There are many good reasons to doubt the sincerity of tobacco companies when they say they want to end the sale of combustible cigarettes. There are no good reason for provincial governments to have included a requirement that they keep selling conventional cigarettes for decades to come.
This post reports on the "covenant" to maintain tobacco sales that is contained in the settlement made public last week.
The covenants
Under each of the three individualized forms of the settlement, each company has undertaken to "not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability ... to satisfy its obligations under the CCAA Plan..."
Two structural elements of the settlement have led to this condition: (1) the deferral of payments to the provinces over a period of decades and (2) the exclusion of "alternative products" from the terms of the settlement.
Deferred payments
Most of the money paid to the provinces will come in installments that are spread out over many years. Although $6 billion will be paid from the $12.5 billion in savings that were safeguarded during the years of insolvency protection, the remaining $19 billion in provincial payments will be taken as a percentage of the companies future income on tobacco sales.
For the first 5 years, the companies will provide 85% of their income, but after every 5 year period the proportion steps down by 5% (Year 6 to 10 at 80%, years 11 to 15 at 75%, etc.)
Included in the settlement document is a chart ("Estimated Upfront Contribution Available") which forecasts the amount that will be paid in the near future. Between now and 2030, the companies forecast providing about $1 billion per year to the provinces. At that rate, their debt to the provinces will not be met until after 2045.
Because of their covenant, for the next 20-plus years the companies have a legal obligation to maintain current efforts to sell tobacco products
Exclusion of "alternative products"
Payments to the provinces come from tobacco sales, but not from the sale of vaping or heated tobacco products. All "alternative products" are carved out of the CCAA Plan.
To make this exclusion more overt, the companies are required to set up separate companies to manage the sale of these alternative goods. This is largely already the case, in the sense that different corporate structures exist for newer products: for example, Nicoventures is a corporate subsidiary of BAT.
“Alternative Product” means (i) any device that produces emissions in the form of an aerosol and is intended to be brought to the mouth for inhalation of the aerosol without burning of (a) a substance; or (b) a mixture of substances; (ii) any substance or mixture of substances, whether or not it contains tobacco or nicotine, that is intended for use with or without those devices to produce emissions in the form of an aerosol without burning; (iii) any non-combustible tobacco (other than smokeless tobacco) or nicotine delivery product; or (iv) any component, part, or accessory of or used in connection with any such device or product referred to above."
The settlement thus provides the companies with an incentive to increase the sales of these newer nicotine products because they can keep all of the revenue. At the same time, they are under an obligation to maintain tobacco sales. The settlement thus puts pressure on the system to increase overall nicotine use.
Links to each company's proposed agreement and the covenant to maintain tobacco sales.
Imperial Tobacco: (British American Tobacco)
ARTICLE 11. COVENANTS AND OTHER PAYMENT ASSURANCE
11.1 Covenants
...
(g) Imperial and its Material Subsidiaries shall conduct their businesses in good faith with a view to fulfilling their obligations pursuant to the Definitive Documents, and shall not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability of Imperial to satisfy its obligations under the CCAA Plan including, the ability of Imperial to pay the Upfront Contributions, Tax Refund Cash Payments and/or Annual Contributions within the Contribution Period;
JTI-Macdonald (Japan Tobacco)
ARTICLE 11. COVENANTS AND OTHER PAYMENT ASSURANCE
11.1 Covenants
...
(g) JTIM and its Material Subsidiaries shall conduct their businesses in good faith with a view to fulfilling their obligations pursuant to the Definitive Documents, and shall not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability of JTIM to satisfy its obligations under the CCAA Plan including, the ability of JTIM to pay the Upfront Contributions, Tax Refund Cash Payments and/or Annual Contributions within the Contribution Period;
Rothmans, Benson & Hedges (Philip Morris)
ARTICLE 11. COVENANTS AND OTHER PAYMENT ASSURANCE11.1 Covenants
...
(g) RBH and its Material Subsidiaries shall conduct their businesses in good faith with a view to fulfilling their obligations pursuant to the Definitive Documents, and shall not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability of RBH to satisfy its obligations under the CCAA Plan including, the ability of RBH to pay the Upfront Contributions, Tax Refund Cash Payments and/or Annual Contributions within the Contribution Period;
