Opinion ID: 783045
Heading Depth: 2
Heading Rank: 1

Heading: General Corporate Relationships

Text: 3 Through the seemingly complex maze of various business entities in this case lies a most palatable enterprise: beer distribution. In 1994, Labatt 1 and various of its wholly-owned subsidiaries entered into a 99-year joint venture with FEMSA Cerveza, S.A. de C.V. (FEMSA) of Mexico and its wholly-owned subsidiary Wisdom. The principal purpose of the joint venture was to establish a single distribution infrastructure through which Labatt and FEMSA could distribute in the United States their current and future brands of beer and malt-based beverages, as well as the brands of their current and future affiliates. The joint venture was primarily governed by a joint venture agreement. 4 Established in connection with the joint venture was LF I, a Delaware limited liability corporation. Labatt, through two of its wholly-owned subsidiaries 2 , owns 70% of LF I. FEMSA, through Wisdom, owns 30% of LF I. LF I, in turn, owns substantially all of LUSA, an operating subsidiary created in connection with the joint venture. From its formation, LUSA has served as the exclusive distributor of the Labatt and FEMSA brands of beer, importing, marketing and selling those brands in the United States. Interbrew, a Belgian corporation, became a party to the joint venture after acquiring Labatt in 1995. Pursuant to this acquisition, LUSA began distributing Interbrew's beer brands (in addition to the Labatt brands already distributed by LUSA) in the United States. 5 In conjunction with the joint venture agreement itself, and pertinent to this appeal, the terms and conditions of the joint venture are further governed by three additional agreements: (1) an Amended and Restated Limited Liability Company Agreement of LF Holdings I, L.L.C. (LF I Agreement); (2) a Principal Owners and Members Agreement (POM Agreement); and (3) an Exclusive Distributor Agreement between LUSA and Labatt (Labatt Distributor Agreement). 6 The LF I Agreement is between the two Labatt wholly-owned subsidiaries that partially own LF I and Wisdom. It sets forth corporate governance principles for LF I. According to this agreement, the business and affairs of [LF I] shall be managed by or under the direction of the Board of Directors. LF I Agmt., § 3.1. The LF I Board consists of seven directors, five of whom are appointed by a Labatt subsidiary (Labatt directors) and two of whom are appointed by Wisdom (Wisdom directors). Pursuant to section 2.7 of the LF I Agreement, ordinary business decisions are determined by simple majority vote of the Board which, it is agreed by all parties, accords the Labatt directors virtual unlimited control over day-to-day business operations of both LF I and LUSA. 3 However, decisions involving certain fundamental matters, as delineated by section 2.9 of the LF I Agreement, require a super-majority vote for approval, that is, no fewer than six members of the LF I Board. As negotiated for by Wisdom, these fundamental matters require the favorable vote of at least one Wisdom director for approval. Section 2.9, thus, effectively vests Wisdom with a minority veto power over fundamental matters. As relevant to this appeal, fundamental matters includes related-party agreements, described in section 2.9(v) as the entry by [LF I] or any of its subsidiaries into or material modifications of any agreement with any Member or any of their respective affiliates, LF I Agmt., § 2.9(v). 7 Just as the LF I Agreement governs operation of LF I, the POM Agreement sets forth the manner in which LUSA will be managed, including principles regarding the marketing of beer brands within LUSA's portfolio. With respect to LUSA's marketing efforts, the POM Agreement requires a balanced approach in connection with each brand LUSA distributes and provides minority owner FEMSA with protections against unfair discrimination in LUSA's marketing efforts. Although section 7.2(c)(I) of the POM Agreement requires balanced marketing efforts by LUSA, ultimately, such efforts are to be based on the best interests of LF I without regard to the financial interests of any Principal Owner in any Supplier.... POM Agmt., § 7.2(c)(I). 8 Finally, LUSA entered into the Labatt Distributor Agreement with Labatt and its affiliates. 4 The Labatt Distributor Agreement grants LUSA exclusive 99-year United States distribution rights to Labatt's current brands, defined as beer brands brewed by Labatt and its affiliates at inception of the distribution arrangement. The Labatt Distributor Agreement also contemplates that new brands, defined as brands that Labatt and its current and future affiliates ... may in the future manufacture outside the United States, might be added to LUSA's portfolio. It specifies procedures for such developments, including granting LUSA a right of first refusal with respect to the distribution rights for any such new brands and, if exercised, LUSA's right to be appointed as exclusive distributor of such new brands in the United States according to the terms and conditions agreed upon by LUSA, Labatt, and the supplier of the new beer brand. 9 Of particular significance to the integration of any new brands into LUSA's portfolio is section 4 of the Labatt Distributor Agreement. Section 4 imposes a mandatory good faith negotiation requirement on LUSA if it or one of its affiliates acquires a brewing company whose brands have a significant market presence in the United States. In the event that such a transaction presents itself, LUSA, Labatt and the new brand supplier: 10 [A]gree that they shall negotiate in good faith for such brands to become [Labatt] Brands on terms and conditions consistent with the then applicable terms and conditions of the [Labatt] Brands and such other consideration as Importer and Suppliers or Labatt, as the case may be, shall deem equitable and appropriate under the circumstances. 11 Labatt Distrib. Agmt., § 4. Therefore, LUSA's right of first refusal is not absolute with respect to new brands with a significant market presence. The parties to any proposed integration of such new brands must negotiate in good faith, but need not agree upon, the terms of a new distribution arrangement. It is undisputed that the Beck's brands, which account for approximately 3.4 — 4.2% of total beer and malt beverages imports into the United States, are considered new brands having a significant market presence.