By Mark Johnson, President, MD Johnson, Inc.
For those of you interested in an ongoing battle between factories and buyers and sellers of dealerships, take note. The McComb Diesel Inc./Daimler Trucks North America LLC case, which has finally been settled after several years litigation, illustrates an ineffective defense against a manufacturer’s right to turn down a dealership’s chosen buyer, known as Right of First Refusal. There are more effective contractual defenses against ROFR.
The case involves McCombs Diesel Inc. trying to sell its truck dealerships.
McComb Diesel, which owns a Daimler truck dealership as well as a number of other non-Daimler dealership assets, entered into a buy sell agreement with a buyer for all of the dealerships and their assets. The Daimler dealership was subject to a ROFR.
The Asset Purchase Agreement had a clause which required the buyer to take all of the assets or none, known as bundling. It was an attempt to nullify Daimler’s right of first refusal. Daimler objected but parties nonetheless proceeded to closing. Daimler sought summary judgment on the right of first refusal to keep the deal from closing. The Federal judge found in Daimler’s favor on all counts and the deal could not proceed.
Bundling is not a new technique in the tug of war over who gets a dealership in a right of first refusal dispute. But we have found bundling is only effective if the dealerships share the same parcel of property and that parcel cannot be divided by law. The manufacturer cannot enforce a ROFR on a parcel of property that cannot be subdivided when some or all of the manufacturers located on the parcel previously consented to the arrangement.
In the McComb case, it is interesting that the buyer and the seller decided to proceed to closing without factory approval. There are bad ideas and then there are really bad ideas. Closing without factory approval would be considered at the top of the really bad idea list.
In many states, such as Florida, right of first refusal, even if contained inside the sales and service agreement, is not enforceable. On the other hand, in many states the right of first refusal is absolutely enforceable and the Federal judge in this case agreed. A more effective approach in such a situation is to separate the real estate from the dealership asset transaction so the factory can exercise its right of first refusal. The buyer chosen by the manufacturer would then be compelled to lease the property if they wanted to complete the purchase.
Then, the parties involved in the buy sell just submit the Asset Purchase Agreement with a new lease from their proposed property company. Landlords are not subject to a factory ROFR so have a lot of latitude to decide who the tenant is. They generally are okay with this kind of arrangement.
Lawyers are getting better at employing this technique, which I hear is not making the factories very happy. I am not sure this is going to get dealers to start contemplating what they can do for the factory, more deeply.
A more typical defense against a ROFR is the Seller’s right to cancel the agreement if all of the assets are not delivered to a single buyer. This gives the Seller some horsepower in negotiations. Keep in mind Sellers normally just want to sell, so they are not all that concerned who the buyer is as long as the deal closes when it is supposed to.
If this provision is part of the APA, the real estate transaction must close at the same time as the rest of the transaction, otherwise the Seller can cancel the agreement, known as a contemporaneous closing. If a manufacturer of one of a group of dealerships in such an agreement tries to assert ROFR, the Seller tells the manufacturer the deal is off.
Other ROFR-thwarting deal terms are also available and do not fall under “attempt to frustrate the manufacturers’ right of first refusal” language. If you need assistance, we can recommend some really great lawyers who get this and we can also discuss your options regarding sales or acquisitions of dealerships.
We have 17 years helping dealers buy and sell stores and properties and MD Johnson, Inc has delivered nearly $5 billion of proceeds to its clients. We don’t “list” dealerships and we don’t run an auction process that always leads to everyone knowing a dealer’s assets are for sale. We know the value of dealerships, we know the buyers and the sellers. Everyone at MD Johnson Inc has been a dealer. We know what’s at stake.
Mark Johnson,is president of MD Johnson, Inc., a dealership valuation and transaction advisory firm. Mark can be reached at mark@mdjohnsoninc.com.
