Statutory Deadlines to Approve a Sale or Exercise Right of First Refusal

By Jason T. Allen

As any buyer or seller knows, factory approval of a transaction is necessary to close a deal and can also dictate the timing of the closing.  Most state statutes provide a deadline by which the factory must respond to a submitted buy/sell, which can act as a backstop for the transaction timeline.  However, the timeline can become complicated, or potentially problematic, if the factory also has a deadline to exercise a right of first refusal (ROFR).  This article discusses the ROFR timeline situation and potential ways to mitigate negative impacts on the buy/sell process and closing.

Statutory Deadline Examples

There are some states, such as Florida, where ROFR’s cannot be exercised.  So, a deal in one of those states does not carry the extra layer of deadline concern.  In those states, the statutory deadline for approval of a buy/sell would be the focus.  

However, in Georgia, California, Pennsylvania and many other states, the factory has a statutory right to exercise a ROFR so long as it follows the deadlines and related limitations provided in the statute.  What that means in practice is that parties to a transaction may not know if they will close the deal, or if the factory will substitute a buyer, until later in the transaction and closer to the suggested closing date.  If the factory exercises its ROFR rights and substitutes a buyer, the ROFR buyer must close on the same terms and the initial buyer is often permitted to seek reimbursement for its costs in the transaction.  That is how the statutes should work in practice.

ROFR Trends

Unfortunately, there appears to be a trend where factories are delaying review of buy/sell materials, or requesting additional materials under the guise that the buy/sell application is incomplete, in order to avoid starting the clock on their deadline to exercise a ROFR.  Why would that happen?  It is simple.  ROFR’s are perhaps the easiest way for the factory to remake their dealer network with hand-picked operators and they are given an express statutory right to do just that.  So, every time a buy/sell crosses a factory desk, if it is in a state that ROFRs are permitted, the factory is given the opportunity to hand-pick a preferred dealer operator for that dealership location.  The premise of the ROFR statutes is that the seller is made whole since the ROFR buyer must take the deal on the same terms, and the original buyer is made whole by a reimbursement for its deal expenses.

However, the trend in factory ROFR usage suggests that the process is not working as intended.  For example, we are seeing factories exercising ROFR’s with increasing frequency, and also implementing tactics to delay pending transactions so that the factory has a longer period of time to select a ROFR candidate.  We are also seeing disputes over the original buyer reimbursement once a ROFR is exercised and notwithstanding the original buyer’s right to be reimbursed for its expenses.

Options 

So, what can be done?  Perhaps the biggest focus should be on documenting the transmittal of the initial materials to the factory along with the buyer’s application materials.  Oftentimes this is the area where the factory will try to point to for delay.  This is an easy source of confusion since the seller relies on the buyer to transmit such materials and a game of telephone can ensue where the factory tells one party something is missing and then both sides are scrambling to determine what actually was provided all the while time is passing.

Ensuring, in writing, that all materials have been delivered to the factory can apply pressure for the clock to start on the review process.  This may sound obvious, but the devil is in the details and creating a clear and consistent record on 1) what is required under the applicable state statute to be submitted to the factory; 2) what has been submitted and received; and 3) that the factory has no questions is crucial to keeping the process on track and putting the factory on the clock.  It may even be necessary to remind the factory in writing of the date the materials were received and when the parties are entitled to a response to flesh out whether the factory may attempt to delay.

Finally, for buyers, keeping detailed records on all expenses related to the transaction is essential.  This may also sound obvious, and it may be simple for things like attorney’s fees and title searches.  But, often there will be many other expenses, such as travel for due diligence, that should be retained and related back to the transaction in the event a ROFR is exercised and reimbursement must be sought.  

Buyers and Sellers enter a transaction with one goal in mind, closing the deal.  The factory may have an entirely different motive, which is altering their dealer network to their benefit.  Clear and consistent documentation of the process is vital to insuring that a deal stays on track and the timelines are complied with, otherwise, there could be significant delays that harm both buyer and seller.