February 2022
By Michael G. Charapp
Charapp & Weiss LLP
Dealers understand that franchisors must approve the sale of a dealership, and that includes transfer of the right to control it. However, there are often changes in ownership that do not rise to that level – minor changes in ownership.
Some dealers believe that since control of the dealership is not involved, they may make minor ownership changes and notify manufacturers later. Examples include:
- Gifts of small ownership interests to children
- Sale of minority interests to managers
- Transfer of ownership to a trust controlled by the existing owner
There is no change in control, they reason, so why should franchisors care. That myth is busted. Under most dealer sales and service agreements, any ownership change must be approved by the franchisor.
Here is an example in the GM DSSA:
12.2 Other Changes in Ownership or Management
If Dealer proposes a change in Dealer Operator, a change in ownership, a change in Executive Manager, or a transfer of the dealership business or its principal assets, General Motors will consider Dealer’s proposal and not unreasonably refuse to approve it, subject to the following:
12.2.1 Dealer agrees to give General Motors prior written notice of any proposed change or transfer described above. Dealer understands that if such change is made prior to General Motors’ approval of the proposal, termination of this Agreement will be warranted, and General Motors will have no further obligation to consider Dealer’s proposal. [emphasis added]
Toyota’s DSSA provides another example:
VI. CHANGE IN MANAGEMENT OR OWNERSHIP
This is a personal service contract. DISTRIBUTOR has entered into this Agreement because DEALER has represented to DISTRIBUTOR that the Owners and General Manager of DEALER identified herein possess the personal qualifications, skill, and commitment necessary to ensure that DEALER will promote, sell and service Toyota Products in the most efficient manner, enhance the Toyota image and increase market acceptance of Toyota Products. Because DISTRIBUTOR has entered into this Agreement in reliance upon these representations and DEALER’s assurances of the active involvement of such person in DEALER operations, any change in ownership, no matter what the share or relationship between parties, or any changes in General Manager from the person specified herein, requires the prior written consent of DISTRIBUTOR, which DISTRIBUTOR shall not unreasonably withhold. [emphasis added]
If you are contemplating ownership changes, give yourself enough time to submit a proposal to your franchisor and have it considered. Many dealers will say that their franchisors would never terminate their franchises for failing to approve a minor ownership change. However, a problem is not a problem until it becomes a problem. What? If you are in a dispute with your franchisor over an important issue – moving, expanding your building, refacing your building, and many other expensive and extensive requirements – why hand your franchisor leverage on a platter?
Remember, when you propose an ownership change, your franchisor will have the right to see the documents relating to that.
- Transfer to a trust. The franchisor will want to see the trust documents to be sure that control will remain in the hands of the named dealer.
- Gifts or sales of ownership interests to existing minority owners. This is a category that many dealers believe does not require consent. After all, the recipient of the increased ownership interest has already been approved by the franchisor. But the OEMs do not see it that way. Any change in ownership must be approved by the franchisor before it is completed. It will want to see the agreement of sale or the gift documentation.
- Gifts or sales of ownership interests to new owners. The franchisor will want to see the agreement of sale or the gift documentation. And the new owner will have to submit an application that is usually the same as the application that accompanies a buy/sell proposal. Approval can be time consuming when investigation of the new owner is involved.