Exclusive distributor relationships with manufacturers are usually the most important assets of a distributor business. The manufacturer is usually much bigger and has most of the leverage; leading to contracts that favor the manufacturer.
Also, the manufacturer is most often not based in the distributor’s state. This has led to state laws that are designed to level the playing field in the local distributor’s dealings with the out of state manufacturer.
One of the areas that states try to help is when the distributor needs the manufacturer’s consent to sell its business to another distributor. In those circumstances states often pass laws that require the manufacturer to approve the transfer of the distributor’s contract if the buyer is qualified.
The business in this case was a Mississippi beer wholesaler. It was a wholesaler of Anheuser-Busch’s beer. Anheuser-Busch is the largest beer supplier in the country. The distributor had a longstanding position as Anheuser-Busch’s exclusive distributor for a swath of the Mississippi Gulf Coast.
In this case, the distributor entered a deal to sell its Anheuser-Busch distributorship to a nearby distributor. The distributor asked Anheuser-Busch to consent and it refused. Anheuser-Busch exercised a right under its contract with the distributor to force the distributor to sell to a different local distributor picked by Anheuser-Busch.
The distributor complied but claimed it lost $3.1 million on the deal because it could not sell non-Anheuser-Busch distribution contracts to the buyer chosen by Anheuser-Busch. The loss was because the purchase price for the deal was based upon the value of each distributorship contract with each brewer, and the distributor was not able to assign non-Anheuser-Busch distributor contracts to the buyer selected by Anheuser-Busch.
The distributor accused Anheuser-Busch of refusing to approve its deal with the original buyer in violation of Mississippi law. That law says that Anheuser-Busch can’t refuse consent so long as the distributor’s proposed buyer meets “such nondiscriminatory, material and reasonable qualifications and standards required by” Anheuser-Busch for similarly situated wholesalers. Under the law, Anheuser-Busch could only refuse to approve the deal “in good faith and for good cause related to the reasonable qualifications” of the distributor’s chosen buyer.
The matter ended up in a Mississippi state court and the trial court dismissed the distributor’s claim. However, on appeal the Mississippi Supreme Court reversed, holding that the distributor had alleged facts that if true could establish that Anheuser-Busch violated Mississippi’s law when it refused to approve the distributor’s original deal.
This case is referred to Rex Distributing Company, Inc. v. Anheuser-Busch, LLC., No. 2018-IA-00037-SCT, Consolidated With No. 2018-IA-00038-SCT, Supreme Court of Mississippi, (May 23, 2019)
One of the questions a seller asks when reviewing a proposal to buy is the likelihood that the deal will close. And one closing risk is the refusal of a required third party consent to the deal.
Required consents can be from franchisors, suppliers, distributors, intellectual property licensors, landlords, foreign, federal, state and local governments, and many others. However, there may be requirements that consents can’t be withheld unreasonably in contracts, as well as in some statutes.
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Telephone: 714 273-6291
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