Pub. 1 2013 Issue 3

24 San Diego Dealer V irtually every dealership sales and service agreement (the DSSA) contains a provision allowing the factory to substitute itself (or a third party) as the buyer of a dealership when the current owner elects to sell. This provision is called a Right of First Refusal (RFR) and is found in what is usually referred to as the “Standard Provisions” attachment to the DSSA. The Standard Provisions are generally lengthy and preprinted. Many dealers do not pay enough (or any) attention to the Standard Provisions. Instead, they tend to focus on the five-to-eight-page cover agreement which specifically addresses their particular store. Regardless of what is contained in the DSSA Standard Provisions, the California Vehicle Code sets out the legal obligations of a factory in exercising its RFR. In a typical situation, a buyer and seller enter into a buy-sell agree- ment which is then given to the factory and the factory then gives the buyer an application to become its franchised dealer. The factory has 45 days from receipt of all of the information required by the applica- tion within which to exercise its RFR. Assuming it does, what happens next and how does the factory’s decision affect the seller and the (now) frustrated buyer? As for the seller, the Vehicle Code requires that the factory pay all the sums that the seller was to receive from the original buyer and that the factory comply with all of the other terms and conditions of the buy-sell agreement as originally written. On the other hand, the frustrated buyer has little recourse against the factory. Again, the RFR is in the seller’s DSSA and that right trumps a later-signed buy-sell agreement. Barring some extraordinary facts, the frustrated buyer has no right to sue the factory for its “interference” in the deal. That being said, the Vehicle Code does require the factory to reimburse the frustrated buyer for certain expenses incurred for such things as investigating, evaluating and negotiating the transaction. Examples include attorney and accountant’s fees, environmental inspections, surveys and the like. Seems pretty clear and straight-forward doesn’t it? What hap- pens, however, if the sale contemplates more than one franchise (for example, let’s assume there are three) and only ONE factory exercises its RFR. Obviously, the original buyer contemplated a package deal consisting of three franchises – is the original buyer still obligated to go ahead and buy the remaining two franchises? What if the frustrated buyer walks because he now can’t buy the original three franchises; is the seller still obligated to sell one to the factory by virtue of its exercising its RFR and thus end up keeping the other two? What if the seller wanted to sell but only to the original buyer; for instance, the original buyer was a longtime employee or close friend? Does the seller still have to sell to the factory and not the employee/friend? Clearly, the parties need to address the possibility that a factory may exercise its RFR and develop a strategy (a “poison pill”) to address the issue. (If you think that it is rare for a factory to exercise its RFR, think again; I was personally involved in two buy-sells in 2012 that were the result of a factory electing to exercise the RFR – and it is getting more common.) There are a number of options to consider and it is of critical importance that they be negotiated during the initial drafting of the buy-sell. Once submitted to the factory, the parties will not be able to amend the buy-sell in a manner which frustrates the factory’s RFR. It is important to have an experienced team guide you through the process. Truly, it is much more than simply how much for the blue-sky, used cars, equipment and the new rent factor. Jim Barone has been an attorney for over 30 years and has spent the majority of his profes- sional career representing auto dealers. He has successfully negotiated many buy-sells (aggregate value of over $3 billion) and other transactions for dealers such as the purchase, sale and construction of new facilities, loan negotiations with lenders, buy-in agreements with minority shareholders, etc. His vast experience in the auto business enables him to guide dealers in all areas of operation including sales, service, environmental matters and the like. Jimcan be reached at (949) 608-6976 and at jbarone@ferruzzo.com Ji Barone, of counsel acts as gen ral counsel to automobile dealersh in-house counsel. With almost 30 years of legal experi nce, Jim is well-vers transactions, commercial real estate, and corporate business operations of aut expertise allows him to walk clients through the complex M&A process,assisting tion.He has successfully closed transactons involving an aggregate value in exc SO THE FACTORYWANTS TO EXERCISE A RIGHT OF FIRS YOUR PENDING BUY-SELL – NOWWHA Virtually every dealership sales and service agreement (the DSSA) contains a provision allowing the facto party) as the buyer of a dealership when the current owner elects to sell. This provision is called a Right o what is usually referred to as the“Standard Provisions”attachment to the DSSA. The Standard Provisions Many dealers do not pay enough (or any) attention to the Standard Provisions. Instead,they tend to focu agreement which specifically addresses their particular store. Regardless of what is contained in the DSS Vehicle Code sets out the legal obligations of a factory in exercising a RFR. In a typical situation,a buyer and seller enter into a buy-sell agreement which is then given to the factory buyer an application to become its franchised dealer. The factory has 45 days from receipt of all of the in tion within which to exercise its RFR. Assuming it does,what happens next and how does the factory’s de (now) frustrated buyer? As for the seller,the Ve icle Code requires that the factory pay all t e sums that the seller was to receive f factory comply with all of the other terms and conditions of the buy-s ll agreement as originally written. buyer has little recourse gains the fact ry. Again,the RFR is in the seller’s DSSA and that right trumps a Baring some extraordi ary fact ,the frustrated buyer has no rig t to sue the factory for its“interference”i Vehicle Code do s requir the fact ry to reimburse the frustrated buyer for certain expenses he has incur evaluating and negotiating the transaction such as attorney and accountant’s fees,environmental inspec Seems pretty clear and straight-forward doesn’t it? What happens,however, if the sale contemplates mor let’s assume there are three) and only ONE factory exercises its RFR. Obviously,the original buyer contem three franchises – is the original buyer still obligated to go ahead and buy the remaining two franchises? because he now can’t bu the original three franchises; is the seller still obligated to sell the one to the fa and thus end up keeping the other two? What if the seller wante to sell bu o ly to the original buyer; fo longtime employee or close friend? D es the seller s ill have to s ll to the factory and not the employee/ Clearly,the parties need o a dress th possibility that a factory may exercise a RFR and develop a strateg issue. (If you think that it is rare for a factory to exercise a RFR,think again; I was personally involved in tw result of a factory electing to exercise a RFR – and it is getting more common.) There are a number of op importance that they be negotiated during the initial drafting of the buy-sell. Once submitted to the fact amend the buy-sell in a manner which frustrates the factory’s RFR. It is important to have an experienced process. Truly, it is much more than simply how much for the blue-sky,used cars,equipment and the new 949.608.690 A Limited Liability Partnership, including Professional Corporations So The Factory Wants To Exercise A Right Of First Refusal on your Buy-Sell, Now What? By Jim Barone, of Counsel Ferruzzo & Ferruzzo, LLP