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.

Grupo Modelo, S.A.B. produces something very near and dear to my heart: many of Mexico’s finest beers, including Corona (the top U.S. export), Modelo Especial, Negra Modelo, Victoria, and Pacifico.  Grupo Modelo’s brands represent approximately 56% of the Mexican beer market. 

InBev, NV’s $52 billion acquisition of Anheuser-Busch raises the question of what will become of the 50% non-controlling stake in Grupo Modelo owned by Anheuser-Busch.  A July 17, 2008 article in The Wall Street Journal reported that the agreement between Anheuser-Busch and Grupo Modelo gives Anheuser-Busch the right to fill 9 seats on Grupo Modelo’s 19-member board of directors and certain rights regarding areas such as capital expenditures.  (I found a copy of the Investment Agreement governing the relationship between Anheuser-Busch and Grupo and the Second Amendment thereto, but I could not find the First Amendment anywhere.)   

The July 17, 2008 Wall Street Journal article also speculated that Grupo Modelo and its key competitor, Fomento Economico Mexicano, S.A.B. (FEMSA), might be sold as part of global consolidation in the beer industry, starting with the sale of Grupo Modelo to InBev.  FEMSA’s brands, including Sol, Tecate, Dos Equis, Bohemia, and Indio, account for approximately 42% of the Mexican beer market.  FEMSA is also the largest Coca-Cola bottler outside of the U.S.

It should be interesting to watch the InBev/Anheuser-Busch/Grupo Modelo relationship evolve.  The possibility that Grupo Modelo may engage in some posturing concerning its intent to purchase Anheuser-Busch’s 50% Grupo Modelo ownership interest should not be ruled out.  The Brazilian/Belgian-Mexican companies could be a powerful combination.

The Mexican government, through its National Service of Food and Agriculture Health and Quality (Servicio Nacional de Sanidad e Inocuidad y Calidad Agroalimentaria – SENASICA), sent a letter to the U.S. Food and Drug Administration (FDA) objecting to the FDA’s allegations that Mexican jalapenos are source of the U.S. salmonella outbreak, according to today’s El Financiero. 

Enrique Sánchez Cruz, the Director of SENASICA, said that the U.S. has not shared evidence with Mexico proving Mexico is to blame for the outbreak.  If such evidence exists, which Mr. Cruz doubted, he that the FDA should specifically identify the source of the outbreak rather than pasting blame on the country of Mexico.  Lastly, he added that the source of the salmonella is probably somewhere in the U.S. distribution chain for the peppers.

Mr. Cruz’s request for information sharing by the FDA seem reasonable.  However, the FDA was correct in first identifying the general source of the outbreak as Mexico if it did not have sufficient information to pinpoint the specific source.  As Mr. Cruz indicates, the FDA should now quickly attempt to identify the specific source.  U.S. and Mexican tomato producers would probably agree.

The PRD announced that it would not release the terms of its energy law reform plan until August, according to a report in today’s El Financiero.  It was originally anticipated that the plan would be released next Wednesday, July 30, 2008.

Fueled by a nationwide housing deficit, strong demand for homes among Mexico’s young and emerging working class, government mortgage lending programs, and a growing mortgage-backed securities market, Mexico’s low-cost housing sector continues to flourish.  Mexican homebuilders Desarrolladora Homex, S.A. de C.V. (NYSE: HXM) and Corporacion Geo, S.A.B. de C.V (GEO.B:MEX) are two of the major players in the sector, which generally focuses on mass producing homes that sell for less than US$40,000.  The Mexican housing industry expects the sector to grow by 15% over the next few quarters, according to a Reuters report.

The left of center Democratic Revolutionary Party (Partido de la Revolucion Democratica – PRD) announced today that it will disclose its proposal for reform of Mexican energy laws on Wednesday, July 30, 2008, according to today’s El Financiero.  The PRD proposal will likely be grounded in preserving Mexico’s ownership of oil and gas resources and keeping all of the profits derived from such resources within state oil monopoly Pemex.  Unlike the competing proposal of the Institutional Revolutionary Party (Partido Revolucionario Institucional – PRI), which I discussed in a July 23, 2008 post and which also gives Mexico full ownership of Mexico’s mineral resources, the PRD plan will probably disallow foreign investment in Mexican oil and gas exploration. That would be a mistake, particularly since Pemex is ill-equipped, both financially and technologically, to develop Mexico’s remaining reserves.

Pemex said yesterday in a Bloomberg report that it may drill for for oil outside of Mexico (for the first time in history) if Mexico’s Congress does not approve Pemex’s hiring of foreign partners for Mexican offshore projects.  The laws prohibiting Pemex from entering into partnerships with foreign investors do not apply outside of Mexico.  Pemex does not have the technology to drill in water deeper than 500 meters (1,640 feet), a meager depth by current standards.  According to the Bloomberg article, Pemex has received an offer from Brazil’s state-controlled oil company Petrolero Brasileiro, SA to explore the El Perdido Foldbelt of the Gulf of Mexico and Pemex jointly owns the Shell Deer Park refinery near Deer Park, Texas with Royal Dutch Shell Plc.

Another U.S. developer, Baja Properties, LLC, is seeking to bank on the throngs of Americans buying property in Mexico for retirement and vacation purposes in Baja California with a new project near La Paz.  According to the project website, the company and its Mexican subsidiary, Mesa Verde Corp, S. de R.L. de C.V., have entered into an agreement to acquire and develop 500 acres of land and the subsidiary has closed its acquisition of 125 of those 500 acres.  The developer is also active in the virtual real estate market: it bought the bajavillas.com website to help market the Mesa Verde project.  Property sales are expected to began in Q1 2009.

La Paz is just over 100 miles south of another relatively new and impressive Baja California development called Loreto Bay, located on around 8,000 acres adjacent to the hamlet of Loreto on the east coast of the Baja peninsula.  Loreto Bay bills itself as the “largest sustainable resort community under development in North America” and even has a Director and Vice President of Sustainability.  There are plans for a golf course, desalination plant, a wind farm, and solar powered buildings.  Sustainability may not be an option: Loreto is in the middle of the desert.  The project appears to be well-financed; investors include Citigroup Property Investors (CPI).  Homes and condominiums range from US$350,000-$900,000+.

The Institutional Revolutionary Party (PRI) today released its new proposal for reform of Mexico’s energy laws.  As reported in El Financiero, the PRI’s plan would allow Pemex, the state-controlled oil monopoly, to enter into contracts with third parties (e.g., foreign investors) to assist with the development of Mexican petroleum resources, including offshore resources, but would not allow Pemex to grant control of any Mexican petroleum resources to such third parties.  The PRI proposal includes the drafting of new body of law called the Energy Transition Law (Ley de Transicion Energetica), which would grant Pemex greater management and operational autonomy.

El Universal reported today that three U.S. franchisors will expand their franchise networks to Mexico.  The franchisors are Seattle-based smoothie maker Emerald City Smoothies (who doesn’t love a good smoothie?), Palm Springs-based water, sewer, and pipe leak repair service company American Leak Detection (we all have leaks), and U.S./India based computer and software training services provider Aptech (which appears to be U.S./India-based).

The future of international legal study in the Americas is the pioneering NAFTA Lawyer Program at the University of Detroit Mercy School of Law (UDM). 

The Program enables bilingual law students to earn law degrees in both the U.S. and Mexico.  Mexican coursework is conducted through the highly-regarded Instituto Tecnologico y de Estudios Superiores de Monterrey (ITESM).  If the two degrees were completed separately, they would take seven and a half years to complete, but this program allows students to complete both degrees in five years.  Following graduation and passage of the applicable bar exam in the U.S. (Mexico has no bar exam requirement), students are qualified to practice law in both the U.S. and Mexico.  Ambitious students can obtain a third law degree from the University of Windsor, Ontario with an additional year of vigorous study. 

I am surprised that more law schools have not taken the initiative to develop programs like the NAFTA Lawyer Program.  The only other truly international legal study program I am aware of is the French/U.S. and German/U.S. legal study program at Cornell Law School.

Although it would have been great if Tulane Law School had a program with ITESM or another Latin American law school when I attended, Tulane’s civil law curriculum is outstanding and provided an excellent background for a cross-border legal practice involving Latin America.  The Louisiana Civil Code of 1808, inspired by the French Civil Code (the Napoleonic Code), was the first civil code promulgated in the Americas and it has had a significant influence on many of the civil codes of Latin America.