Franchise legislation in some states aims to eliminate automakers’ ability to reassign dealership acquisition agreements to a buyer of their own choosing.
Bills to eliminate that right of first refusal on buy-sell deals have been introduced in West Virginia and California, and some dealer lawyers say they expect similar legislation will be brought forth in additional states.
Shawn Mercer, a partner with Bass Sox Mercer in Raleigh, N.C., said right of first refusal is prohibited in a minority of states today.
Dealers want the ability to select a buyer for their stores that has a connection to the community or provides assurances for employees, said Johnnie Brown, outside general counsel for the West Virginia Automobile Dealers Association, which put together bill language in that state.
“We’re holding very strong on that. That’s something that our membership desires greatly,” Brown said.
Automakers exercised the right of first refusal in two of three completed buy-sell deals in West Virginia that Brown was involved in last year, he said.
Automakers argue that right of first refusal, which is generally written into franchise agreements, gives them more flexibility in managing their dealership networks. It particularly helps them diversify the array of dealers representing their brands, according to a statement from the Alliance for Automotive Innovation, which represents major automakers.
“State franchise laws make it difficult to end a franchise contract with a dealer, so the manufacturer wants to know the dealer representing its brand and serving its community is a good one,” the alliance’s statement said.
Some dealers and minority dealer associations favor right of first refusal as a tool to help even the playing field for minority operators, who can have a tougher time getting their business started.
But dealer lawyer Len Bellavia of Bellavia Blatt in Mineola, N.Y., said right of first refusal has “a chilling effect” on dealers’ ability to sell their stores to a buyer of their choosing. Some potential buyers are less likely to go through the deal-making process if there’s a chance the automaker could assign the contract to someone else, he said.
Bellavia and other lawyers argue that automakers, even without the right of first refusal, retain the ability to approve or reject a proposed buyer. They are still able to evaluate the buyer’s qualifications, such as his or her financial ability and business experience.