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Ask two lawyers what any term in a contract means and you’ll get at least three definitions. So it’s not surprising that disputes often arise in mergers over the disposition of assets — from licenses to leases to stakes in joint ventures. “These issues come up all the time with respect to smaller groups of assets,” notes Frank Aquila, a partner at Sullivan & Cromwell. But in two pending deals — the merger between Dallas’ Suiza Foods Corp. and Franklin Park, Ill.-based Dean Foods Co., the two biggest dairy companies in the U.S., and the purchase by leading drinks producer Diageo of part of Seagram’s drinks portfolio — the stakes are higher than which company gets to use a warehouse or a fleet of trucks. In the Suiza case, soy milk producer White Wave Inc. is fighting for self-determination. For London-based Diageo, the prize is Captain Morgan rum, one of Seagram’s most prominent names. Neither case is close to a resolution. After Dean and Suiza announced their merger in April, White Wave, the maker of Soy Silk, a fast-growing soy milk brand with annual revenues of $85 million, sued Dean, charging that Dean, which owns 36 percent of privately held White Wave, should give the company the “right of first offer” to buy out the stake provided in the option agreement signed by the two in 1999. The option agreement, upon which both sides rest their arguments, gives Dean Dip, a subsidiary of Dean Foods, the right to buy out the rest of White Wave in 2002 at a discount to “fair market value,” as prescribed by a formula in the contract. The agreement, however, also gives White Wave the right of first offer on Dean Dip’s stake if there’s a transfer of the shares to another party. Transfer is defined as “any direct or indirect sale, transfer, assignment, pledge or other dispositions,” according to White Wave’s lawsuit. White Wave argues that the Dean-Suiza merger transfers the White Wave stake to Suiza. Dean, however, has argued that its shares in the Boulder, Colo.-based White Wave are owned by Dean Dip, which is untouched by the merger between its parent and Suiza. In fact the language in White Wave’s contract is both specific and general and covers the current scenario — a merger of Dean Foods with a third party — says George Curtis, counsel to White Wave at Gibson, Dunn & Crutcher. White Wave notes that Suiza is its biggest competitor, with Sun Soy, the other major soy milk brand, and will now own Dean, which in turn has two board seats at White Wave through its 36 percent stake, access to confidential information on privately held White Wave and veto rights on any major transactions White Wave may consider. White Wave’s Silk brand has 79 percent of the refrigerated soy milk market and could be an attractive takeover target for many food and beverage companies seeking fast-growth products, say investment bankers. Remarks by Gregg Engles, Suiza’s chairman and CEO at an annual meeting May 17, give White Wave some ammunition. Engles talked about sewing up the soy milk market with the Dean Foods deal. In fact, given White Wave’s market share, an outright acquisition by Suiza might face significant antitrust challenges. Dean argues that Dean Dip hasn’t transferred its 36 percent stake in White Wave to anyone else, and so the right of first offer simply hasn’t been triggered. In fact, White Wave initially drafted the option and stock purchase agreements with Dean Foods, the parent company, but Dean wanted to change the party named in the contract to Dean Dip, and White Wave didn’t raise any objections, according to White Wave’s court documents. “When the courts look at right of first refusal, they tend to look at the contracts very narrowly,” says James Munson, a lawyer with Kirkland & Ellis, representing Dean in the White Wave case. A narrow interpretation of the language in the contract could favor Dean’s contention that Dean Dip, the shareholder hasn’t transferred the shares. In the Diageo case, Destileria Serralles, a Puerto Rican company that manufactures Captain Morgan rum, sued Joseph E. Seagram & Sons Inc., claiming that it had a right of first refusal on the Captain Morgan brand since Seagram sold its drinks portfolio to Diageo and Pernod. Destileria had reached a side agreement to sell Captain Morgan to Allied Domecq, the Bristol, U.K.-based spirits company which is the second biggest in the world, before Diageo and Pernod were named the winner of the Seagram’s drinks brands in an auction in December. Destileria’s right of first refusal is written into its supply agreement with Seagram dating to 1985. The company claims it has a right of first refusal on the Captain Morgan trademark if there is a “sale, assignment or transfer of the trademark in connection with a transfer of the Captain Morgan Rum brands,” according to legal documents filed by Seagram. Seagram has argued in the U.S. District Court in San Juan, Puerto Rico, that there has been no transfer of the Captain Morgan trademark in Diageo’s and Pernod’s takeover of the Seagram business, according to Dan Ichel at Simpson Thacher & Bartlett, who represents Seagram in the case. Instead there has been a sale of the stock of the company that owns the Captain Morgan trademarks, and the two are not the same. “There are literally dozens of cases where parties have the right of first refusal on an asset which they claim applies when there is a sale of the stock of the company owning the asset,” Ichel says. “The courts have usually said they don’t have such a right when there’s a sale of the company rather than the asset itself.” So why didn’t Destileria write in that its right of first refusal would also apply if Seagram or its drinks business gets sold? James Sabella, at Sidley Austin Brown & Wood, Destileria’s counsel in the case, says, “In 1985 no one envisioned that Seagram would get out of the liquor business. It’s like saying General Motors would get out of the auto business.” At that time Destileria had wanted the right of first refusal to the Captain Morgan trademark because it was an important business to the company and “they didn’t want to do business with a stranger,” Sabella says. It’s not uncommon that disputes arise over distribution arrangements made a long time ago. “Many of these agreements tend to be old, drafted at a time when there was no reason to contemplate these types of transactions,” says Paul Schim, M&A partner at Cleary, Gottlieb, Steen & Hamilton. Often the wording of contracts in question doesn’t deal well with potential mergers and acquisitions because it’s drafted by the companies’ own lawyers or experts in intellectual property law, neither of whom may be conversant with M&A law, says Andrew Nussbaum, of Wachtell, Lipton, Rosen & Katz. It’s not surprising, then, that disputes over merger parties’ rights to brands or assets are becoming increasingly common. “It’s something we pay attention to when we represent a buyer of a business,” says Nussbaum. “It’s not unusual that there are one or two material contracts that a target has [with third parties] that have either vague clauses about what happens in a change of control, or worse, a very precise clause that is bad for the buyer.” For M&A lawyers, the challenge to structure deals in ways that get around change-in-control clauses aimed at terminating or limiting the scope of such licenses. While companies may want to write all-encompassing language into contracts to protect their brands, often the other side isn’t willing to accept it. “It’s not a certainty you’ll be able to negotiate a change-in-control clause because no one wants to give away the right to continue to own an important asset if they do any deal,” says Schim. Copyright (c)2001 TDD, LLC. 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