The buyer’s CFO failed to submit financials for its other five dealerships to Hyundai in its original consent application. The seller terminated the deal because the buyer did not secure Hyundai’s consent to the buyer’s purchase of the dealership by the purchase agreement’s 75-day deadline.
M&A Stories
August 17, 2022
Introduction
When purchasing an auto dealership, the buyer must obtain consent from the automaker. However, in this case, the buyer faced a setback that resulted in the termination of the deal.
The Deal
This particular deal involved the sale of a Hyundai dealership. The buyer and seller signed an asset purchase agreement, and the buyer had 75 days to obtain Hyundai’s consent for the deal. If the buyer failed to secure this consent within the given timeframe, the seller had the right to terminate the deal.
The Issue: The buyer, who owned five other dealerships, formed an acquisition entity for this transaction. Hyundai sent an email instructing the buyer to submit financial information for all its dealerships. However, there was confusion regarding whether financials were required for the newly formed acquisition subsidiary. The buyer group’s CFO spoke to a Hyundai representative who stated that financials were not needed for the subsidiary but did not clarify the requirement for the other dealerships’ financials.
The Mistake: Unfortunately, the buyer group failed to submit financials for its existing dealerships with the Hyundai application. A few days before the scheduled closing, they learned that financial statements were, indeed, required. They hurriedly submitted the required information, but it was too late, and Hyundai did not provide consent within the 75-day deadline.
The Consequences: As a result of the missed deadline, the seller terminated the deal, leaving the buyer in a difficult situation.
The Lawsuit
In an attempt to salvage the deal, the buyer group took legal action against the seller, but their arguments were unsuccessful in both the district court and the appeal court.
See Smail Imports Inc. v. RMJ, Motors, Inc., No. 21-2605, United States Court of Appeals, Third Circuit, (Submitted Under Third Circuit L.A.R. 34.1(a) on June 10, 2022. Opinion filed: August 4, 2022).
Conclusion
The buyer’s CFO made a crucial mistake by not providing the necessary financials on time, leading to the termination of the deal. It serves as a reminder that due diligence is essential in such transactions, and proper communication with all parties involved is crucial to avoid costly errors.
By John McCauley: I write about recent legal problems of buyer 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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