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M&A and Alcohol: Don’t Let Regulatory Red Tape Leave Your Deal With a Hangover

December 9th, 2021

Arielle Albert and Brian Fink highlight some important considerations and legal obstacles that investors face when buying and selling businesses with interests in alcohol licenses.

Mergers and Acquisitions By Arielle Albert and Brian Fink

In the world of mergers and acquisitions, target businesses are often a complex mix of different enterprises. Those who regularly practice in this area create “due diligence” procedures in order to make certain they do not run afoul of the many legal landmines buried inches below the surface. When a target business is involved in any portion of the hospitality industry, these dangers increase exponentially.

Though beverage alcoholic licensing issues may spring to mind if the key enterprise involves a manufacturer, wholesaler, retail bar or liquor store, similar issues will arise in many other businesses, such as hotels, resorts, restaurants, logistics companies, entertainment venues, supermarkets, gas stations, and the list goes on. Failure to comply with beverage alcohol regulations could jeopardize key assets that makes the target so valuable: its beverage alcohol licenses.

The chances for error are numerous and can occur at various points in the deal. At the outset, in the due diligence phase, Buyer’s attorney may fail to uncover past violations or other liabilities related to beverage alcohol laws.

At the drafting stage, neglecting to consider licensing issues can severely disrupt the anticipated timeline for the transactions. Depending upon the jurisdiction, obtaining a license can take between four and nine months. Just imagine having a contract with a clause that allows Seller to cancel if Buyer does not close within 90 days and then finding out that it will take six months to obtain regulatory approval of the transaction.

At the post-closing stage, by failing to timely notify regulators of changes to a business’s ownership or exercising control without permission from the regulating agency, the purchaser puts these licenses at risk of penalty, suspension, or revocation.

Many of these liabilities can be avoided. This article will highlight some important considerations when investing in licensed businesses.

The Regulated Supply Chain

Federal law regulates the production, importation, and wholesale distribution of alcohol. Wine, beer and spirits are each subject to different statutes and regulations. The business relationships in the alcohol supply chain are also subject to myriad federal laws and regulations. The Alcohol and Tobacco Tax and Trade Bureau, also known as the TTB, and, to a lesser extent, the Food & Drug Administration, are the federal agencies tasked with regulating the alcohol marketplace.

Empowered by the Twenty-first Amendment, states regulate the production, import and wholesale distribution of alcoholic beverages within their borders as well as the retail sale of alcohol for on- or off-premises consumption. These laws vary significantly from state-to-state. Sometimes they complement federal laws and other times they place additional requirements on top of them.

Federal and state regulations are extensive and complex, so the explanation in this article is intended to provide an overview. It is not and cannot be a complete discourse.

For licensing purposes, the alcohol supply chain is typically divided into three tiers. Generally the first tier includes suppliers, manufacturer and importers. The second or middle tier is made up of wholesalers or distributors. The third and final tier comprises retailers. Federal laws and the laws of almost every state severely limit or restrict the financial and operational interests a person may have in businesses licensed in the first or second tier on the one hand and a business licensed in the third tier on the other. For the most part, investors must pick a tier and live within it. Concurrent interests in manufacturers and retailers are almost always prohibited.

As you navigate a transaction from due diligence, through its structuring phase, to the closing and beyond, it is imperative to understand the tier into which the target business falls and which restrictions are placed upon an entity in that tier by federal law and the law of the states in which the business operates and intends to operate once the deal is complete.

Due Diligence and Alcohol Licenses

Due diligence is the first major undertaking of a transaction. First, confirm the target company has all the necessary licenses and permits to operate in each jurisdiction where it conducts business. If the target company is a multistate chain of restaurants, each restaurant should have the requisite licenses, permits, and/or endorsements to operate in each jurisdiction.

Often restaurants must also have licenses or permits issued not just by the state but by a municipality, such as a city, county and township. If the target company is a distillery, you must confirm it holds the necessary state and federal licenses to manufacture distilled spirits. If the distillery sells its products in 30 additional states, you must confirm that it has the necessary permits or licenses that those states require.

The next critical undertaking is determining whether the licenses are in good standing with each relevant agency. This means that the licenses are not expired and have and will be timely renewed. This also means that they accurately reflect the method of operation of the target company.

An important aspect of investigating the status of a license is to determine where there is current or pending disciplinary charges that may result in its cancellation or suspension. Sometimes this information is available on public databases and other times you must specifically request it from an agency or Seller.

When the target company is a supplier of beverage alcohol (including manufacturers and importers), you must also do a thorough review of its distributing relationships in each jurisdiction. This is because many states have franchise laws, which prevent suppliers from terminating a wholesaler regardless of whether there is a written agreement between the parties. While the laws in each franchise state vary, as a general rule the supplier cannot terminate the wholesaler without “good cause.” The definition of “good cause” typically includes the bankruptcy or insolvency of the franchisee, assignment of assets of the franchise business to creditors, violation of laws related to the franchise business and conduct by the franchisee which materially impairs the goodwill associated with the product. “Good cause” generally does not include the sale of the target company and thus, franchise laws will generally obligate a supplier to continue its distributing relationships even though its ownership has changed hands. So, if Buyer is acquiring a brewery or other alcohol manufacturer, it must be informed of the distributing relationships it is taking on and be cognizant of the obstacles it will encounter should it wish to change these arrangements in franchise states.

The diligence obligations do not end with a review of the target’s licenses and relevant agreements. You should also confirm that all investors are qualified to hold an interest in the target business and that each is willing to disclose sensitive personal information in order to obtain licensing approval. As a preliminary matter, you should find out whether any investor has an interest in a business licensed in another tier. As already mentioned, an investor who has a minority interest in a supplier, such as a brewery, winery or distillery will generally be barred from having any interest in a restaurant chain with liquor licenses.

Finally, state and federal law have requirements that those who traffic in alcoholic beverage law be of good moral character. Many states will bar an investor with a prior felony from having an interest in a license. Thus, due diligence requires an inquiry to establish that each member of an LLC or shareholder in a corporation, as well as managers, directors and officers, will qualify to hold an interest in the licensed business. Moreover, these qualified investors must be willing to submit personal details about their lives and potentially their spouse’s lives.

Knowing well in advance whether the interested parties are qualified to hold an interest in a licensed business can save time, money and avoid catastrophic problems. Indeed, disclosure requirements are often onerous and mandate submission of personal and financial information on behalf of the applicant entity, owners, officers, directors, managers and sometimes family members. These disclosure requirements cannot be circumvented by way of holding corporations or other investment vehicles. When it comes to ownership and control, most state agencies look through the entities invested in the target company, seeking to qualify the human beings that will financially benefit and control the business.

Immediate and Long-Term Licensing Needs

After completing due diligence of the licenses, identify whether the contemplated transaction triggers legal requirements to obtain new licenses or seek approval of the transaction before closing. All of this can cause delay and almost certainly prevent any contemplation of a simultaneous-sign-and-close transaction.

States often break down into three categories: those that require advanced approval; those that require notice at the time of closing; and those that allow post-closing notification and licensing adjustments. Each state in which the target company operates should be identified early on as a pre-approval state, upon-closing state, or post-closing state.

For example, New York requires license holders to obtain pre-approval from the State Liquor Authority for all ownership changes. Delaware law provides that the commissioner may refuse approval of changes in the ownership, officers or directors, financial interest, or lease in connection with any license. Other states require businesses to apply for new licenses if they incur a change in ownership above a certain threshold. South Carolina, for example, requires a licensee to surrender its license upon any change in ownership resulting in a transfer of 25 percent or more of the licenses’ ownership interests.

Similarly, Minnesota law provides that a license may be transferred, “only with the commissioner’s consent. When a licensee is a corporation a change in ownership of more than ten percent of its stock must be reported to the commissioner within ten days of the change.” Still others, like Colorado, generally allow changes in ownership to commence without pre-approval but require applications for approval of the change to occur immediately after the closing.

Federal law also governs changes in ownership of licensed suppliers (including manufacturers and importers) and wholesalers requiring either the filing and approval new ownership prior to closing or submission of a new permit application within 30 days after closing. Failing to meet this obligation may result in the termination of the target companies’ federal permits—a death knell to any supplier or wholesale business.

As you can see, approval, notification and application requirements must be identified for all jurisdictions in which a business operates because these obligations are crucial to the transaction’s structure. Getting the green light from pre-approval states like New York and Delaware are likely to be a condition of closing while for post-closing states, cooperation between the parties may be a representation that survives closing to address licensing obligations.

These are just some of the most common legal obstacles that investors and law firms face when buying and selling businesses with interests in alcohol licenses. Flagging and addressing them early on can save both parties substantial time, money and headaches down the line.

Arielle J. Albert is a partner and Brian Fink is an associate at Danow, McMullan & Panoff, P.C. They can be reached at and, respectively.

New Tariffs on French and German Wines In Effect

February 5th, 2021

Effective January 12, 2021, certain wines and other alcoholic beverages imported into the United States from France and Germany are subject to a 25% import duty.  In its ongoing trade feud with the European Union over aircraft manufacturing subsidies, the United States has been periodically adding tariffs to many food and alcoholic-beverage products imported from European Union member states.

On October 6, 2019, the Office of the U.S. Trade Representative (“USTR”) in a Federal Register notice initially added a 25% duty to a handful of wines, liqueurs and cordials imported from France, Germany, Ireland, Spain, and the United Kingdom.  Following a period of public comment, on January 6, 2021, the USTR in another Federal Register notice expanded the list of products subject to this duty.

The expanded products now subject to the 25% duty include the following alcoholic beverages from France and Germany:

  • Spirits obtained by distilling grape wine or grape marc (grape brandy), other than Pisco and Singani, in containers each holding not over 4 liters, valued over $38 per proof liter
  • Effervescent grape wine, in containers holding 2 liters or less
  • Tokay wine (not carbonated) not over 14% alcohol, in containers not over 2 liters
  • Marsala wine, over 14% ABV, in containers holding 2 liters or less
  • Grape wine, other than Marsala, not sparkling or effervescent, over 14% ABV, in containers holding 2 liters or less
  • Wine of fresh grapes, other than sparkling wine, in containers holding over 2 liters
  • Grape must, nesoi, in fermentation or with fermentation arrested otherwise than by addition of alcohol

During the first round of tariffs in October 2019, the New York State Liquor Authority (“SLA”) offered a reprieve to licensees required by statute to post their inventory prices.  Specifically, licensed importers and wholesalers were at risk of not being able to pass the cost of the unexpected tariffs onto their wholesale and retail buyers because of time limits imposed by the Alcoholic Beverage Control Law’s price-posting provisions.  Counsel’s office for the SLA permitted these licensees to add the actual cost of the tariffs to their price postings.  Thus, licensees forced to import and sell at higher costs could pass those costs onto their buyers.

It is yet to be known whether the SLA or other state alcoholic-beverage regulators will provide similar relief in this next round.

Double Trouble: Compliance While Trying to Rebuild Business Is the Dual Challenge

November 16th, 2020

On September 30th, New York City joined the rest of New York State. It, too, is allowed limited indoor dining. Yet, as of this writing, this gain is at risk of slipping away. The Governor and the Mayor have already imposed new dining restrictions reminiscent of Phase 3, applicable to certain areas of the City. In the face of this uncertainty, restaurant owners, their employees and patrons’ lives “are as shaky as a fiddler on the roof!”

New York State issued Indoor Food Services Guidelines pursuant to Executive Order 202.61. Although some of these Guidelines apply only to New York City, restaurants throughout the state would be wise to follow them.

Incidental Music

While most of the provisions set forth in the Guidelines are easy to understand, the issue of when and how music may be made available at restaurants has caused confusion. The Liquor Authority provided clarification in memoranda of law filed in two recent cases: Independent Venue Association v. Bradley, Case No. 20-cv- 6870 (United States District Court for the Southern District of New York New York) and Sportsmen’s Tavern LLC v. New York
State Liquor Authority, Case No. 809297/2020 (Erie County Supreme Court)

In both cases, the Authority distinguished from music in restaurants incidental to the eating experience, and music in concerts and other events in which the entertainment is the main patron draw. Because entertainment events draw large crowds that tend to arrive and leave at substantially the same time with people remaining for long periods of time, they have the potential to become “super spreader” events and are banned.

On the other hand, when music is not the primary draw but is incidental to the dining experience, it does not create a high risk of contagion and is permitted. The First Amendment only protects the advertisement of legal conduct, and the Authority warns restaurants not to advertise illegal events. Legal incidental music may be advertised.

Licensees must be careful. Only those restaurants whose method of operation already allows music may provide incidental music, and the Authority may act harshly against a licensee who attempts to use the incidental music policy as a loophole to turn a restaurant into an illegal concert hall.


The Guidelines require restaurants to practice social distancing. Until further notice, indoor capacity in New York City is limited to 25% of the maximum occupancy exclusive of employees. (For restaurants outside New York City the restriction is 50% of maximum occupancy.)

Because all of the guests at a wedding, social gathering or similar event know each other and can be expected to intermingle, indoor occupancy for social gatherings is further limited to the lesser of permissible percentage of maximum capacity or 50 people.

It is important to note these occupancy restrictions address indoor dining. There is no similar restriction on outdoor dining, except to the extent (i) the occupancy has been limited by a governmental agency, such as the fire department, (ii) that which is necessary to comply with social distancing, and (iii) the event and social gathering restrictions discussed above.

Additional Guidelines

The Guidelines have numerous other requirements that licensees in the City must follow. For example, restaurants may not seat or serve anyone at a bar. All patrons must be seated and served at tables. All service must cease at 12 AM (midnight) and may not resume until 5:00 AM.

Other requirements include required notices, violation reporting, employee and patron screening, social distancing, patron contact tracing, face coverings and air ventilation.

Both a complete outline and a relatively concise summary of the guidelines can be found at

Border Battles Escalate

September 30th, 2020

Consumers have become increasingly comfortable with purchasing products over the Internet. At the same time, software allowing retailers to accept orders and process credit cards is now available to almost all retailers. Consequently, sale of wine and spirits over the Internet continues to flourish. There appears to be only one major obstacle: Section 2 of the Twenty-First Amendment to the Constitution of the United States. It provides, “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.”

Although following the 2005 Supreme Court case of Granholm v. Held most states have permitted limited direct shipment from wineries to consumers within their borders, only a few states permit out-of-state retail licensees to ship some form of alcoholic beverage to consumers within its borders.

According to the National Conference of State Legislatures, Florida, Hawaii, Kentucky, Nebraska, New Hampshire and Rhode Island—and the District of Columbia—authorize the direct shipment of all spirits; Delaware, Massachusetts, Montana, North Dakota, Ohio, Oregon, Vermont and Virginia allow direct shipment of beer and wine; Connecticut and New Jersey allow shipments of wine, cider and mead; New Mexico authorizes the shipment of wine and cider; and Oregon allows the shipment of beer, wine and cider.

Each state has its own rules as to what permit is required before one may ship into the state and the limits of how much of any beverage may be delivered. For instance: Arkansas requires a consumer to be present at the time of purchase unless shipping from a small farm winery licensee; Delaware requires shipments to go through a wholesaler and a Delaware retail license before being delivered to a consumer; Mississippi provides that a consumer may purchase at a winery and have the shipment sent to an in-state package retailer; Rhode Island requires that the consumer be present at the place of purchase; and Utah authorizes consumers to purchase wine through a wine subscription program, but the shipments must be delivered to a state store or package agency.

Some states have become proactive in an effort to stop what they consider illegal shipments from out-of-state retailers. Illinois, Massachusetts, and Louisiana began sending “cease-and-desist” letters to out-of-state retailers shipping into their borders. Dave Yost, Ohio’s Attorney General, brought an action in federal court seeking to enjoin a number of wine clubs and other out-of-state shippers from violating Ohio laws. Mississippi used its long-arm jurisdiction statute to bring an action in state court against a number of out-of-state shippers.

Many states have found it easier and more effective to pressure Federal Express and United Parcel Service to refuse shipping alcohol from retailers who do not have an appropriate license into their states.

The stakes are high, and some retailers are fighting back. Retailers in Missouri and Michigan brought actions in federal courts claiming that state laws that permit shipment by in-state retailers to consumers but forbid out-of-state retailers from doing the same violate the Dormant Commerce Clause of the United States Constitution. The Commerce Clause reserves to Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian Tribes.” The Supreme Court has ruled that by reserving the right to regulate commerce among the states to Congress, the Constitution also generally forbids states from interfering with that commerce in a way that grants an advantage to citizens of its state. This prohibition is often called the “Dormant Commerce Clause” because it is unspoken.

Thus far, courts have rejected the retailers’ arguments, finding in favor of the states. The courts generally agree with the states, who argue that the three-tier system is legitimate and that direct shipment by out-of-state retailers would allow the retailer-shipper to bypass an in-state wholesalers and circumvent the states’ core Twenty-First-Amendment powers.

However, the Supreme Court of the United States may soon intervene in this battle. On September 29, it will consider whether to hear an appeal from an Indiana retailer who lost its case involving out-of-state shipping into the State of Michigan. If the Supreme Court agrees with the retailer, the entire system under which alcohol is distributed will come under even more scrutiny.

FDA Warns Companies for Unlawfully Marketing Hangover Cures and Treatments

August 1st, 2020

Earlier this week, the U.S. Food & Drug Administration (“FDA”) announced that it issued warning letters to seven companies for illegally selling products marketed as dietary supplements claiming to cure, treat, mitigate, or prevent hangovers.

A product that claims its intended use is to cure, mitigate, treat, or prevent a disease is regarded as a drug under the Food, Drug & Cosmetic Act (“FD&C Act”).  Drugs, unlike dietary supplements and foods, are subject to pre-approval clinical trials and proof that they are safe and effective for each of their intended uses.  Thus, products that FDA interprets as unapproved drugs are considered unsafe for human consumption and may not be lawfully marketed and sold.

FDA routinely looks to see whether product claims comply with the FD&C Act.  One of the most common violations that food and dietary supplement statements result in is the marketing of an unapproved drug.

According to FDA, a statement claims to cure, mitigate, treat, or prevent a disease if it claims, explicitly or implicitly, that the product has an effect on the characteristic signs or symptoms of a specific disease or class of diseases.  For FDA, a hangover is a sign or symptom of alcohol intoxication, which the agency considers a disease.

FDA inspected the websites of these seven companies and viewed various statements about the products.  Notably, FDA also inspected Amazon sale pages and cited those as carrying unlawful drug claims.

Some of the statements resulting in these warning letters include:


FDA also cited product reviews and published research as support for its conclusions that the products were unapproved drugs.

While some of the companies cited for these violations published many statements, others published only a few.  Even one unlawful product statement claiming to mitigate, cure, prevent, or treat a disease can result in the recall of that product and enforcement action against the product’s marketer or manufacturer.

by Brian Fink

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