By Alysha Webb, Editor and Publisher
Right of First Refusal. It is a clause written into most dealer agreements, but seldom exercised in the past. In recent years, however, the manufacturers have been exercising ROFR more frequently. This type of market action creates a lot of anxiety with buyers and sellers and creates an atmosphere in M&A that is more defensive than collaborative. Seller and buyers need to understand the law, have counsel that is familiar with the law and govern themselves accordingly.
A contractual ROFR is not necessarily a bad thing. According to almost all ROFR clauses, the subsequent assignee has to accept all of the seller’s provisions. The buy sell (APA) must be accepted without changes except for certain timelines that are automatically extended. There are a number of carved-out exemptions where the manufacturer isn’t allowed to exercise a ROFR, mainly involving family members or long-time employees. Most states also prohibit the practice but it still goes on frequently.
Still, ROFR can prevent a dealer from selling his or her store to the preferred candidate, and it can prevent that candidate from getting a store he or she might have dearly wanted. From the manufacturer’s point of view, a ROFR allows them to put a candidate in the position who better meets the manufacturer’s goal, be it more minority representation, more business experience, or even a better future location.
Recently, Illinois dealer Ed Napleton brought an action against Jaguar Land Rover, the Long Island Automotive Group, and others after Jaguar Land Rover exercised their claimed right of first refusal when Napleton tried to buy five dealerships from the Long Island Automotive Group. The five dealerships included three Jaguar Land Rover stores, one Honda store, and one Volvo store.
After refusing to let Napleton buy the stores, Jaguar Land Rover assigned the buy sell to Manuel Kadre, a Miami lawyer who also owns dealerships in New York State. Since it apparently was a package deal, Kadre also got the Honda and Volvo stores. All are on Long Island.
Napleton claims there is no way Kadre had time to do proper due diligence on the acquisition and that the Jaguar Land Rover manufacturer must have given Kadre access to the due diligence that Napleton had already paid to have done.
In right of first refusal scenarios, manufactures typically have 60 days to notify the buyer and the seller that the APA is being assigned to another dealer and to give that information to both parties. During that 60 day period, buyers must decide with little to no due diligence.
According to most ROFR agreements, Jaguar Land Rover has the right to assign the APA to Kadre or any other dealer of their choosing. The assignment could have been for diversity reasons or simply because JLR had promised an opportunity to a candidate they liked better than the buyer selected by the seller.
In the big picture, few sellers care if the buy sell is assigned as long as the terms of the agreement are met. That is an important caveat: As long as the terms of the agreement are met. Using a clearly and professionally prepared APA can ensure that both parties are satisfied with the terms of the agreement and there are no unpleasant surprises. That is especially true because our investigation suggests that few dealers who have experienced their buy sell being assigned to another dealer are successful in reversing the manufacturer’s action.
