NOTE: The following article is from the collection of articles in our Automobile Dealership Buy/Sell Newsletters. The newsletter deals with the complex area of buying and selling automobile dealerships. Some of the material may not be up to date because of changes in the law from the date shown at the end of the article. This article is not to be taken as legal, accounting, tax, or other advice. You should consult your own professionals for such advice and for any updating of the information provided.
It is not altogether uncommon for parties to a buy-sell transaction to engage in lengthy negotiations and, indeed, to arrive at tentative understandings, before lawyers arrive on the scene to finalize and document the transaction. This “pre-attorney” stage can involve substantive conversations and meetings respecting the material terms of the transaction, inspection of the dealership property, and the participation of the parties’ accountants and other trusted assistants or professionals.
During this initial phase, important issues of both a legal and non-legal nature will arise. For this reason, great care should be taken to avoid creating legal or logistical problems. What follows is a brief discussion of some important points to keep in mind during this pre-attorney phase.
- Important Discussions and Meetings Should Be Documented.
It is usually the case that the parties to the transaction will discuss very important topics, including price and other important terms, over the phone or in meetings. It is always a good idea to take careful notes of all such conversations and meetings. The notes should be dated and provide as much detail of the conversation as possible. Any consultants or assistants engaging in discussions and negotiations, especially in the absence of their principal, should do likewise. All such notes and memos should be kept in a separate file. In this way, if a disagreement or dispute arises later on during the negotiations or after closing, the detailed notes or memos can help set the record straight, especially if litigation ensues.
- Letters of Intent.
Sometimes the parties will set out the main points of the proposed deal in a “letter of intent.” Letters of intent generally are not intended to be binding contracts, but rather lay the groundwork for the actual buy-sell contract to be drafted later on. However, depending upon the circumstances, letters of intent may be deemed binding contracts, creating legal obligations which may be difficult to get out of. The rule here is simple: Be careful of what you are asked to sign! It is always best to let an attorney see any written document before you sign it.
- Lease Assignment Issues.
This is a very important issue, especially if the seller is a tenant under a long-term lease with a third party landlord. Most leases require the landlord’s approval (not to be unreasonably withheld) for the assignment of the lease to a buyer. Generally, the buyer will want the landlord approval to be a condition of closing, and the seller’s principal will want a release from any personal guaranty as an additional condition of closing. Because these issues involve the necessary participation of a third party, they should be addressed and resolved right up front. Failure to promptly address these issues could lead to unnecessary delays in moving the buy-sell forward, and therefore these matters should not be left to the end.
- Collection of Necessary Information.
The parties will usually attempt to reach agreement as to which contracts and obligations the buyer will be assuming. This can be a very important issue for the seller on such expensive items as computer leases and other long term dealership obligations. Additionally, the buyer will generally want a list or schedule of litigation pending against the dealership. The best practice is for the seller to have someone begin compiling all of this information (copies of the assumed contracts and a schedule of pending litigation) in the early stages. This should be easy enough to do, but, again, leaving this housekeeping item to the end can cause unnecessary delays in closing the transaction and misunderstandings between the parties.
- Environmental Issues.
The buyer should make a determination as soon as possible as to whether there might be any serious problems regarding the environmental condition of the dealership property. The buyer should request and the seller should provide any recent environmental reports or similar information. Existing environmental problems could require testing or remediation, and an early determination in this regard could help the parties avoid delays. An early determination of environmental problems could also help the buyer make a decision up front as to whether he wants to even go forward with the deal. For a more detailed discussion on this issue, see the article in this newsletter entitled “Environmental Due Diligence in Dealership Transactions.”
- Minority Shareholders.
Minority shareholders in a selling corporation sometimes are the forgotten people, but they should not be forgotten in the buy-sell process. Minority shareholders may have statutory rights or rights under the selling corporation’s by-laws which could have an effect on the smooth completion of the buy-sell process. For example, if approval of the selling corporation’s sale of assets requires a duly noticed board meeting, the minority shareholder will have to be given the appropriate notice of the board meeting, or otherwise sign a waiver of such notice, before due corporate authorization for the transfer can be completed. If the selling corporation waits until the last minute to have the board meeting for corporate approval, and a dispute arises with the minority shareholder and he or she refuses to sign the written waiver, the closing of the buy-sell transaction can be unnecessarily delayed. It is therefore important to ascertain the rights, if any, of minority shareholders in the buy-sell process and address those rights early on to avoid any unnecessary delays.
Although it is best to have competent legal counsel as early as possible in the buy-sell process, there of course will be occasions where the principals to the transaction take significant steps down that road before securing legal counsel. In such cases, care should always be taken by the principals to protect their legal rights and avoid any unnecessary delays. This article has presented a few tips and guidelines which will hopefully prove useful and helpful for that purpose.
This article was written in 1998.