Leonard A. Bellavia, senior partner at Bellavia Blatt & Crossett P.C., has been working on dealership mergers and acquisitions for three decades. In that time he saw a manufacturer exercise right of first refusal one time. In the last two years he has seen it twice.
Right of first refusal, which allows a manufacturer to stop a buy sell without revealing the reason, is on the rise. Bellavia is involved in two high-profile cases, one of which recently settled. The other is still being litigated.
The first involved Globe Motor, a Mercedes-Benz dealership in Fairfield, N.J. Jonathan Sobel, who was denied the right to buy the store, sued Mercedes-Benz USA. The case is being settled though the terms were not revealed.
The second is more complicated. Ed Napleton, owner of Napleton Dealership Group of Westmont, Ill., was in the process of buying the five-dealership Long Island Automotive Group. The group included a Volvo store, a Honda store, and three Jaguar Land Rover stores.
After Napleton had completed due diligence on the deal, Jaguar Land Rover informed him it was exercising right of first refusal on all three stores and the entire deal foundered. Napleton is suing Jaguar Land Rover.
In both cases, the person who was given the right to acquire the dealerships was Miami lawyer Manuel Kadre.
Bellavia spoke to Automotive Buy Sell Report about the two cases, the legal aspects of the exercise of right of first refusal, and how tightening state franchise laws are increasing the incidence of right of first refusal being exercised.
ABSR: What can you tell me about the Napleton and Globe cases?
Bellavia: The two cases that are being litigated, I am involved with both of them. Globe is being settled.
Napleton, one of the largest groups in country, was in a contract to purchase Long Island Automotive, which was owned by Marubeni Group. Marubeni is a deep-pocketed Japanese company.
Marubeni entered into a contract to sell all of their Long Island operations to Napleton, then received notification that Jaguar Land Rover was interested in exercising its right of first refusal.
ABSR: Was the whole deal off?
Bellavia: It shouldn’t be [off]. Start off with the fact that the manufacturer can only exercise right of first refusal of its own franchise. One argument is that the manufacturer can only take part of the assets. At what price, given that the agreement was for all the assets?
This is not to say they don’t have right of first refusal, but they have to exercise it carefully, not arbitrarily. The issue is whether right of first refusal is legally effective. Is it a legal nullity? That is, is it not enforceable or legally recognizable?
ABSR: You grant that manufacturers do have the right to stop a deal. So what is a proper exercise of right of first refusal?
Bellavia: Each state has different franchise laws but there are deadlines. The right of first refusal is in the dealer agreement but state franchise laws trump whatever is in the dealer agreement. In many states the language has wording of how it is to be recognized, such as 30 to 60 days of the submission of the buy sell contract of the manufacturer.
Some state statues indicate that if the factory does exercise right of first refusal they must compensate the buyer. The buyer is protected but that is small solace.
The concept of right of first refusal is tried and true. Automakers use it for a variety of reasons, such as they want to close a point, put in a minority operator, etc. The purposes of the policy are fine. Problems arise when a manufacturer doesn’t exercise it for a good reason.
ABSR: So how do you determine when it is not properly exercised?
Bellavia: They can do it for any reason or no reason. Where it is improperly exercised is when they won’t adhere to the deadline, or where they seek to separate out a packaged deal. The manufacturer can walk a very fine tight rope.
Currently the whole [Napleton] deal is suspended until litigation moves forward. If Jaguar Land Rover wins it can close the points or assign them to a third party.
ABSR: Is the exercise of ROFR on the rise?
Bellavia: I have been doing buy sells for close to 30 years, in most of that time I have only seen it once. [Then] in the last two years I have seen it twice.
ABSR: Why is it increasing?
Bellavia: I would attribute it to the fact that state franchise laws are tightening up the process. OEs can’t interfere as easily so manufacturers are using it as a stop gap, if it is the only recourse they have.
ABSR: How are state franchise laws tightening up?
Bellavia: They limit the time manufacturers have to review a buy sell (and) they tie a manufacturer down with respect to a buyer. If a candidate satisfies the four c’s — capital character, competence, customer satisfaction — there is little a manufacturer can do to block the transaction.
ABSR: How does the threat of right of first refusal impact price?
Bellavia: If you are talking about Mercedes-Benz, it dilutes the Blue Sky value of the franchise. Mercedes-Benz has been exercising it more frequently. If I am a potential buyer of a Mercedes store I would probably think twice about investing time and money in a buy sell.
With Jaguar Land Rover, I wouldn’t come to that same conclusion. [But] if we are seeing it at the premium brand level it could be the start of a disturbing trend that I think should mobilize state legislatures to at least limit ROFR in some circumstances. People can agree there should be carve outs, such as putting a minority dealer in.
ABSR: What can a seller do to help prevent the exercise of right of first refusal?
Bellavia: To a very limited extent the seller can insert provisions in the agreement. They have to make the agreement either right of first refusal -proof or provide for contingencies in the event that one or more of the franchises in a package deal ends up being ROFRed.
The state legislatures should get involved because an owner spends a life building up the business for retirement. All that goes by the way side in a selective right of first refusal. It puts the seller in a very precarious situation and undermines all the protections that the franchise laws have built up.
If you are selling one franchise it is not a problem, once you have multiple franchises it becomes more murky. You have to parse out the value of each franchise. The seller could wind up in worse position. Now right of first refusals have become the nemesis of the sellers.
Leonard Bellavia is a senior partner with Bellavia Blatt & Crossett PC, with offices in New York, New Jersey, and Connecticut. He can be reached at 1-516-873-3000 or lbellavia@dealerlaw.com.
One Comment
etenner
I agree with Leonard that the state legislatures need to get involved. I have had the same experience representing auto dealers in buy/sells in California over the last 28 years that Leonard has had. I saw one ROFR exercised in 25 years and now I am seeing it more often. California has always had laws requiring manufacturers to approve a buyer within a limited time period, so I don’t think that is the catalyst. I think it has more to do with Manufacturers looking for ways to get dealers to put the Manufacturer’s interests ahead of the dealers. I think they were emboldened by 2008 and have been looking for ways to get more of what they want ever since – and have been succeeding. Manufacturers and dealers have competing interests. Dealers often want to focus on making more money which sometimes means making more profit on each sale at the expense of selling more cars. Manufacturers, on the other hand, want dealers to sell more cars and don’t care about a dealer’s profitability as long as they meet the manufacturers minimum capital requirements. If the manufacturer can put a buyer in who will focus on selling more cars, by exercising a right of first refusal on a buyer who may focus more on their own profitability – it benefits the manufacturer in many ways. Not only do they sell more cars, but they reward the dealers who sell more cars by giving them preferential treatment when they want to buy a dealership. It seems to me that it may have some anti-competitive components – although I have not done that analysis.