millions) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
Advertising and promotion related |
$ | 2 | $ | 2 | $ | | $ | | ||||||||
Wages and payroll taxes |
5 | 5 | | | ||||||||||||
Inventory valuation |
5 | 3 | | | ||||||||||||
Employee benefits |
| | | 1 | ||||||||||||
Operating loss, credit and other carryforwards |
14 | | | | ||||||||||||
Stock options |
6 | 6 | | | ||||||||||||
Operating lease liabilities |
2 | 2 | | | ||||||||||||
Depreciation and asset disposals |
| | 80 | 78 | ||||||||||||
Hedging transactions |
| 2 | 1 | | ||||||||||||
Operating lease right-of-use assets |
| | 2 | 2 | ||||||||||||
Trademarks and other intangibles |
| | 21 | 20 | ||||||||||||
Research and development capitalization |
7 | | | | ||||||||||||
Other temporary differences |
| 1 | | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 41 | $ | 21 | $ | 104 | $ | 104 | |||||||||
Less valuation allowance |
| | ||||||||||||||
|
|
|
|
|||||||||||||
Total deferred tax assets |
$ | 41 | $ | 21 | ||||||||||||
|
|
|
|
|||||||||||||
Net deferred tax asset (liability) |
$ | (63 | ) | $ | (83 | ) | ||||||||||
|
|
|
|
On a separate-return basis, WK Kellogg Cos total tax benefit of carryforwards at year-end 2022 was $14 million. Of the total carryforwards at year-end 2022, $12 million does not expire while the remaining $2 million generated in 2022 will expire at various dates. While the generation of carryforwards has been reflected in the provision for income taxes of WK Kellogg Cos operations on a separate-return basis, WK Kellogg Cos actual tax attributes have primarily been utilized by Kellogg ParentCo on a consolidated basis.
WK Kellogg Co is included in the income tax returns filed by Kellogg ParentCo in the U.S., various cities and states, and foreign jurisdictions including Canada, Mexico and Puerto Rico. With limited exceptions, the Company is no longer subject to U.S. federal examinations by the IRS for years prior to 2020. WK Kellogg Co is included in certain income and non-income tax filings of Kellogg ParentCo that are under examination in various state and foreign jurisdictions.
The following table summarizes the activity related to WK Kellogg Cos unrecognized tax benefits:
(millions) |
2022 | 2021 | 2020 | |||||||||
Balance at beginning of year |
$ | 5 | $ | 7 | $ | 6 | ||||||
Increase (decrease) associated with tax positions taken during the current year |
| 1 | 1 | |||||||||
Increase (decrease) associated with positions taken during a prior year |
| (1 | ) | | ||||||||
Settlements |
| (1 | ) | | ||||||||
Decrease associated with lapses in statutes of limitations |
| (1 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Balance at end of year |
$ | 5 | $ | 5 | $ | 7 | ||||||
|
|
|
|
|
|
F-24 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
The amount of unrecognized tax benefits for the years ended December 31, 2022, January 1, 2022 and January 2, 2021, that, if recognized, would affect the effective tax rate, was not material. During the years ended December 31, 2022, January 1, 2022 and January 2, 2021, the Company recognized an immaterial amount of tax related interest on unrecognized tax benefits. Management estimates the reasonably possible changes to unrecognized tax benefits during the next twelve months to be immaterial and is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate. However, WK Kellogg Co would not be liable for any incremental taxes payable, interest or penalties, which remain Kellogg ParentCos obligation.
NOTE 10
RELATED PARTY TRANSACTIONS
WK Kellogg Co has not historically operated as a standalone business and has various relationships with Kellogg ParentCo whereby Kellogg ParentCo provides services to WK Kellogg Co.
Transfers to/from Kellogg ParentCo, net
As discussed in Note 1 in the basis of presentation section, net parent investment is primarily impacted by contributions from Kellogg ParentCo which are the result of treasury activity and net funding provided by or distributed to Kellogg ParentCo. The components of net parent investment are:
(millions) |
2022 | 2021 | 2020 | |||||||||
Net transfers (to)/from Kellogg ParentCo as reflected in the Combined Statement of Cash Flows |
$ | 18 | $ | 68 | $ | (216 | ) | |||||
Non-cash direct stock compensation expense |
3 | 2 | 2 | |||||||||
Non-cash deferred tax and other |
6 | | | |||||||||
Non-cash allocated pension and postretirement plan benefit |
116 | (157 | ) | (31 | ) | |||||||
|
|
|
|
|
|
|||||||
Net transfers to Kellogg ParentCo as reflected in the Combined Statement of Changes in Equity |
$ | 143 | $ | (87 | ) | $ | (245 | ) | ||||
|
|
|
|
|
|
Corporate Overhead and Other Allocations
Kellogg ParentCo provides WK Kellogg Co certain services, including executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations. Allocated costs also include costs related to commingled supply chain functions such as logistics, distribution and co-manufacturing/co-packing operations. Our Combined Financial Statements reflect an allocation of these costs. When specific identification is not practicable, a proportional cost method is used, primarily based on gross sales value, headcount, production pounds or shipping pounds.
The allocation of expenses from Kellogg ParentCo to WK Kellogg Co were reflected as follows in the Combined Statement of Operations:
(millions) |
2022 | 2021 | 2020 | |||||||||
Cost of goods sold |
$ | 172 | $ | 169 | $ | 192 | ||||||
Selling, general and administrative |
308 | 256 | 324 | |||||||||
Other (income) expense, net |
106 | (176 | ) | (45 | ) | |||||||
|
|
|
|
|
|
|||||||
Total |
$ | 586 | $ | 249 | $ | 471 | ||||||
|
|
|
|
|
|
The financial information herein may not necessarily reflect the combined financial position, results of operations and cash flows of WK Kellogg Co in the future or what they would have been had WK Kellogg Co
F-25 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
been a separate, standalone entity during the periods presented. Management believes that the methods used to allocate expenses to WK Kellogg Co are reasonable; however, the allocations may not be indicative of actual expenses that would have been incurred had we operated as an independent, publicly traded company for the periods presented. Actual costs that WK Kellogg Co may have incurred had it been a standalone company would depend on a number of factors, including the chosen organizational structure, whether functions were outsourced or performed by our employees and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure.
Stock compensation
As discussed in Note 6, stock compensation expense related to Kellogg ParentCo employees who also support WK Kellogg Co have been allocated to the Company and recorded in COGS and SGA expense in the Combined Statement of Operations and included in the table above. Stock compensation costs allocated to WK Kellogg Co were $17 million, $11 million and $15 million for the years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.
Retirement Benefits
As discussed in Notes 7 and 8, WK Kellogg Cos employees participate in defined benefit pension and other postretirement plans sponsored by Kellogg ParentCo that also include participants of Kellogg ParentCos other businesses. The costs of such plans have been allocated in the Combined Statement of Operations within COGS, SGA expense and other income (expense), net and are included in the amounts presented in the table above. The allocations related to such plans was expense of $116 million, income of $156 million and income of $31 million for the years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.
Centralized Cash Management
Kellogg ParentCo uses a centralized approach to cash management and financing of operations. The majority of WK Kellogg Cos businesses are party to Kellogg ParentCos cash pooling arrangements to maximize Kellogg ParentCos availability of cash for general operating and investing purposes. Under these cash pooling arrangements, cash balances are swept regularly from WK Kellogg Cos accounts. Cash transfers to and from Kellogg ParentCos cash concentration accounts and the resulting balances at the end of each reporting period are reflected in net parent company investment in the Combined Balance Sheets.
As discussed in Note 1, Kellogg ParentCo has committed that it will provide financial assistance to WK Kellogg Co, as determined by Kellogg ParentCo, to enable the Company to continue its operations and fulfill all of its financial obligations, expiring at the earlier of the consummation of the Spin-off or December 2024.
Debt
Kellogg ParentCos third-party debt and the related interest expense have not been allocated to WK Kellogg Co for any of the periods presented as WK Kellogg Co was not the legal obligor of the debt and Kellogg ParentCos borrowings were not directly attributable to WK Kellogg Cos businesses.
Commercial Operations
Unless otherwise stated, all significant intercompany transactions between WK Kellogg Co and Kellogg ParentCo have been included in these Combined Financial Statements and are considered to be effectively settled for cash at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Combined Statement of Cash Flows as a financing activity and in the Combined Balance Sheets as net parent investment.
WK Kellogg Co sells certain products to other Kellogg ParentCo businesses, which may use the WK Kellogg Cos products as raw materials in its manufacturing processes or may resell the finished goods. These product
F-26 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
sales resulted in revenue of $31 million, $22 million and $23 million for the years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively. Accounts receivable as a result of WK Kellogg Co sales to other Kellogg ParentCo businesses was approximately $1 million as of December 31, 2022 and January 1, 2022.
WK Kellogg Co also purchases certain products from other Kellogg ParentCo businesses, which is recorded in COGS. These purchases amounted to $82 million, $65 million and $55 million for the years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively, and resulted in accounts payable of $11 million as of December 31, 2022 and January 1, 2022. These amounts may not necessarily reflect the combined financial position and results of operations of WK Kellogg Co in the future or what they would have been had WK Kellogg Co been a separate, standalone entity during the periods presented. Actual costs that WK Kellogg Co may have incurred had it been a standalone company would depend on a number of factors, including the chosen organizational structure, whether functions were outsourced or performed by our employees and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure.
WK Kellogg Co also makes certain royalty payments to Kellogg ParentCo, which is recorded in COGS. These royalties amounted to $13 million, $12 million and $15 million for the years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively. Royalty payable was recorded within accounts payable and was immaterial as of December 31, 2022 and January 1, 2022.
Spin costs
Kellogg ParentCo is incurring incremental costs to evaluate, plan and execute the Spin-off. These charges were primarily related to legal and consulting costs. WK Kellogg Co is allocated a pro rata portion of those costs, that WK Kellogg Co received a benefit from, based on either specific identification, where possible, or a proportional cost method based on gross sales value. WK Kellogg Co was allocated total charges of $26 million, including $3 million in COGS and $22 million in SGA expense for the year ended December 31, 2022.
NOTE 11
DERIVATIVE INSTRUMENTS
WK Kellogg Co is exposed to certain market risks such as changes in foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Kellogg ParentCo uses derivative and nonderivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.
Since the derivative instruments are entered into and settled by Kellogg ParentCo for both WK Kellogg Co and its other businesses, no asset or liability has been recorded on the Combined Balance Sheets. However, an appropriate allocation of the gains/losses and fees associated with entering into derivative instruments has been included in WK Kellogg Cos Combined Statement of Operations.
The effect of derivative instruments on WK Kellogg Cos Combined Statement of Operations for the years ended December 31, 2022, January 1, 2022, and January 2, 2021 was as follows:
Gain (loss) recognized in COGS | Gain (loss) recognized in other income (expense), net |
|||||||||||||||||||||||
(millions) |
2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||
Commodity contracts |
$ | 15 | $ | 18 | $ | 1 | $ | | $ | | $ | | ||||||||||||
Foreign Currency derivatives |
$ | 12 | $ | (1 | ) | $ | (2 | ) | $ | | $ | 1 | $ | 1 |
F-27 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
NOTE 12
CONTINGENCIES
WK Kellogg Co is subject to various legal proceedings, claims, and governmental inspections or investigations in the ordinary course of business covering matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, workers compensation, employment and other actions. These matters are subject to uncertainty and the outcome is not predictable with assurance. WK Kellogg Co uses a combination of insurance and self-insurance for a number of risks, including workers compensation, general liability, automobile liability and product liability.
WK Kellogg Co has established accruals for certain matters where losses are deemed probable and reasonably estimable. There are other claims and legal proceedings pending against WK Kellogg Co for which accruals have not been established. It is reasonably possible that some of these matters could result in an unfavorable judgment against WK Kellogg Co and could require payment of claims in amounts that cannot be estimated at December 31, 2022. Based upon current information, management does not expect any of the claims or legal proceedings pending against WK Kellogg Co to have a material impact on WK Kellogg Cos combined financial statements. WK Kellogg Co is subject to various legal proceedings, claims, and governmental inspections or investigations in the ordinary course of business covering matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, workers compensation, employment and other actions. These matters are subject to uncertainty and the outcome is not predictable with assurance.
In 2021, there was a fire at one of WK Kellogg Cos manufacturing facilities, the damages of which are in the process of being recovered via insurance policies maintained by Kellogg ParentCo. WK Kellogg Co recognized an insurance receivable of $20 million in accounts receivable, net as of January 1, 2022. The amount outstanding as of December 31, 2022 was immaterial. For the year ended December 31, 2022, WK Kellogg Co recognized insurance recoveries of $16 million in COGS to offset the incremental costs incurred due to the fire. For the year ended January 1, 2022, WK Kellogg Co recognized an expense of $7 million in other income (expense), net related to the insurance deductible related to the fire.
NOTE 13
ENTITY-WIDE DISCLOSURES
WK Kellogg Co manages its operations through one operating and reportable segment, engaged in the manufacturing, marketing and sales of cereal products in North America. Consistent with our operational structure, our Chief Operating Decision Maker (CODM), makes resource allocation and business decisions on a combined basis. Our CODM also uses combined single-segment financial information for the purpose of evaluating financial performance, allocating resources, setting incentive compensation targets, as well as forecasting future period financial results.
Our products include various brands of cereal which are marketed under the Kelloggs, Kashi and Bear Naked tradenames.
WK Kellogg Cos largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 28% of combined net sales for the years ended December 31, 2022 and January 1, 2022 and 26% for the year ended January 2, 2021. These sales are primarily in the United States.
F-28 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Supplemental geographic information is provided below for net sales to external customers and long-lived assets:
(millions) |
2022 | 2021 | 2020 | |||||||||
Net sales |
||||||||||||
United States |
$ | 2,369 | $ | 2,160 | $ | 2,533 | ||||||
Canada |
292 | 265 | 298 | |||||||||
Other |
34 | 35 | 36 | |||||||||
|
|
|
|
|
|
|||||||
Combined |
$ | 2,695 | $ | 2,460 | $ | 2,867 | ||||||
|
|
|
|
|
|
|||||||
Long-lived assets |
||||||||||||
United States |
$ | 544 | $ | 529 | $ | 537 | ||||||
Canada |
72 | 62 | 68 | |||||||||
Other |
29 | 28 | 30 | |||||||||
|
|
|
|
|
|
|||||||
Combined |
$ | 645 | $ | 619 | $ | 635 | ||||||
|
|
|
|
|
|
NOTE 14
SUPPLEMENTAL FINANCIAL STATEMENT DATA
Combined Statement of Operations | ||||||||||||
(millions) |
2022 | 2021 | 2020 | |||||||||
Depreciation expense |
$ | 68 | $ | 68 | $ | 69 | ||||||
Overhead expense |
$ | 305 | $ | 244 | $ | 309 | ||||||
Research and development expense |
$ | 25 | $ | 27 | $ | 30 | ||||||
Advertising expense |
$ | 225 | $ | 268 | $ | 300 |
Combined Balance Sheet | ||||||||
(millions) |
2022 | 2021 | ||||||
Trade receivables |
$ | 213 | $ | 122 | ||||
Allowance for expected credit losses |
| | ||||||
Other receivables |
16 | 33 | ||||||
|
|
|
|
|||||
Accounts receivable, net |
$ | 229 | $ | 155 | ||||
|
|
|
|
|||||
Raw materials |
$ | 43 | $ | 40 | ||||
Spare parts |
48 | 44 | ||||||
Supplies |
22 | 25 | ||||||
Materials in process |
20 | 18 | ||||||
Finished goods |
298 | 203 | ||||||
|
|
|
|
|||||
Inventories, net |
$ | 431 | $ | 330 | ||||
|
|
|
|
|||||
Land |
$ | 10 | $ | 10 | ||||
Buildings |
594 | 589 | ||||||
Machinery and equipment |
1,763 | 1,707 | ||||||
Vehicles |
2 | 2 | ||||||
Office Furniture and Fixtures |
19 | 17 | ||||||
Construction in progress |
125 | 105 | ||||||
Accumulated depreciation |
(1,868 | ) | (1,811 | ) | ||||
|
|
|
|
|||||
Property, net |
$ | 645 | $ | 619 | ||||
|
|
|
|
|||||
Right of use asset |
$ | 7 | $ | 8 | ||||
Other noncurrent assets |
4 | 6 | ||||||
|
|
|
|
|||||
Other assets |
$ | 11 | $ | 14 | ||||
|
|
|
|
F-29 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Combined Balance Sheet | ||||||||
(millions) |
2022 | 2021 | ||||||
Accrued distribution and plant related costs |
$ | 12 | $ | 41 | ||||
Lease liability current |
3 | 3 | ||||||
Other accrued liabilities |
32 | 29 | ||||||
|
|
|
|
|||||
Other current liabilities |
$ | 47 | $ | 73 | ||||
Restructuring liability |
$ | | $ | 4 | ||||
Lease liability noncurrent |
5 | 5 | ||||||
Other noncurrent |
| 1 | ||||||
|
|
|
|
|||||
Other liabilities |
$ | 5 | $ | 10 | ||||
|
|
|
|
Allowance for expected credit losses | ||||||||||||
(millions) |
2022 | 2021 | 2020 | |||||||||
Balance at beginning of year |
$ | | $ | 1 | $ | | ||||||
Additions (reductions) charged to expense |
| (1 | ) | | ||||||||
Expected credit losses charged to reserve |
| | 1 | |||||||||
|
|
|
|
|
|
|||||||
Balance at end of year |
$ | | $ | | $ | 1 | ||||||
|
|
|
|
|
|
NOTE 15
SUBSEQUENT EVENTS
These Combined Financial Statements were derived from the financial statements of Kellogg Company, which issued its annual financial statements for the fiscal year ended December 31, 2022 on February 21, 2023. Accordingly, WK Kellogg Co has evaluated transactions for consideration as recognized subsequent events in these financial statements through the date of February 21, 2023. Additionally, WK Kellogg Co has evaluated transactions that occurred through June 16, 2023, the date these financial statements were available for issuance, for the purposes of unrecognized subsequent events. We have determined that there have been no events that have occurred that would require adjustments to or disclosure in these Combined Financial Statements.
F-30 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
COMBINED STATEMENT OF OPERATIONS
(millions)
Quarter ended | ||||||||
(unaudited) |
April 1, 2023 | April 2, 2022 | ||||||
Net sales |
$ | 720 | $ | 623 | ||||
Cost of goods sold |
539 | 500 | ||||||
Selling, general and administrative expense |
155 | 87 | ||||||
|
|
|
|
|||||
Operating profit |
$ | 26 | $ | 36 | ||||
Other income (expense), net |
8 | 29 | ||||||
|
|
|
|
|||||
Income before income taxes |
$ | 34 | $ | 65 | ||||
Income taxes |
8 | 14 | ||||||
|
|
|
|
|||||
Net income |
$ | 26 | $ | 51 | ||||
|
|
|
|
Refer to Notes to Unaudited Combined Financial Statements.
COMBINED STATEMENT OF COMPREHENSIVE INCOME
(millions)
Quarter ended April 1, 2023 |
||||||||||||
(unaudited) |
Pre-tax amount |
Tax (expense) benefit |
After-tax amount |
|||||||||
Net income |
$ | 34 | $ | (8 | ) | $ | 26 | |||||
Other comprehensive income: |
||||||||||||
Foreign currency translation |
$ | 2 | | $ | 2 | |||||||
|
|
|
|
|
|
|||||||
Comprehensive income |
$ | 36 | $ | (8 | ) | $ | 28 | |||||
|
|
|
|
|
|
Quarter ended April 2, 2022 |
||||||||||||
(unaudited) |
Pre-tax amount |
Tax (expense) benefit |
After-tax amount |
|||||||||
Net income |
$ | 65 | $ | (14 | ) | $ | 51 | |||||
Other comprehensive income: |
||||||||||||
Foreign currency translation |
1 | | 1 | |||||||||
|
|
|
|
|
|
|||||||
Comprehensive income |
$ | 66 | $ | (14 | ) | $ | 52 | |||||
|
|
|
|
|
|
Refer to Notes to Unaudited Combined Financial Statements.
F-31 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
(millions)
April 1, 2023 (unaudited) |
December 31, 2022 |
|||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | | $ | | ||||
Accounts receivable, net |
224 | 229 | ||||||
Inventories, net |
374 | 431 | ||||||
Other current assets |
18 | 10 | ||||||
|
|
|
|
|||||
Total current assets |
$ | 616 | $ | 670 | ||||
Property, net |
645 | 645 | ||||||
Goodwill |
53 | 53 | ||||||
Other intangibles |
57 | 57 | ||||||
Other assets |
11 | 11 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,382 | $ | 1,436 | ||||
|
|
|
|
|||||
Current liabilities |
||||||||
Accounts payable |
$ | 439 | $ | 473 | ||||
Due to related parties |
13 | 11 | ||||||
Accrued advertising and promotion |
102 | 103 | ||||||
Accrued salaries and wages |
24 | 32 | ||||||
Other current liabilities |
49 | 47 | ||||||
|
|
|
|
|||||
Total current liabilities |
$ | 627 | $ | 666 | ||||
|
|
|
|
|||||
Deferred income taxes |
63 | 63 | ||||||
Non-Pension post-retirement liability |
14 | 15 | ||||||
Other liabilities |
5 | 5 | ||||||
Commitments and contingencies (Note 8) |
||||||||
Equity |
||||||||
Net parent investment |
709 | 725 | ||||||
Accumulated other comprehensive income (loss) |
(36 | ) | (38 | ) | ||||
|
|
|
|
|||||
Total equity |
$ | 673 | $ | 687 | ||||
|
|
|
|
|||||
Total liabilities and equity |
$ | 1,382 | $ | 1,436 | ||||
|
|
|
|
Refer to Notes to Unaudited Combined Financial Statements.
F-32 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
(millions)
Quarter ended April 1, 2023 | ||||||||||||
(unaudited) |
Net parent investment |
Accumulated other comprehensive income (loss) |
Total equity |
|||||||||
Balance, December 31, 2022 |
$ | 725 | $ | (38 | ) | $ | 687 | |||||
Net income |
26 | | 26 | |||||||||
Net transfer (to)/from parent |
(42 | ) | | (42 | ) | |||||||
Other comprehensive income, net of tax |
| 2 | 2 | |||||||||
|
|
|
|
|
|
|||||||
Balance, April 1, 2023 |
$ | 709 | $ | (36 | ) | $ | 673 | |||||
|
|
|
|
|
|
Quarter ended April 2, 2022 | ||||||||||||
(unaudited) |
Net parent investment |
Accumulated other comprehensive income (loss) |
Total equity |
|||||||||
Balance, January 1, 2022 |
$ | 607 | $ | (37 | ) | $ | 570 | |||||
Net income |
51 | | 51 | |||||||||
Net transfer (to)/from parent |
(17 | ) | | (17 | ) | |||||||
Other comprehensive income, net of tax |
| 1 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Balance, April 2, 2022 |
$ | 641 | $ | (36 | ) | $ | 605 | |||||
|
|
|
|
|
|
Refer to Notes to Unaudited Combined Financial Statements.
F-33 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
COMBINED STATEMENT OF CASH FLOWS
(millions)
Year-to-date period ended |
||||||||
(unaudited) | April 1, 2023 | April 2, 2022 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 26 | $ | 51 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
17 | 14 | ||||||
Stock compensation |
1 | 1 | ||||||
Pension and postretirement plan benefit |
(7 | ) | (26 | ) | ||||
Other |
| 1 | ||||||
Changes in operating assets and liabilities |
||||||||
Trade receivables |
7 | (63 | ) | |||||
Inventories |
58 | (16 | ) | |||||
Accounts payable |
(23 | ) | 50 | |||||
Due to / from related parties |
1 | | ||||||
Accrued advertising and promotion |
(2 | ) | 13 | |||||
Accrued salaries and wages |
(8 | ) | (5 | ) | ||||
Other current assets and liabilities |
(3 | ) | (18 | ) | ||||
|
|
|
|
|||||
Net cash provided by operating activities |
$ | 67 | $ | 2 | ||||
|
|
|
|
|||||
INVESTING ACTIVITIES |
||||||||
Additions to properties |
$ | (31 | ) | $ | (10 | ) | ||
|
|
|
|
|||||
Net cash (used in) investing activities |
$ | (31 | ) | $ | (10 | ) | ||
|
|
|
|
|||||
FINANCING ACTIVITIES: |
||||||||
Net transfers (to)/from parent |
$ | (36 | ) | $ | 8 | |||
|
|
|
|
|||||
Net cash (used in) provided by financing activities |
$ | (36 | ) | $ | 8 | |||
|
|
|
|
|||||
Effect of exchange rate changes on cash and cash equivalents |
| | ||||||
Increase (decrease) in cash and cash equivalents |
$ | | $ | | ||||
Cash and cash equivalents at beginning of period |
| | ||||||
Cash and cash equivalents at end of period |
$ | | $ | | ||||
Supplemental cash flow disclosures of non-cash investing activities |
||||||||
Additions to properties included in accounts payable |
$ | 25 | $ | 11 |
Refer to Notes to Unaudited Combined Financial Statements.
F-34 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
North American Cereal Business of Kellogg Company
Notes to Combined Financial Statements for the quarter ended April 1, 2023 (unaudited)
NOTE 1
DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
Description of the Company
On June 21, 2022, Kellogg Company (Kellogg ParentCo) announced its intent to separate its North American Cereal Business (Cereal Business) via a tax-free spin-off, resulting in the creation of a new independent public company. The Cereal Business consists of the business and operations conducted by Kellogg ParentCo. Our products are manufactured by us in the United States, Mexico and Canada and marketed in the United States, Canada and the Caribbean.
To effect the separation, Kellogg ParentCo intends to execute a tax-free spinoff of the Cereal Business by way of a pro-rata distribution of common stock of WK Kellogg Co, a newly formed Delaware corporation incorporated in November 2022, to Kellogg ParentCos shareholders of record as of the spin-off transaction record date (the Spin-off). Kellogg ParentCo, directly or through its subsidiaries, holds both the Kellogg ParentCo Business, the Cereal Business and WK Kellogg Co. In connection with the Spin-off, Kellogg ParentCo will undertake a series of internal reorganization transactions so that WK Kellogg Co will hold the Cereal Business assets, liabilities and operations directly and separately from the Kellogg ParentCo Business assets, liabilities and operations. Following these steps, WK Kellogg Co will hold only the Cereal Business assets, liabilities and operations. WK Kellogg Co will be the reporting entity and will ultimately serve as the parent company for the business to be divested by Kellogg ParentCo.
The accompanying Unaudited Combined Financial Statements represent the assets, liabilities and operations related to the Cereal Business to be transferred to WK Kellogg Co as well as the assets, liabilities and operations of WK Kellogg Co. The Cereal Business to be transferred from Kellogg ParentCo to WK Kellogg Co and the results of WK Kellogg Co are referred to throughout these Unaudited Combined Financial Statements as WK Kellogg Co, the Company, we, us or our.
Our cash is managed centrally at the Kellogg ParentCo level and as such, cash management decisions by Kellogg ParentCo have an impact on our Unaudited Combined Financial Statements. The cash and cash equivalents held by Kellogg ParentCo at the corporate level are not specifically identifiable to us and, therefore, have not been reflected in our Unaudited Combined Financial Statements. As a result of our participation in Kellogg ParentCos cash management arrangement, we do not hold our own cash and do not have access to any of Kellogg ParentCos credit facilities as a source of additional liquidity. Accordingly, these events and conditions can result in a net working capital deficit (i.e., total current liabilities in excess of total current assets) at the end of certain reporting periods. To alleviate such conditions, Kellogg ParentCo has committed that it will provide financial assistance to WK Kellogg Co, as determined by Kellogg ParentCo, to enable the Company to continue its operations and fulfill all of its financial obligations, expiring at the earlier of the consummation of the Spin-off or December 2024. Accordingly, management believes that the financial support from Kellogg ParentCo will provide sufficient liquidity to meet the Companys projected obligations for at least twelve months.
Basis of presentation
These Unaudited Combined Financial Statements were prepared on a standalone basis derived from the consolidated financial statements and accounting records of Kellogg ParentCo. These statements reflect the combined historical results of operations, financial position and cash flows of the Cereal Business in accordance with accounting principles generally accepted in the United States (GAAP).
The unaudited interim financial information included in this information statement reflects all adjustments, all of which are of a normal and recurring nature, that management believes are necessary for a fair statement of the results of operations, comprehensive income, financial position, equity and cash flows for the periods presented.
F-35 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
The information included in this interim report should be read in conjunction with our Combined Financial Statements and accompanying notes included elsewhere in this information statement.
The Combined Balance Sheet information at December 31, 2022 was derived from annual audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the quarter ended April 1, 2023 are not necessarily indicative of the results to be expected for other interim periods or the full year.
These Unaudited Combined Financial Statements are presented as if WK Kellogg Co had been carved out of Kellogg ParentCo and had been combined for all periods presented. The Unaudited Combined Financial Statements include the attribution of certain assets and liabilities that have been held at Kellogg ParentCo but which are specifically identifiable or attributable to the business being transferred to WK Kellogg Co. The assets and liabilities in the carve-out financial statements have been presented on a historical cost basis.
All significant intercompany transactions within WK Kellogg Co have been eliminated. All transactions between WK Kellogg Co and Kellogg ParentCo are considered to be effectively settled in the Unaudited Combined Financial Statements at the time the transaction is recorded, other than transactions stemming from commercial operations described in Note 6. The total net effect of the settlement of these intercompany transactions is reflected in the Unaudited Combined Statement of Cash Flows as a financing activity and in the Unaudited Combined Balance Sheet as net parent investment.
These Unaudited Combined Financial Statements include expense allocations for: (1) co-manufacturing, product warehousing and distribution; (2) a combined sales force and management; (3) certain support functions that are provided on a centralized basis within Kellogg ParentCo, including, but not limited to executive oversight, treasury, finance, internal audit, legal, information technology, human resources, communications, facilities, and compliance; and (4) employee benefits and compensation, including stock based compensation. These expenses have been allocated to WK Kellogg Co on the basis of direct usage where identifiable, with the remainder allocated on a basis of gross sales value, production pounds, headcount or other applicable measures. For an additional discussion and quantification of expense allocations, see Note 6.
Management believes the assumptions underlying these Unaudited Combined Financial Statements, including the assumptions regarding allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by WK Kellogg Co during the periods presented. Nevertheless, the Unaudited Combined Financial Statements may not reflect the results of operations, financial position and cash flows had WK Kellogg Co been a standalone company during the periods presented. Actual costs that WK Kellogg Co may have incurred had it been a standalone company would depend on a number of factors, including the chosen organization structure, whether functions were outsourced or performed by our employees and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure.
Debt obligations and related financing costs of Kellogg ParentCo have not been included in the Unaudited Combined Financial Statements of WK Kellogg Co, because WK Kellogg Co is not a party to the obligations between Kellogg ParentCo and the debt holders.
The income tax provision in the Unaudited Combined Statement of Operations has been calculated as if WK Kellogg Co was operating on a standalone basis and filed separate tax returns in the jurisdiction in which it operates. Therefore, cash tax payments and items of current and deferred taxes may not be reflective of WK Kellogg Cos actual tax balances prior to or subsequent to the carve-out.
Kellogg ParentCo maintains various benefit and combined stock-based compensation plans at a corporate level and other benefit plans at a country level. Our employees participate in such programs and the portion of the cost of those plans related to our employees is included in our financial statements. However, the Unaudited Combined Balance Sheets do not include any equity issued related to stock-based compensation plans or any net benefit plan obligations unless the benefit plan covers only our dedicated employees or where the entire legal
F-36 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
obligation associated with the benefit plan will transfer to WK Kellogg Co. Further, where WK Kellogg Co employees participate in defined benefit plans sponsored by Kellogg ParentCo that include participants of Kellogg ParentCos other businesses, such plans are accounted for as multiemployer plans in these Unaudited Combined Financial Statements.
The equity balance in these Unaudited Combined Financial Statements represents the excess of total assets over total liabilities, including intercompany balances between us and Kellogg ParentCo (net parent company investment) and accumulated other comprehensive loss. Net parent company investment is primarily impacted by distributions to Kellogg ParentCo which are the result of net funding provided by or distributed to Kellogg ParentCo and treasury activity. See Note 6 for further information.
WK Kellogg Co manages its business and reports its operations in one operating and reportable segment, engaged in the manufacturing, marketing and sales of cereal products in North America. Consistent with our operational structure, our Chief Operating Decision Maker (CODM), makes resource allocation and business decisions on a combined basis. Our CODM also uses combined single-segment financial information for the purpose of evaluating financial performance, allocating resources, setting incentive compensation targets, as well as forecasting future period financial results.
NOTE 2
ACCOUNTING POLICIES
Accounts payable Supplier Finance Programs
Kellogg ParentCo establishes competitive market-based terms with our suppliers, regardless of whether they participate in supplier finance programs, which generally range from 0 to 150 days dependent on their respective industry and geography.
Kellogg ParentCo has agreements with third parties to provide accounts payable tracking systems which facilitate participating suppliers ability to monitor and, if elected, sell payment obligations from Kellogg ParentCo to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of Kellogg ParentCo prior to their scheduled due dates at a discounted price to participating financial institutions. Kellogg ParentCo has no economic interest in the sale of these suppliers receivables and no direct financial relationship with the financial institutions concerning these services. Kellogg ParentCos obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers decisions to sell amounts under the arrangements. However, Kellogg ParentCos right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers. As our suppliers also had the ability to participate in this program during the periods presented, the impact of this program has been included in these Unaudited Combined Financial Statements. The payment of these obligations by WK Kellogg Co is included in cash used in operating activities in the Unaudited Combined Statement of Cash Flows. As of April 1, 2023 and December 31, 2022, $119 million and $138 million, respectively, of WK Kellogg Cos outstanding payment obligations had been placed in the accounts payable tracking system.
Accounting standards adopted in the period
Supplier Finance Programs: Disclosure of Supplier Finance Program Obligations. In September 2022, the FASB issued an ASU to improve the disclosures of supplier finance programs. Specifically, the ASU requires disclosure of key terms of the supplier finance programs and a rollforward of the related obligations. The amendments in this ASU do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Combined Financial Statements have historically presented information regarding the nature and amount of outstanding Accounts Payable obligations
F-37 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
confirmed into supplier finance programs within the Accounting Policies note. WK Kellogg Co adopted the ASU in the first quarter of 2023 and plans to include the rollforward information in the first quarter of 2024.
NOTE 3
SALE OF ACCOUNTS RECEIVABLE
Kellogg ParentCo has a program in which a discrete group of customers are allowed to extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).
Kellogg ParentCo has two Receivable Sales Agreements (Monetization Programs) described below, which are intended to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of Kellogg ParentCos accounts receivable balance and overall working capital. The Monetization Programs are designed to effectively offset the impact on working capital of the Extended Terms Program. The Monetization Programs sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the Unaudited Combined Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum receivables that may be sold by Kellogg ParentCo at any time is approximately $945 million. As WK Kellogg Co receivables were a part of Kellogg ParentCos accounts receivable balance, the impact of this program has been included in the Unaudited Combined Financial Statements.
Kellogg ParentCo, and consequently WK Kellogg Co, has no retained interest in the receivables sold, however Kellogg ParentCo does have collection and administrative responsibilities for the sold receivables. Kellogg ParentCo, and consequently WK Kellogg Co, has not recorded any servicing assets or liabilities as of April 1, 2023, and December 31, 2022 for these agreements as the fair value of these servicing arrangements, as well as the fees earned, were not material to the financial statements.
For WK Kellogg Co, accounts receivable sold of $275 million and $256 million remained outstanding under these arrangements as of April 1, 2023, and December 31, 2022, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Unaudited Combined Statement of Cash Flows. The allocated recorded net loss on sale of receivables, based on the proportion of monetized receivables, was $4 million and less than $1 million for the quarters ended April 1, 2023 and April 2, 2022, respectively. The recorded loss is included in other income (expense), net.
NOTE 4
RETIREMENT BENEFITS
Kellogg ParentCo sponsors a number of U.S. and foreign pension plans as well as other nonpension postretirement and postemployement plans to provide various retirement benefits for its employees. WK Kellogg Co employees participate in these plans sponsored by Kellogg ParentCo, which include participants of Kellogg ParentCos other businesses. Such plans are accounted for as multiemployer plans in these Unaudited Combined Financial Statements and as a result, no asset or liability was recorded by WK Kellogg Co to recognize the funded status of these plans. There are also certain defined benefit pension and nonpension postretirement plans that our employees participate in that are either dedicated to our employees or where the plan assets and liabilities that relate to our employees will legally transfer to WK Kellogg Co at the time of separation from Kellogg ParentCo.
Pension
We recorded expense of $2 million and income of $13 million for the quarters ended April 1, 2023 and April 2, 2022 respectively, relating to our employees participation in these Kellogg ParentCo sponsored plans. For the quarter ended April 1, 2023, the entire $2 million of expense was related to service costs and recorded in COGS. For the quarter ended April 2, 2022, $3 million of expense related to service costs was allocated to COGS and $16 million of income was allocated to other income (expense), net. No contributions have been recognized in the Unaudited Combined Financial Statements as we are not required to make contributions to these plans.
F-38 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Postretirement
We recorded income of $9 million and $13 million for the quarters ended April 1, 2023 and April 2, 2022 respectively, relating to our employees participation in Kellogg ParentCo sponsored postretirement plans. These amounts were recorded in the Unaudited Combined Statement of Operations as follows: for the quarter ended April 2, 2022, $2 million of expense related to service costs was allocated to COGS and $15 million of income related to all other elements of benefit expense was allocated to other income (expense), net; for the quarter ended April 1, 2023, $1 million of expense related to service costs was allocated to COGS and $10 million of income was allocated to other income (expense), net.
For the postretirement plans that are either dedicated to our employees or where the plan assets and liabilities that relate to our employees will legally transfer to our Company at the time of separation from Kellogg ParentCo, the total expense recognized was less than $1 million for the quarters ended April 1, 2023 and April 2, 2022.
NOTE 5
INCOME TAXES
WK Kellogg Cos operations have historically been included in the consolidated U.S. federal, certain state and local tax returns filed by Kellogg ParentCo. We also file certain separate U.S. state and local and foreign income tax returns. WK Kellogg Co has calculated its provision for income taxes using a separate return method as if the Company was a separate group of companies under common ownership. Under this method, WK Kellogg Co is assumed to file hypothetical separate returns with the tax authorities, thereby reporting its taxable income or loss and paying the applicable tax to or receiving the appropriate refund from Kellogg ParentCo. Current income tax liabilities are assumed to be immediately settled with Kellogg ParentCo against net parent investment. WK Kellogg Co reports deferred taxes on its temporary differences and on any carryforwards that it could claim on its hypothetical returns. Cash tax payments, current and deferred tax balances and unremitted foreign earnings may not be reflective of WK Kellogg Cos actual tax balances prior to or subsequent to the distribution.
WK Kellogg Cos combined effective tax rate for the quarters ended April 1, 2023 and April 2, 2022 was 23.3% and 22.0%, respectively. The effective tax rate for the quarters ended April 1, 2023 and April 2, 2022 was impacted by state and local income taxes and the differential of WK Kellogg Cos foreign statutory tax rates from the U.S. federal statutory tax rate.
The amount of unrecognized tax benefits for the quarters ended April 1, 2023 and April 2, 2022, that, if recognized, would affect the effective tax rate, was not material. During the quarters ended April 1, 2023 and April 2, 2022, the Company recognized an immaterial amount of tax related interest on unrecognized tax benefits.
Management estimates the reasonably possible changes to unrecognized tax benefits during the next twelve months to be immaterial and is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate. However, WK Kellogg Co would not be liable for any incremental taxes payable, interest or penalties, which remain Kellogg ParentCos obligation.
NOTE 6
RELATED PARTY TRANSACTIONS
WK Kellogg Co has not historically operated as a standalone business and has various relationships with Kellogg ParentCo whereby Kellogg ParentCo provides services to WK Kellogg Co.
F-39 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Transfers to/from Kellogg ParentCo, net
As discussed in Note 1 in the basis of presentation section, net parent investment is primarily impacted by contributions from Kellogg ParentCo which are the result of treasury activity and net funding provided by or distributed to Kellogg ParentCo. The components of net parent investment are:
(millions) |
April 1, 2023 | April 2, 2022 | ||||||
Net transfers (to)/from Kellogg ParentCo as reflected in the Unaudited Combined Statement of Cash Flows |
(36 | ) | 8 | |||||
Non-cash stock compensation expense |
1 | 1 | ||||||
Non-cash pension and postretirement plan benefit |
(7 | ) | (26 | ) | ||||
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Net transfers to Kellogg ParentCo as reflected in the Unaudited Combined Statement of Changes in Equity |
(42 | ) | (17 | ) | ||||
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Corporate Overhead and Other Allocations
Kellogg ParentCo provides WK Kellogg Co certain services, including executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations. Allocated costs also include costs related to commingled supply chain functions such as logistics, distribution, and co-manufacturing/co-packing operations. Our Unaudited Combined Financial Statements reflect an allocation of these costs. When specific identification is not practicable, a proportional cost method is used, primarily based on gross sales value, headcount, production pounds or shipping pounds.
The allocation of expenses from Kellogg ParentCo to WK Kellogg Co were reflected as follows in the Unaudited Combined Statement of Operations:
(millions) |
April 1, 2023 | April 2, 2022 | ||||||
Cost of goods sold |
$ | 55 | $ | 35 | ||||
Selling, general and administrative |
85 | 62 | ||||||
Other (income) expense, net |
(6 | ) | (29 | ) | ||||
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Total |
$ | 134 | $ | 68 | ||||
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The financial information herein may not necessarily reflect the combined financial position, results of operations and cash flows of WK Kellogg Co in the future or what they would have been had WK Kellogg Co been a separate, standalone entity during the periods presented. Management believes that the methods used to allocate expenses to WK Kellogg Co are reasonable; however, the allocations may not be indicative of actual expenses that would have been incurred had we operated as an independent, publicly traded company for the periods presented. Actual costs that WK Kellogg Co may have incurred had it been a standalone company would depend on a number of factors, including the chosen organizational structure, whether functions were outsourced or performed by our employees and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure.
Stock compensation
Stock compensation expense related to Kellogg ParentCo employees who also support WK Kellogg Co have been allocated to the Company and recorded in COGS and SGA expense in the Unaudited Combined Statement of Operations and included in the table above. Stock compensation costs allocated to WK Kellogg Co were $4 million and $3 million for the quarters ended April 1, 2023 and April 2, 2022, respectively.
F-40 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Retirement Benefits
As discussed in Note 4, WK Kellogg Cos employees participate in defined benefit pension and other postretirement plans sponsored by Kellogg ParentCo that also include participants of Kellogg ParentCos other businesses. The costs of such plans have been allocated in the Unaudited Combined Statement of Operations within COGS, SGA expense and other income (expense), net and are included in the amounts presented in the table above. The allocated income related to such plans was $7 million and $26 million for the quarters ended April 1, 2023 and April 2, 2022, respectively.
Centralized Cash Management
Kellogg ParentCo uses a centralized approach to cash management and financing of operations. The majority of WK Kellogg Cos businesses are party to Kellogg ParentCos cash pooling arrangements to maximize Kellogg ParentCos availability of cash for general operating and investing purposes. Under these cash pooling arrangements, cash balances are swept regularly from WK Kellogg Cos accounts. Cash transfers to and from Kellogg ParentCos cash concentration accounts and the resulting balances at the end of each reporting period are reflected in net parent company investment in the unaudited combined balance sheet.
Kellogg ParentCo has committed that it will provide financial assistance to WK Kellogg Co, as determined by Kellogg ParentCo, to enable the Company to continue its operations and fulfill all of its financial obligations, expiring at the earlier of the consummation of the Spin-off or December 2024.
Debt
Kellogg ParentCos third-party debt and the related interest expense have not been allocated to WK Kellogg Co for any of the periods presented as WK Kellogg Co was not the legal obligor of the debt and Kellogg ParentCos borrowings were not directly attributable to WK Kellogg Cos businesses.
Commercial Operations
Unless otherwise stated, all significant intercompany transactions between WK Kellogg Co and Kellogg ParentCo have been included in these Unaudited Combined Financial Statements and are considered to be effectively settled for cash at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Unaudited Combined Statement of Cash Flows as a financing activity and in the Unaudited Combined Balance Sheet as net parent investment.
WK Kellogg Co sells certain products to other Kellogg ParentCo businesses, which may use the WK Kellogg Cos products as raw materials in its manufacturing processes or may resell the finished goods. These product sales resulted in revenue of $9 million and $8 million for the quarters ended April 1, 2023 and April 2, 2022, respectively. Accounts receivable as a result of WK Kellogg Co sales to other Kellogg ParentCo businesses was approximately $2 million and $1 million as of April 1, 2023 and December 31, 2022.
WK Kellogg Co also purchases certain products from other Kellogg ParentCo businesses, which is recorded in COGS. These purchases amounted to $20 million and $22 million for the quarters ended April 1, 2023 and April 2, 2022, respectively. Accounts payable as a result of these purchases was $13 million and $11 million as of April 1, 2023 and December 31, 2022, respectively. These amounts may not necessarily reflect the combined financial position and results of operations of WK Kellogg Co in the future or what they would have been had WK Kellogg Co been a separate, standalone entity during the periods presented. Actual costs that WK Kellogg Co may have incurred had it been a standalone company would depend on a number of factors, including the chosen organizational structure, whether functions were outsourced or performed by our employees and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure.
WK Kellogg Co also makes certain royalty payments to Kellogg ParentCo, which are recorded in COGS. These royalties amounted to $3 million for the quarters ended April 1, 2023 and April 2, 2022. Royalty payable was recorded within accounts payable and was an immaterial amount as of April 1, 2023 and December 31, 2022.
F-41 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
Spin costs
Kellogg ParentCo has incurred incremental costs to evaluate, plan and execute the Spin-off. These charges were primarily related to legal and consulting costs. WK Kellogg Co is allocated a pro rata portion of those costs, that WK Kellogg Co received a benefit from, based on either specific identification, where possible, or a proportional cost method based on gross sales value. For the quarter ended April 1, 2023, WK Kellogg Co recorded total charges of $21 million, including $2 million in COGS and $19 million in SGA expense. No costs were incurred for the quarter ended April 2, 2022.
NOTE 7
DERIVATIVE INSTRUMENTS
WK Kellogg Co is exposed to certain market risks such as changes in foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Kellogg ParentCo uses derivative and nonderivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.
Since the derivative instruments are entered into and settled by Kellogg ParentCo for both WK Kellogg Co and its other businesses, no asset or liability has been recorded on the Unaudited Combined Balance Sheets. However, an appropriate allocation of the gains/losses and fees associated with entering into derivative instruments has been included in WK Kellogg Cos Unaudited Combined Statement of Operations.
The effect of derivative instruments on WK Kellogg Cos Unaudited Combined Statement of Operations for the quarters ended April 1, 2023, and April 2, 2022 was as follows:
Gain (loss) recognized in COGS |
Gain (loss) recognized in other income (expense), net |
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(millions) |
April 1, 2023 |
April 2, 2022 |
April 1, 2023 |
April 2, 2022 |
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Commodity contracts |
$ | (6 | ) | $ | 23 | $ | | $ | | |||||||
Foreign Currency derivatives |
$ | 2 | $ | 1 | $ | | $ | (1 | ) |
NOTE 8
CONTINGENCIES
In 2021, there was a fire at one of WK Kellogg Cos manufacturing facilities, the damages of which are in the process of being recovered via insurance policies maintained by Kellogg ParentCo. WK Kellogg Co recognized an insurance receivable of $1 million in accounts receivable, net as at April 1, 2023. The amount outstanding as of December 31, 2022 was immaterial. For the quarter ended April 1, 2023, WK Kellogg Co recognized insurance recoveries of $2 million in other income (expense), net. For the quarter ended April 2, 2022, WK Kellogg Co recognized insurance recoveries of $12 million in COGS to offset the incremental costs incurred due to the fire.
F-42 |
Confidential Treatment Requested by WK Kellogg Co
Pursuant to 17 C.F.R. Section 200.83
NOTE 9
SUPPLEMENTAL FINANCIAL STATEMENT DATA
Combined Balance Sheet
(millions) |
April 1, 2023 (unaudited) |
December 31, 2022 | ||||||
Trade receivables |
$ | 206 | $ | 213 | ||||
Allowance for expected credit losses |
| | ||||||
Other receivables |
18 | 16 | ||||||
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Accounts receivable, net |
$ | 224 | $ | 229 | ||||
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Raw materials |
$ | 35 | $ | 43 | ||||
Spare parts |
49 | 48 | ||||||
Supplies |
22 | 22 | ||||||
Materials in process |
20 | 20 | ||||||
Finished goods |
248 | 298 | ||||||
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Inventories, net |
$ | 374 | $ | 431 | ||||
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Land |
$ | 10 | $ | 10 | ||||
Buildings |
597 | 594 | ||||||
Machinery and equipment |
1,762 | 1,763 | ||||||
Vehicles |
2 | 2 | ||||||
Office Furniture and Fixtures |
20 | 19 | ||||||
Construction in progress |
133 | 125 | ||||||
Accumulated depreciation |
(1,879 | ) | (1,868 | ) | ||||
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Property, net |
$ | 645 | $ | 645 | ||||
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Right of use asset |
$ | 8 | $ | 7 | ||||
Other noncurrent assets |
3 | 4 | ||||||
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Other Assets |
$ | 11 | $ | 11 | ||||
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Accrued distribution and plant related costs |
$ | 17 | $ | 12 | ||||
Lease liability current |
3 | 3 | ||||||
Other accrued liabilities |
29 | 32 | ||||||
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Other current liabilities |
$ | 49 | $ | 47 | ||||
Lease liability noncurrent |
$ | 5 | $ | 5 | ||||
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Other liabilities |
$ | 5 | $ | 5 | ||||
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NOTE 10
SUBSEQUENT EVENTS
These Unaudited Combined Financial Statements were derived from the financial statements of Kellogg Company, which issued its annual financial statements for the fiscal year ended December 31, 2022 on February 21, 2023 and its quarterly financial statements for the fiscal quarter ended April 1, 2023 on May 4, 2023. Accordingly, WK Kellogg Co has evaluated transactions for consideration as recognized subsequent events in these financial statements through the date of February 21, 2023 and May 4, 2023 respectively. Additionally, WK Kellogg Co has evaluated transactions that occurred through June 16, 2023, the date these financial statements were available for issuance, for the purposes of unrecognized subsequent events. We have determined that there have been no events that have occurred that would require adjustments to or disclosures in these Unaudited Combined Financial Statements.
F-43 |