Grupo Modelo Files Suit Against Constellation Beers

FILED DECEMBER 15, 2009

Dear Client:

Trouble in paradise. Grupo Modelo has filed a lawsuit in US District Court in New York against Constellation Beers (not Crown), which is an equal partner in Crown with Modelo. The reason for the action is that Modelo believes that Constellation refuses to fund its part of Crown's planned marketing budget in 2010.

According to the complaint, obtained by BBD tonight, Constellation Beers has been "obstructing Crown's business in order to further their own selfish goals." Wow, that's strong language for a partner in the beer business. Modelo says it has "been forced" to spend "its own money" in order to make Crown flush.

Here's what went down, according to the complaint. Constellation and Modelo each have the same number of board members at Crown, and each October they agree on a business plan by unanimous vote. This October Crown's management proposed a marketing spend per case. However, they also prepared a business plan where the marketing spend would be "substantially" less per case. "Management projected that the higher level of marketing spend would result in higher net income for Crown and growth in the volume of beer sold. On the other hand, a reduction in marketing expenditures would lower net income and lead to volume decline."

Modelo says that Crown's management recommended the higher marketing spend per case. Modelo even says that Constellation's representatives on Crown's board "have made it clear that they agree with management's recommendation and that they believed the higher marketing spend to be in Crown's best interests." Despite that, says Modelo, Constellation "refused to approve management's recommended spend. They instead threatened to saddle Crown with the lower [redacted] per case in marketing that they knew to be detrimental to Crown's business."

HOLDING CROWN HOSTAGE? That's not all. Modelo says that Constellation also "sought to renegotiate the terms of the LLC Agreement, and they attempted to hold Crown hostage in order to achieve their goal." Modelo says that Constellation "explicity linked approval of management's recommended business plan with proposals for restructuring the joint venture....and insisted that they would not approve management's plan unless GModelo alone contributed the additional [redacted] needed to support the level of marketing expenditures that all parties agreed to be in Crown's best interests." Modelo goes on to say that Constellation sought to use the "prospect of harm" to Crown "as a club" to get Modelo to pay up. Modelo chose to pay up "to prevent harm to Crown." Modelo seeks relief and damages.

What's interesting about this is that Crown management is no doubt caught in the middle on this. If you believe the Modelo complaint, Crown management recommended a marketing spend that Constellation either doesn't want to pay, or worse, is using as a bargaining chip to renegotiate the Crown JV and/or get Modelo to pay for the extra marketing spend. It puts Crown's management, some of whom used to be employees of Constellation before the Crown J-V, in the middle. More later.....

Until tomorrow, Harry

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