Ettelman & Hochheiser, P.C.

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ARTICLES AND NEWSLETTERS

MILLER’S PROPOSED AMENDMENT: THE COOR’S CONFLICT IS ONLY THE TIP OF THE ICEBERG

By now every Miller wholesaler in the country has received Miller’s Third Amendment to its Distributor Agreement and has read all of the articles highlighting the conflict that the amendment creates with the Coors’ agreement. Indeed, Coors is on record stating that any Coors wholesaler that signs the agreement will likely be in breach of the Coors distribution agreement. Miller and Coors purportedly have been engaged in discussions trying to solve the problem, hopefully they will come to a resolution.

While we hate to be the bearer of bad news, the “Coors conflict” is not even close to being the most significant problem with the amendment. The real problem with the Miller amendment is that it gives Miller the ability to determine not only to whom and at what price you can sell the Miller brand, but to whom and at what price Miller wholesalers can sell their entire business, including non-Miller brands. The amendment effectively deflates the value of Miller wholesalerships by precluding Miller wholesalers from selling any part of their business in fair market transactions.

How the Miller Amendment Works.

You’ve probably all seen parking signs admonishing you not to even think about parking in a particular spot. The Miller amendment stops just short of that. The sad truth, however, is that under the Miller amendment all you can do is think about selling; you can’t even have any discussions with any third parties regarding a sale of all or any portion of your business before you notify Miller. This means that you can’t test the market to determine what prospective purchasers may be willing to pay. Then, for 120 days from the date you give Miller notice that you are considering selling all or part of your business, Miller has the exclusive right to negotiate with you for the acquisition by Miller or its designee of your business. If you think you can just wait out the 120 day period and then sell to anyone you want, think again. You are bound to negotiate with Miller in good faith; a standard that has significant legal consequences. In a nutshell, this obligation will make it extremely difficult for Miller wholesalers to refuse to sell to Miller (or its designee), and if they refuse to do so, Miller can claim a breach of the distribution agreement which would give Miller the ability to terminate for cause, without any compensation.

If you somehow make it through the exclusive period without being forced to sign an agreement with Miller or its designee (and Miller doesn’t threaten to terminate you without payment for refusing to negotiate in good faith) you then purportedly have the right to discuss, negotiate and sell to a third party. These rights are virtually illusory, however for a number of reasons. First, any such sale is still subject to Miller’s approval process and, more importantly, its right of first refusal. Succinctly stated, there are few things that will chill a potential sale more quickly than a right of first refusal. Few purchasers are willing to spend the time and money necessary to negotiate and sign an agreement in the face of a right of first refusal; unless of course, they have an opportunity to buy for below market value or you agree to a break-up fee if Miller exercises its right. Either way, you lose. Let’s assume, however, that you find a purchaser who is willing to negotiate. The amendment requires that you deliver to Miller a non-binding letter of intent; however, this is a misnomer because it also requires that all of the material terms of the deal must be contained in the letter of intent. In other words, you have to negotiate and sign a definitive contract of sale, subject only to Miller’s approval. Miller then has 30 days from either the receipt of the letter of intent, or the information that Miller requests in accordance with their due diligence inquiries to decide whether to exercise their option to purchase. Accordingly, there is no end-date for Miller to exercise its option, they can simply continue to request information, including confidential financial and customer information which they are not required to keep confidential, and delay their deadline to exercise their option to purchase. In the meantime, your deal is stalled indefinitely.

Again, let’s assume that Miller declines to exercise its option which supposedly frees you up to sell to a third party in accordance with the contract you have signed. The next step is for the prospective purchaser to go through Miller’s approval process. This requires the submission of a completed distributor application. Miller then has 60 days from receipt of the completed application to approve or reject the purchaser. This, of course, gives Miller an additional opportunity to delay the process by requiring additional or different information regarding the purchaser. Again, your deal is stalled.

While it is true that the existing Miller agreement contains the same right of first refusal and the same approval process, there is a significant difference in the amendment. Under the amendment, any sale to a third party must, regardless of any delay by Miller, close within one year from the date that you first gave Miller notice of your intent to sell. Accordingly, while Miller has virtually unlimited ability to delay the process, your time to close a transaction is etched in stone. While a year may sound like it is sufficient time, in reality, most of the year is allocated to Miller’s decision making processes. Right off the bat, the first 4 months are dedicated to Miller’s exclusive negotiations period. As previously stated, however, Miller can substantially stretch that period by, for example, suing the wholesaler for refusing to negotiate in good faith. In any event, at most the wholesaler has eight months to find a buyer which is undeterred by Miller’s right of first refusal, negotiate a deal, go through due diligence with the buyer, sign an agreement, go through Miller’s right of first refusal process (minimum 30 days with significant risk of further delays because of Miller’s right to conduct expansive due diligence), go through Miller’s approval process (minimum 60 days with significant risk for further delays because of Miller’s right to demand information regarding the prospective purchaser) and close. If you don’t close within that time period, it’s back to square one; you have to start the process all over again by giving Miller another notice of intent to sell which, in turn, gives Miller a fresh 120 day exclusive negotiation period!

The bottom line is that if you sign the Miller amendment, you are virtually handing control of the sale of not only the Miller brand but your whole business over to Miller, and you are virtually assured that you will not be able to sell for fair market value. It is as if the Miller amendment grants Miller the option to buy your entire business at a significant discount any time you contemplate the sale of either your business, the Miller brand or a significant non-Miller brand. In the world of mergers and acquisitions this is known as an inadvertent acquisition or a disguised purchase. Accordingly, while the potential conflict with the Coors agreement is an important issue that must be resolved, it pales in comparison to the real problem with the amendment.