Maryland court rejects control test in interpreting whether a company is a “successor brewer” under beer franchise fair dealing act allowing termination of distribution agreement.
Beer wholesaler Frederick P. Winner, Ltd., sued Pabst Brewing Co. over Pabst’s termination of the beer distribution rights the brewer had granted to the wholesaler. The termination came after a change in Pabst’s ownership. The beer distributor claimed the termination violated its rights under the Maryland Beer Franchise Fair Dealing Act. The trial court granted the beer maker summary judgment finding that the change in corporate structure at the grandparent level (see the chart below) following the purchase of the beer company that led to the termination made the current Pabst Brewing Company, a “successor beer manufacturer” for the purposes of the Beer Franchise Fair Dealing Act. An important finding because under the beer distribution law, a successor beer manufacturer is allowed to terminate an agreement entered into by the prior brewer.
You can find the full recitation of facts and read the opinion in this Maryland Beer Franchise Fair Dealing Act case here. In relevant part, the change in ownership looked like this:
With the Pabst Brewing Company of the successor structure changing from a corporation to an LLC following the transaction. But that was a change in corporate form, and according to all the records and testimony cited by the appellate court, amounted to a hill of beans given that Pabst corporate officers and representatives had provided various statements that the appellate court viewed as downplaying the changes made by the transactions in dealing with state regulators in what appears to be an attempt to smoothly get licenses updated:
“We briefly revisit the 2014 change in Pabst Brewing’s ownership structure before delving into our analysis of whether the successor beer manufacturer statute is implicated in this case. Winner and Pabst Brewing entered into the 2014 Agreement on April 30, 2014, which supplanted a prior agreement that had begun January 31, 1994. When the parties entered into the 2014 Agreement, Pabst Brewing was a Delaware Corporation and a wholly-owned subsidiary of Pabst Holdings, Inc., which was, in turn, a wholly-owned subsidiary of Pabst Corporate Holdings, Inc., which was controlled by Dean Metropoulos. As of November 13, 2014, Pabst Brewing became a Delaware limited liability company and Pabst Corporate Holdings, Inc. sold its interest in Pabst Holdings, Inc. to Blue Ribbon, LLC, which was controlled by Eugene Kashper. Following the acquisition, Pabst Brewing replaced its directors and officers.”
“Barbara J. Hruby, Pabst Brewing’s Manager of Government Affairs, sent a letter to the Comptroller of Maryland advising that “on November 13, 2014, a new group of investors completed the purchase [of] all of the equity interests of Pabst Holdings, LLC, the parent of Pabst Brewing Company, which holds the above license(s)/permit(s).” Pabst Brewing advised that it would “file amended Brewer’s Notices and permits with the federal Alcohol and Tobacco Tax and Trade Bureau” but explained that Pabst Brewing “will continue to be the operating company doing business with the same Employer Identification Number (EIN).” Pabst Brewing further explained:
For business tax planning purposes, the parties to the transaction did elect to be treated as a limited liability company immediately prior to closing, but no new entity was formed and all basic business functions will continue uninterrupted. All existing bonds will be updated with the information on the new owners. Pabst brands will remain the same after closing and distribution to retailers will continue through the three-tier system. While Pabst Brewing Company will have several new senior executives in its management team, many veteran executives and most of the other Pabst employees remain, including members of the existing compliance team. We do not anticipate immediate changes in day-to-day operations.
“Pabst Brewing further provided the names of the new officers as well as the names of former officers who had submitted their resignations. Following the change in ownership, Winner received a letter terminating its distributorship. The letter was written on the letterhead of “Pabst Brewing Company.”
“We must determine whether the change in Pabst Brewing’s corporate structure in 2014, coupled with the change in ownership at Pabst Brewing’s grandparent level, rendered Pabst Brewing and/or its parent and grandparent companies “successor beer manufacturers” under the statute. Answering this question requires us to decide if Pabst Brewing and/or Blue Ribbon is, pursuant to AB § 5-201(a)(5), “a person or license holder who replaces a beer manufacturer with the right to sell, distribute, or import a brand of beer.”
The appellate court also looked to the testimony regarding the corporate transaction for the sale adduced at trial which came from Pabst’s president and its general counsel:
“First, we observe that Eugene Kashper, the CEO of both Blue Ribbon, LLC and Pabst Brewing Company LLC, submitted an affidavit declaring that Blue Ribbon “owns 100% of the shares of Pabst Holdings, LLC, which owns the membership interests of Pabst Brewing Company, LLC.” Contrary [*19] to the trial court’s finding that Blue Ribbon owns the Pabst Brewing brands, Mr. Kashper stated in his affidavit that “Pabst Brewing Company LLC owns the Pabst brands of beer.” Mr. Kashper maintained, however, that “[e]ffectively, through Blue Ribbon, LLC, I am the owner of the Pabst brands.” Furthermore, Pabst Brewing’s former General Counsel, Michael J. Kramer, explained that Blue Ribbon’s purchase of Pabst Holdings, Inc. “was structured as a sale of stock and not a sale of assets” and did not “involve the sale of any brands belonging to [Pabst Brewing],” nor did the transaction include “any assignments of [Pabst Brewing’s] trademarks, or any assignments of contracts related to [Pabst Brewing’s] brands.”
The appellate court reviewing the matter cited to the evidence above in reaching the conclusion that the change in corporate structure at the grandparent level did not qualify the newly owned Pabst Brewing Company as a successor beer manufacturer under the statute. With the attendant result that the trial court’s ruling was overturned and in further proceedings, Pabst will not be able to claim that the sale at the grandparent level gave it the right to terminate as a successor beer manufacturer (the case isn’t over, so there may be other grounds or reasons for termination).
In reaching the result, Maryland rejected a proposal by Pabst that the court adopt a “control based” test which would not deal with the actual entities involved, but whether control of those entities had changed. The court had a few reasons for not adopting this control based test:
“Pabst Brewing asserts that other courts have adopted a control-based test and that we should similarly do so. In particular, Pabst Brewing points to the decision of the United States Court of Appeals for the Sixth Circuit in Tri County Wholesale Distributors v. Labatt USA Operating Co., 828 F.3d 421 (6th Cir. 2016). Like the case before us in this appeal, Tri County required a determination of whether a supplier satisfied a definition of a successor beer manufacturer, and, therefore, whether the supplier was permitted to terminate franchise agreements. 828 F.3d at 423. In Tri County, the appellate court employed a “functional, control-based approach” and reasoned that the supplier satisfied the successor beer manufacturer definition after a parent company acquired a holding company that, “through a series of . . . intermediate nesting holding companies,” owned and controlled Labatt USA Operating. Id. at 424-27.
“Critically, however, the language of the statute at issue in Tri County was far broader than the statute at issue in this appeal. The relevant Ohio statute at issue in Tri County provided that a “successor manufacturer” may terminate a distributor when “a successor manufacturer acquires all or substantially all of the stock or assets of another manufacturer through merger or acquisition.” Id. at 429 (quoting Ohio Rev. Code § 1333.85(D)) (emphasis supplied).6 This is a much broader definition than the definition of successor beer manufacturer under Maryland law, which recognized a successor as one who “replaces a beer manufacturer with the right to sell, distribute, or import a brand of beer.” AB § 5-201(a)(5). Indeed, if the General Assembly had intended the determination of whether an entity is a successor beer manufacturer to be focused upon the control of the company and/or the acquisition of stock or assets, the legislature could have included such language in the statute. Instead, the General Assembly focused upon whether a beer manufacturer was “replaced” with an entity that has “the right to sell, distribute, or import a brand of beer.” This is the clear and unambiguous language that we must apply to the undisputed facts presented in this case.
“Pabst Brewing asserts that although the Maryland statute is, in Pabst Brewing’s words, “not a model of clarity,” a reading of the relevant statutory language compels the conclusion that Pabst Brewing, under the direction of Blue Ribbon, was permitted to terminate Winner’s distributorship. We are not persuaded. The Maryland statute, unlike the Ohio statute discussed in Tri County, focuses on whether “a person or license holder” had “replace[d] a beer manufacturer with the right to sell, distribute, or import a brand of beer.” AB § 5-201(a)(5) (emphasis supplied). Pabst Brewing expressly informed the Maryland Comptroller that although “investors completed the purchase all of the equity interests [sic] of Pabst Holdings, LLC,” Pabst Brewing would “continue to be the operating company doing business with the same Employer Identification Number (EIN).” Pabst Brewing further informed the Comptroller that “the parties to the transaction did elect to be treated as a limited liability company immediately prior to closing, but no new entity was formed and all basic business functions [would] continue uninterrupted.”
“Furthermore, the undisputed evidence demonstrates that Blue Ribbon’s purchase of Pabst Holdings, Inc. was “a sale of stock and not a sale of assets” and did not “involve the sale of any brands belonging to [Pabst Brewing],” nor did the transaction include “any assignments of [Pabst Brewing’s] trademarks, or any assignments of contracts related to [Pabst Brewing’s] brands.” In our view, the sale of the equity interests in Pabst Brewing’s parent company when Blue Ribbon purchased Pabst Holdings, Inc. from Pabst Corporate Holdings, Inc., did not constitute a “replacement” of Pabst Brewing, nor did the entity that had the “right to sell, distribute, or import a brand of beer” change. Prior to the 2014 transaction, Pabst Brewing, structured as a corporation, had the right to sell, distribute, or import certain brands of beer. Following the transaction, Pabst Brewing, structured as a limited liability corporation but operating under the same EIN and having reassured the Comptroller that no new entity had been formed, had the right to sell, distribute, or import the same brands of beer. A change in ownership and control occurred two rungs up the corporate chain, but the entity with the right to sell, distribute, or import the brands of beer remained the same, and, therefore, was not replaced.
This conclusion is compelled by the relevant statutory language, but further, the result is consistent with general well-settled principles of corporate law. “In Maryland, . . . a corporation is a distinct legal entity, separate and apart from its stockholders.'” Gosain v. Cty. Council of Prince George’s Cty., 420 Md. 197, 210, 22 A.3d 825 (2011) (quoting Dean v. Pinder, 312 Md. 154, 164, 538 A.2d 1184 (1988)). Consistent with this principle, when determining whether an entity meets the definition of “successor beer manufacturer,” we shall not blur the distinction between Pabst Brewing Company, LLC itself and its parent and grandparent companies. See id. (expressly rejecting a petitioner’s attempts “to blur the distinction between the corporations and the individuals owning the corporations”).
As stated above, after this analysis, the court rejected the Pabst argument and reversed the circuit court’s judgment for further proceedings identifying issues that it was specifically not deciding, such as whether a brewer has a right to terminate when it is not a successor beer manufacturer and whether the distributor had proven any damages.
To alleviate corporate headaches involved with multi-state licensure, sometimes compliance logistics can drive a transaction as much as tax and IP considerations. As the court noted here, there are more expansive “successor brewer” provisions in other state statutes that would have landed Pabst’s transaction squarely within the definition, and assuming an attendant right, the ability to terminate. But Maryland was not one of those states. In Maryland, the notion of a successor beer manufacturer involves the type of replacement commonly associated with an asset purchase and separate entities.