The asset purchase agreement gave the seller the right to terminate the deal if the transaction had not closed by the outside closing date and GM had refused to consent to the transaction.
M&A Stories
August 30, 2022
Introduction
When buying or selling an auto dealership, the approval of the carmaker is crucial. However, in a recent case involving a failed sale of a GM auto dealership in Seattle, the buyer was unable to force the seller to appeal GM’s decision, resulting in the termination of the deal.
The Deal
The buyer and seller had signed an asset purchase agreement, which stated that the seller would make reasonable efforts to obtain GM’s approval for the transaction. However, the agreement also granted the seller the right to terminate the deal if GM refused to consent. Unfortunately, GM did refuse, and the seller exercised their right to terminate the agreement.
The Lawsuit
The buyer filed a lawsuit in a Washington state court, alleging that the seller had breached their contractual duty to cooperate in obtaining GM’s consent. The buyer argued that the agreement obligated the seller to appeal GM’s rejection of the buyer’s dealer application, regardless of the appeal process’s duration. However, both the trial court and the intermediate appellate court ruled in favor of the seller, stating that the seller had the right to terminate the deal if the closing date had passed and GM had refused consent.
See Larson Motors, Inc. v. Jet Chevrolet, Inc., No. 83124-1-I, Court of Appeals of Washington, Division One, (Filed August 8, 2022).
Lessons Learned
In hindsight, the buyer could have included a provision in the purchase agreement that required the seller to appeal GM’s refusal to the State Department of Licensing. Such a provision would have given the buyer more leverage in case of a rejection from GM.
By clarifying the rights and obligations of both parties in the agreement, potential conflicts can be avoided, and the chances of a successful deal can be increased.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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