Indirect Transfers May Not Include Upstairs Entities

The decision in The American Bottling Company v. BA Sports (“American Bottling”)[1] demonstrates that in the context of anti-assignment or change of control provisions, prohibitions against “indirect transfers” (such as those occurring at an entity’s great-grandparent level) are not necessarily triggered by changes at the parent level.  This ruling from the Delaware Superior Court, which applied Illinois law, tracks similar rulings applying Delaware law.[2]

At issue in American Bottling was a distribution agreement between The American Bottling Company (“ABC”) and sports drink manufacturer BodyArmor.  The agreement provided that ABC had the exclusive right to distribute BodyArmor’s products throughout the United States.  It also provided that BodyArmor had the right to terminate for cause if ABC transferred, directly or indirectly, any of its duties or privileges under the agreement without BodyArmor’s consent.

In 2018, ABC’s corporate great-grandparent, Dr. Pepper Snapple Group (“DPSG”), was acquired by JAB Holding Company (“JAB”).  Following the merger with DPSG, JAB replaced ABC’s CEO and CFO. Another 12 officers subsequently left ABC after the new CEO selected a new management team.

The recitation of facts in American Bottling suggests that BodyArmor desired to be acquired by the new controlling entity, and was frustrated by its lack of interest in doing so.  The decision also notes that BodyArmor was concerned about significant personnel changes at ABC, including testimony that BodyArmor’s founder selected ABC as the distribution partner based in part on his personal relationship with ABC’s CEO and CFO.  Accordingly, BodyArmor took the position that the merger triggered its termination right under the distribution agreement, and subsequently entered into a new distribution agreement with an ABC competitor, The Coca-Cola Company (“Coca-Cola”).  In connection with the new agreement, Coca-Cola also purchased 15 percent of BodyArmor.

ABC sued BodyArmor for breach of contract and Coca-Cola for tortious interference with contract.  In this decision, the court considered various competing motions by the parties, including granting ABC’s motion for summary judgment that the termination right was not triggered and that BodyArmor therefore breached the agreement.  The court reasoned that the provision as drafted specified only direct or indirect transfers of ABC and not of its parent entities, and that BodyArmor could have drafted the provision to include actions by a parent or other upstairs entity that would trigger the termination right.

The court also held that the management changes highlighted by BodyArmor did not trigger the termination right.  The court reasoned that BodyArmor’s position amounted to a “key man” provision, which is common practice, and, if that is what BodyArmor desired, it should have explicitly bargained for such a provision.  Otherwise, the court noted that BodyArmor’s interpretation would lead to absurd results that would trigger the termination provision, such as routine retirements or natural attrition, which would give BodyArmor a veto right over personnel decisions.

Take-away:  American Bottling reaffirms the highly contractarian lens through which Delaware courts will interpret agreements between parties.  This decision indicates that the phrase “directly or indirectly” in relation to change of control provisions may not apply to changes at the parent or more senior level, and that practitioners should seek to include precise language of the types of changes that will trigger anti-assignment or change of control provisions.

[1] The American Bottling Company v. BA Sports Nutrition, LLC and The Coca-Cola Company, No. N19C-03-048 AML CCLD, 2021 WL 6068705 (Del. Super. Ct. Dec. 22, 2021).

[2] Sixth St. Partners Mgmt. Co., L.P. v. Dyal Cap. Partners III (A) LP, No. CV 2021-0127-MTZ, 2021 WL 1553944, at *7 (Del. Ch. Apr. 20, 2021), aff’d, 253 A.3d 92 (Del. 2021) (finding plain language of transfer restriction provision could not bind “upstairs” entities in a transaction); Borealis Power Holdings Inc. v. Hunt Strategic Util. Inv., L.L.C., 233 A.3d 1, 10 (Del. 2020) (rejecting argument that “any direct or indirect transfer” included transfers in upstairs equity because it elided express language of contract).

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