WSD has learned that Constellation Brands is seeking to terminate its exclusive importation agreement with Italian wine producer Ruffino on the grounds that it violated their contract. How so? Because it was one of the wineries charged by the Italian government for using grapes grown in vineyards not registered as Chianti Classico DOCG in its Chianti Classico wine back in 2005.
However, Ruffino says Constellation does not have grounds to end the import agreement, and claims the company is instead trying to block Ruffino's majority shareholder from exercising its options to sell its stake to Constellation for as much as $71 million. Back in January we reported that Constellation Brands has initiated legal proceedings against Ruffino's majority shareholder. At the time, chief Rob Sands stated: "This action should take some time to resolve." And he wasn't kidding. First some background, and then we'll explain the latest developments.
QUICK BACKGROUND. Recall in 2004 Constellation purchased a 40% stake in Ruffino for roughly $80 million from its parent company, MPF International (owned by the Folonari family). The joint-venture agreement gave Folonari and another small shareholder the option to sell their stake to Constellation from January 1, 2010 to December 31, 2010. The price is determined by a formula specified in the contract.
Fast-forward to May 2010, when the minority shareholder opted to sell its 9.9% stake in Ruffino to Constellation for $29.6, hence increasing Constellation's stake to 49.9%, according to Constellation's 10-Q filing. Then in December, Constellation "received notification" from the Folonari family "that it was exercising its option" to sell its full 50.1% stake in Ruffino to Constellation. In response, Constellation said it "had initiated arbitration proceedings against the 50.1% shareholder alleging various matters which should affect the validity of the put option."
RUFFINO FIGHTS CONSTELLATION'S TERMINATION ATTEMPTS. On March 18, 2011 Ruffino filed a lawsuit against Constellation Brands in a New York district court, seeking injunctive relief and damages. The company "seeks to enjoin an improper attempt" by Constellation to terminate a 10-year fixed term exclusive importation agreement under which Constellation is Ruffino's sole US importer. "Should the termination go forward, Ruffino will suffer irreparable and substantial harm," since it sells a huge chunk of its wines, apparently 60%, in the US. Ruffino says Constellation's notice of termination "was sent in bad faith" and calls it a "sham."
Here is a rundown of events, according to the suit:
--In 2004 Ruffino and Constellation's subsidiary Franciscan Vineyards enter into an exclusive importation agreement that is set to end December 31, 2014, with automatic renewal for another 10 years unless the relationship is terminated "under the express terms and conditions of the Agreement."
--In 2004 a subsidiary of Constellation, CB International Finance S.a.r.l., based in Luxembourg, acquired a 40% stake in Ruffino. As part of the agreement, Constellation execs also took some seats on Ruffino's Board of Directors. The lawsuit claims the appointed directors from Constellation "have attended (in person or by telephone) all meetings" of Ruffino's board.
--June 19, 2009 Ruffino, Franciscan and Constellation agree to substitute Constellation for Franciscan in the importation agreement.
--Fast forward to February 17, 2011, when Constellation notified Ruffino that it was terminating the importation agreement for breach of contract, effective 60 days after the date of the letter. Why? Constellation claims Ruffino's management was "directly and personally engaged in illegal activity that ultimately resulted in the conviction of the directors of Ruffino and punishment under Italian law" between 2001 and 2005. Constellation says that if it had known of this supposed illegal activity, it "would not have caused Franciscan to sign the Importation Agreement." Constellation also alleges that Ruffino "deceitfully and falsely told Constellation and Franciscan that Ruffino was a victim of [the matters] and that Ruffino was not and had not been directly or personally involved" in using non-designated wines in its Chianti Classico.
-- Recall in 2005 the Italian government accused Ruffino of not using "grapes solely sourced from the Chianti de Classico district of Italy in certain vintages of its Chianti Classico wine, as required by Italian law." The government then seized "certain quantities of wine held by Ruffino for the 2001 through 2004 vintages." Thirty days later the government released the wine back to Ruffino after the company agreed to downgrade the wine in question to a lesser classification (IGT). Ruffino management then entered into a plea bargain with the Italian prosecutor, which according to Italian law "cannot be used as an admission of fraud in any subsequent civil case." Ruffino has since been charged a fine of 40,000 euros.
--Ruffino says Constellation was fully aware of this situation. But even if Constellation were left in the dark, Ruffino's lawsuit claims there is still no basis to end the importation agreement because "Constellation has never claimed and even now does not claim in the Termination Letter that Ruffino has breached any substantive provision of the Importation Agreement."
--Ruffino says "no later that October 2005, Constellation has full and actual knowledge of the Chianti Classico matters" and "was further fully advised of all relevant legal proceedings as this progressed." The lawsuit claims all accusations by the Italian government and subsequent legal proceedings were discussed in board meetings where members of Constellation were present. Furthermore, "the Chianti Classico matter was widely reported in the trade and even public press at the time both in Italy and the United States. All knowledgeable persons in the wine industry were well aware of it, including Constellation's senior officers and directors."
--Meanwhile, Constellation continued to import and distribute Ruffino's wines in the US, "including the Chianti Classico wines which were at the heart of the matter." Constellation also allegedly helped reposition the wine by working with Ruffino "to establish marketing plans for the newly labeled wine and to create a new Ruffino product from this wine" for distribution in the US.
--Remember the amendment that both companies signed to their import agreement in 2009? The lawsuit claims the amendment not only replaced Franciscan with Constellation, but it also stated this: "The parties hereto mutually waive and release and discharge each other from any and all breaches or other failure to perform by any party under the Importation Agreement at any time prior to and through the Effective Date of this Amendment, including any and all claims or actions or causes of action based thereon." It also allowed Constellation to import competing Italian wine brands.
--Furthermore, Ruffino says in the case of any claim of breach, the import agreement gives the other party 60 days "to fully cure such breach," which they have done.
THE MEAT OF THE MATTER. In all, Ruffino claims "Constellation has ulterior motives for the issuance of the sham Termination Letter in this case: Its affiliate has an obligation to purchase the remaining equity in Ruffino from its current owner under an agreed pricing formula. Constellation does not wish to honor this legally binding obligation and is attempting to avoid it by its bad faith termination."
The lawsuit says that under the provisions of the joint-venture, if Constellation "were to lawfully terminate the Importation Agreement," the Folonari family, who are attempting to exercise their options to sale their 50.1% stake in Ruffino to Constellation, would have to pay Constellation instead. According to a letter from Constellation's subsidiary that is involved in the Ruffino j-v, CBIF, the Folonaris would have to pay "approximately $124 million." Therefore, says the lawsuit, "Constellation and its subsidiary CBIF therefore have ample financial motives to invent a reason to terminate the Importation Agreement.."
And there you have it. It looks as though this case could see a long and drawn out battle in the courts. A request for comment from Constellation was not returned by press time.
THE IOWA LEGISLATURE has passed a bill that would allow gas stations and convenience stores across the state to sell spirits in their main aisles near their other goods. Currently spirits are partitioned off from c-stores with a separate cash register. The measure now goes to Gov. Terry Branstad for his consideration.
MARYLAND TAX INCREASES PASSES COMMITTEE. A proposal to raise the tax on alcohol from 6% to 9% over the next three years has advanced to the full senate.
BROWN-FORMAN'S BOARD has authorized a stock repurchase program of as much as $250 million through the end of November.
Until Monday, Megan
"Heroing is one of the shortest-lived professions there is."
SUBSCRIBE to Wine & Spirits Daily today: http://www.winespiritsdaily.com/subscribe.php
Email us for CORPORATE PACKAGE rates
Make yourself heard, your opinions count. Feedback and tipster form: http://www.winespiritsdaily.com/hotline.php
--------- Sell Day Calendar ----------
Today's Sell Day: 19
Sell days this month: 20
Sell days this month last year: 20
This month ends on a: Mon.
This month last year ended on a: Fri.
YTD sell days Over/Under: 0
WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: email@example.com
� 2011 Wine & Spirits Daily, all rights reserved. Please, no forwarding or copying. May quote with attribution.
Follow me on Twitter http://twitter.com/WineSpiritDaily
Editor: Megan Metcalf - firstname.lastname@example.org
Customer Service: Jennifer Waddill - email@example.com
Check winespiritsdaily.com for back issues or to subscribe or renew. Phone: 210-805-8006. Email: firstname.lastname@example.org
SchuPub, LLC, 601 E. Ashby Place, San Antonio, TX 78212, USA