Partners battle over beverage empire

NOTE: This story has been corrected from an earlier version that misidentified one of the judges in the legal fight over the company behind Arizona iced tea. That judge is New York County, N.Y., Justice Martin Shulman.

Domenick Vultaggio and John Ferolito spent four decades in business together, building one of the best-selling beverage brands in the country, Arizona iced tea. With its 23-ounce can and large 99-cent logo, Arizona and related brands earn sales of $1 billion annually and employ 1,000 people. Vultaggio and Ferolito long ago became rich men.

Yet a recent reunion was hardly friendly. The venue was a wood-paneled courtroom on Feb. 29 in Mineola, N.Y., where a trial opened amid mutual allegations of greed and misconduct. The trial will test whether Ferolito breached his duty to help finance Beverage Marketing USA Inc., the company behind Arizona. The wider dispute is over whether to keep the company private or cash it out for the billions of dollars that Ferolito says companies like Nestlé S.A., The Coca-Cola Co. and Tata Global Beverages Ltd. have offered.

“The greed aspect of it is fairly biblical, but I see it as a Greek tragedy,” Louis Solomon, the Cadwalader, Wickersham & Taft partner who represents Vultaggio, said during opening arguments. “It is a clash of the Titans.”

Vultaggio, who since 1998 has run Beverage Marketing and its affiliates as chairman, wants to keep the business in private hands, as it has been since he and Ferolito launched the brand in 1992. Ferolito wants to sell the company, or at least his stake — moves he has said would allow Arizona to become a global power. “All we want is a divorce,” said Ferolito’s lawyer, Nicholas Gravante of Boies, Schiller & Flexner.

Damages in the proceedings under way in Nassau County, N.Y., Superior Court could reach $225 million, Solomon said. Even more money will be at stake during a second trial, expected later this year in New York County, N.Y., Supreme Court, to determine how much it would cost to buy Ferolito out. The number in Ferolito’s lawyers’ minds is at least $1 billion, Gravante said.

BROOKLYN BEGINNINGS

Long before they started hiring law firms, Vultaggio and Ferolito were a couple of high school graduates looking to make a buck. During the summer of 1972, Ferolito said in court documents, he launched a beverage business. Within a year he brought Vultaggio into a partnership. Earlier, they sold paper goods door to door.

The business at first focused on distributing beverages, rather than producing them. After a few years operating in the then high-crime Brooklyn neighborhoods of Crown Heights and Bedford-Stuyvesant, they branched into brewing malt liquors with brands like Midnight Dragon. The idea for iced tea didn’t hit until 1990 —#8212; while delivering to a regular customer that year, Vultaggio watched as a Snapple truck dropped off case after case of its iced tea, according to Arizona’s Web site. Soon, Vultaggio and Ferolito were in the iced tea business, too, and in 1992 the first cans of Arizona iced tea hit store shelves in New York City.

It met with overnight success — 700,000 cans sold during the first year. And while early on the company experienced what Vultaggio described as “some down years,” the company since 1999 has grown during every quarter.

As the partners grew successful, they began to almost entirely finance the company themselves rather than through bank loans — a strategy that Vultaggio at trial claimed they’d agreed upon in 1992 through an oral contract. Ferolito disputes that any such agreement exists, but he and Vultaggio did provide capital over the years.

Initially, Ferolito handled corporate matters while Vultaggio ran the warehouse. After moving the business in 1994 to Lake Success, N.Y., in suburban Long Island, Vultaggio moved into the corporate suite. Almost immediately, the relationship began to fall apart, according to Ferolito. “Substantial differences in our approaches to management and decision-¬making created tension and led to increasingly intense disputes,” he said in an affidavit. “Moreover, Vultaggio began to treat me badly, refusing to meet with me or take my calls, and deliberately avoiding me at the office.”

Solomon, Vultaggio’s lawyer, said at trial that Ferolito’s account was “exaggerated.” But Vultaggio did testify to occasional confusion as Ferolito gave orders that countermanded his own. By 1998, it was clear to both partners that they could not manage the company together, so they reached a written agreement by which Ferolito relinquished management. He moved to Florida, where he bought several houses and started a series of small business ventures. His family continues to own half of Beverage Marketing, with Ferolito personally controlling 26 percent while a trust set up for his son owns another 24 percent. Vultaggio owns 26 percent, and his two sons each have 12 percent.

Starting in 2005, Ferolito began reaching out to companies including Coca-Cola and Tata about a sale. Vultaggio viewed the company as a family business that should remain on Long Island, Solomon said. Still, he was open to letting Ferolito sell his part. Vultaggio’s say on a deal was key, since their 1998 agreement restricted the transfer of stock to outsiders. Vultaggio testified to spending months talking to Coca-Cola, in particular. A deal got “pretty close,” but fell apart over Ferolito’s price demands, Vultaggio said.

Vultaggio now claims that Ferolito was angling all along to sell the entire company, in order to win a “control premium” for his stock — a bonus paid by a buyer to secure control of a company. By 2007, Ferolito had hired McDermott Will & Emery to renegotiate the ownership agreement and reassert control over the company, according to Vultaggio and trial exhibits. In October 2007, Ferolito threatened to pull funding from the company and insisted that it be sold, according to Vultaggio. Still, Vultaggio resisted. “They knew my position,” he said.

Unable to sell, Ferolito hired DLA Piper to file suit in February 2008, seeking a declaration that the no-transfer language was unenforceable. Meanwhile, Ferolito announced a deal to sell a “significant equity interest” to private-equity fund Patriarch Partners LLC. Court documents showed that Patriarch would have acquired a 2 percent stake from Ferolito with an option on another 23 percent, or half of his family’s interest, based on a valuation of $4.32 billion.

Since Vultaggio had expressed interest in buying out his partner, Ferolito in a letter filed as an exhibit explained that he structured the deal to allow for a counterproposal based on the same $4.32 billion valuation. Vultaggio, represented by Kramer Levin Naftalis & Frankel and Proskauer Rose, didn’t bite. Recalling the deal at trial, Vultaggio insisted that Patriarch was “never a real buyer,” having done no due diligence. Patriarch counsel Hillary Richard of Brune & Richard in New York did not respond to requests for comment.

Unable to close the deal, Ferolito, now represented by Milbank, Tweed, Hadley & McCloy, and Patriarch filed an amended complaint in October 2008, again seeking a declaration that the 1998 agreement was unenforceable. Vultaggio replied via counterclaims that Ferolito had breached the contract by attempting a sale and sought an injunction against any sale to an outside party. He also filed a third-party action against Patriarch, alleging tortious interference with the 1998 contract, seeking rescission of the deal.

In May 2009, a trial judge, New York County Justice Martin Shulman, concluded that Ferolito’s flirtation with Pat¬riarch “borders on unconscionable” and upheld the transfer restrictions. “Ferolito’s callous disregard of the explicit obligations he knowingly undertook could not be countenanced by the court even if his strained arguments had a valid basis, which they do not,” Shulman wrote.

DISSOLUTION

Shulman’s ruling withstood appeal. Unable to sell his stake, Ferolito turned to a third law firm, Boies, Schiller & Flexner. The new strategy envisioned something very different from a sale: In October 2010, the firm filed a petition in Nassau County Supreme Court to dissolve the company. The intent was not to liquidate the company but to “break the logjam,” Gravante of Boies Schiller said.

“We wanted the entire company sold or for Ferolito to buy out Vultaggio or for Vultaggio to buy out Ferolito,” he said.

Vultaggio — still represented by Solo¬mon, who’d jumped from Proskauer to Cadwalader — moved the dissolution proceeding from Nassau to New York County and then offered to buy out his partner. Although that would put Ferolito on the road to getting what he wanted, two big hurdles stood in the way.

First, each side had a different idea of how much Ferolito was owed. Ferolito’s lawyer, Gravante, argued that the past offers indicated the company was worth between $4 billion and $6 billion. Solo-mon insisted that the only recorded transaction that could provide a valuation was when Ferolito sold and repurchased from a company executive a stake in Beverage Marketing’s international arm. That deal valued the company at $432 million.

Second, Ferolito objected to Vultaggio’s decision to have the company itself buy his stock rather than Vultaggio personally — in part because he questioned whether it had the wherewithal. Additionally, “we don’t believe Beverage Marketing can do that under the owners’ agreement without Ferolito’s consent,” Gravante said. An intermediate state appeals court was scheduled to hear arguments at the end of March.

A separate dispute, before Nassau County Supreme Court Justice Timothy Driscoll, involves whether Ferolito and Vultaggio agreed to equally inject money into the company when necessary, and whether any such agreement was enforceable. In June 2008, not long after filing his first suit, Ferolito filed another complaint seeking to force Beverage Marketing to repay his half of the millions of dollars in loans that he and Vultaggio had made to the company since 2005.

Solomon called Ferolito a “faithless fiduciary” who hoped to create a cash crunch that might force a sale. One bank froze their accounts after Ferolito attempted to withdraw millions of dollars, Solomon said, and another turned the company down for a loan pending resolution of the dispute. Meanwhile, $25 million of the company’s money was frozen in a Deutsche Bank account when the auction-rate securities market seized up in February 2008, according to evidence produced by Vultaggio.

Beverage Marketing plans to seek up to $225 million from Ferolito, Solomon said — representing $50 million on average that the company paid him during every year in which he didn’t pay his capital contributions plus damages for lost corporate opportunities, including a potential expansion.

“As it is, Don had to loan $56 million of his own money into the company to allow it to keep running,” Solomon said.

Ferolito disputes that Beverage Mar¬keting missed out on any opportunities or that it faced a cash crunch, Gravante said. More fundamentally, he disputed whether his client ever agreed to equally finance the company. If Ferolito did make such an oral promise, the deal was made void by their 1998 written agreement, signed when Ferolito left for Florida, Gravante argues.

“There is absolutely no evidence this agreement existed,” Gravante said. “But if they want to make it into a ‘John Ferolito is a bad man’ kind of case, then we have more than enough ammunition with respect to Mr. Vultaggio to make sure that backfires on them.”

WASTE, MISMANAGEMENT, LOOTING

He referred to allegations of waste, mismanagement, looting and self-dealing by Vultaggio. In court papers, Ferolito contends that Vultaggio put on the payroll his personal architect, so he could deduct his fees as a business expenses; and his chef, who secured health insurance as a result. Vultaggio also is alleged to have hired his sons, Wesley and Spencer, and paid them salaries, even though they were part owners. Vultaggio is alleged to have halted independent audits of the Arizona companies from 2008 through 2010.

Solomon called those allegations “irrelevant,” but whatever testimony emerges on those points could affect the valuation proceedings. Shulman, the New York County judge, has indicated that he considers questions of misconduct, waste and excessive expenses relevant to the company’s value.

It remains unclear whether Vultaggio personally could afford to buy out Ferolito if the company is worth billions. According to Solomon, the court could allow him to pay Ferolito over time.

Either way, a high valuation could force a sale of some or all of the company. As recently as March 2011, court records showed that Tata was still interested. But with appeals almost guaranteed in either trial, the Indian conglomerate will have to wait to find out whether it or anyone else will be allowed to purchase one of the largest beverage companies in the United States.