DEALERSHIP SELLERS AND BUYERS BEWARE! A PRIMER ABOUT THE MANUFACTURER’S RIGHT OF FIRST REFUSAL
In recent articles appearing in Automotive News, industry analysts have suggested that the automakers’ use of the right of first refusal (ROFR) is noticeably on the rise. Manufacturers are more readily exercising the right to fulfill their market agendas, control placement of desired franchisees to represent their brands, and facilitate minority representation. Dealers, especially those contemplating a sale or purchase of dealership assets or transfer of majority ownership interest, should review and understand the ROFR provisions within the applicable franchise agreements.
There are significant considerations associated with the ROFR that can impact the seller and buyer in a dealership sale transaction. The ROFR provision typically is included in the franchise agreement or dealer sales and service agreement between the manufacturer and the selling dealer. It gives the manufacturer the right to bring its own, selected buyer to a dealership sale transaction after the selling dealer and original proposed buyer have agreed upon the terms of their buy/sell deal.
One important consideration about the ROFR is whether it is addressed by state franchise law. In a few states, manufacturers are prohibited from exercising the ROFR. Several other states do not prohibit the exercise, but instead impose limitations on its use. For example, some states mandate that the manufacturer’s right be exercised (and assigned to the manufacturer-chosen third party buyer) on the same terms and conditions as the original purchase offer. Additional limitations might include requiring manufacturer reimbursement of expenses incurred by the original prospective buyer in negotiating the buy/sell agreement. Such costs may include reasonable attorney’s fees, accounting charges and due diligence costs (e.g., surveys, title work, environmental assessments).
Another consideration is what the franchise agreement states about the ROFR and the process leading up to its possible exercise. Where a state franchise law is silent about the manufacturer’s ROFR, the provisions of the manufacturer’s franchise agreement control. Generally, under most manufacturers’ franchise agreements, dealers who intend to sell their dealerships are required to give the manufacturer written notice and provide relevant documents within specified time periods. When the selling dealer notifies the manufacturer of the proposed sale, the manufacturer will evaluate the proposed transaction and buyer candidate. This may include evaluation whether to exercise the ROFR. Failure to provide notice can be adversely consequential to the dealer’s interests and to the transaction itself, as manufacturer approval of the sale transaction is required.
A third consideration about the ROFR relates to whether and how it may be applied in a proposed multi-franchise sale transaction; that is, one where the selling dealer has multiple franchises and different franchisors, either under the same rooftop or at the same physical location, or even at multiple locations. The ROFR may impact the dealer’s ability to sell all of the franchises in a single or packaged transaction. Generally, sellers want to maximize the best deal possible, including the monetary consideration buyer is paying for the whole package. Where the package includes multiple franchises, however, and one of the manufacturers exercises its ROFR, the seller may not receive all agreed upon consideration or the deal might end up being scrapped altogether. The manufacturer might also try to elicit from the selling dealer an allocation of the total purchase price or blue sky amount allocated to each franchise to isolate that amount for payment by the manufacturer or its assignee in the event of the exercise of the ROFR. As a result, the parties’ carefully crafted transaction becomes subject to division, delay and possible unraveling.
An additional consideration relates to a few recent judicial decisions. At least one court has held that the manufacturer’s ROFR may not be circumvented by the offer to purchase the subject assets/franchises as part of a packaged or bundled transaction. The proposed seller and buyer in a multi-franchise transaction must evaluate the likelihood of a manufacturer’s attempt to slice its franchise from the whole transaction pie. Similar analysis is useful where the sale of assets or transfer of ownership also involves the sale or lease of dealership real estate. Also, claims have been made by proposed buyers of dealerships that the seller should disclose to the buyer at the start of negotiations the existence of an ROFR provision in the seller’s franchise agreement. At a minimum, as part of buyer’s due diligence, the buyer should request and review a current copy of the seller’s franchise agreement.
The exercise of the ROFR can complicate and frustrate the buy/sell process between buyers and sellers. Manufacturers seem more willing to use the ROFR to fulfill their franchise representation agendas in certain markets. Dealers thinking about the sale or purchase of dealership assets or transfer of ownership must carefully review and consider the manufacturer’s ROFR and its potential impact to their sale transaction.