Grupo Modelo CEO Carlos Fernandez was reported today to have said that “Grupo Modelo is reserving its contractual rights” under the 1993 Investment Agreement between Grupo Modelo and Anheuser-Busch, as amended by the First Amendment and Second Amendment thereto (I could not locate a copy of the First Amendment).  This was a follow-up to Grupo Modelo’s mid-July statement proclaiming, “our agreement with Anheuser-Busch was carefully constructed to ensure we have a definitive say in who our partner is”.  Grupo Modelo’s rights under the Investment Agreement are not as clear as its statements might lead one to believe.

What are Grupo Modelo’s rights under the Investment Agreement?

Several provisions of the Investment Agreement might give Grupo Modelo certain rights in relation to the InBev/Anheuser-Busch transaction, but no provision of the Investment Agreement clearly indicates the parties’ rights and obligations in the event of a change in control of Anheuser-Busch. 

Section 6.6, for example, prohibits Anheuser-Busch and Grupo Modelo from selling or offering to sell their Grupo Modelo shares to “any [person or entity] or its controlling shareholders engaged, directly, or indirectly, in the production, distribution, or sale of beer in or to the United States or Mexico”.  This clause prohibits sales of Grupo Modelo shares to competitors of Anheuser-Busch and Grupo Modelo.  Since Anheuser-Busch is not selling its Grupo Modelo shares (because InBev is acquiring Anheuser-Busch), the best Grupo Modelo could argue under Section 6.6 is that InBev’s acquisition of Anheuser-Busch should be construed as a de facto sale of Grupo Modelo shares to a competitor.  However, even if that argument is successful (which is unlikely), the Investment Agreement does not specify Grupo Modelo’s remedies in such a situation.

The buy-sell provisions in Section 6.2 of the Investment Agreement might be applicable if Grupo Modelo’s de facto sale argument in the above paragraph prevails, but Section 6.2 was clearly intended to prohibit transfers of Grupo Modelo shares by Anheuser-Busch, not to prohibit Anheuser-Busch from transfering Anheuser-Busch shares to a third party.  For the record, Section 6.2 prohibits Anheuser-Busch from disposing of any of its shares in Grupo without first offering those shares to Messrs. Antonino Fernandez R., Pablo Aramburuzabala, Nemesio Diez R., Juan Sanchez-Navarro y P., Valentin Diez M., and the other Grupo Modelo shareholders (collectively, the “Controlling Shareholders“).  After Anheuser-Busch offers its Grupo shares to the Controlling Shareholders, the Controlling Shareholders and Anheuser-Busch must enter into good faith negotiations regarding the purchase price to be paid for such shares by the Controlling Shareholders. 

What if InBev/Anheuser-Busch and Grupo Modelo fail to agree on their rights and obligations under the Investment Agreement?

If there is a dispute between InBev/Anheuser-Busch and Grupo Modelo regarding “the validity, intent, interpretation, performance, enforcement or arbitrability” of any terms of the Investment Agreement, it is to be decided by majority vote of Grupo’s board of directors, provided that at least 2 board members appointed by Anheuser-Busch are included in such majority.  (The Second Amendment to the Investment Agreement gives Anheuser-Busch the right to appoint 9 board members and gives the Controlling Shareholders the right to appoint 10 board members.) 

If the Grupo’s board of directors is unable to resolve the dispute by obtaining such a majority vote within 30 days, then Anheuser-Busch and the Controlling Shareholders are to each appoint one nominee to a special committee, which must attempt to resolve the dispute amicably.  If the special committee fails to resolve the dispute within 30 days, then the dispute is to be resolved by an international arbitration panel consisting of 3 arbitrators: one appointed by the chairman of Anheuser-Busch, one appointed by the Controlling Shareholders, and one appointed by the two arbitrators appointed by Anheuser-Busch and the Controlling Shareholders.  Arbitration is to take place in New York City under the UNCITRAL Arbitration Rules.

In the event that Anheuser-Busch and Grupo Modelo have a “fundamental business disagreement” (e.g., after the close of the InBev/Anheuser Busch transaction, there is a dispute regarding a change in the charter or by-laws, a change in dividend policy, corporate objectives, etc.), then the above-mentioned dispute settlement provisions do not apply.  Rather, Section 12.2 of the Investment Agreement allows Anheuser-Busch to require Grupo Modelo to purchase all of the Grupo Modelo shares held by Anheuser-Busch at the price paid by Anheuser-Busch for its Grupo shares.  This may be the least favorable outcome for InBev, particularly because analysts have estimated that Anheuser-Busch’s Grupo Modelo shares are worth approximately $10 billion, which is probably considerably more than Anheuser-Busch paid for the shares starting in 1993 under the Investment Agreement.