Explore the complexities of asset acquisitions in the world of mergers and acquisitions (M&A). Learn from a real-life case in the Kansas City area and understand how the legal nuances of third party beneficiaries can impact your M&A deals.
September 14, 2023
In the world of mergers and acquisitions, asset deals come with their unique set of challenges. Unlike equity deals, where buyers inherit a company along with its known and unknown liabilities, asset buyers face a different conundrum: potentially missing out on valuable assets they weren’t aware of.
The Kansas City Dealership Deal
Our story unfolds in the context of a car dealership acquisition located in the greater Kansas City area. The intricacies of Kansas law and dealer contracts with the car manufacturer dictate where and how dealerships can establish and relocate their businesses. Each dealer is assigned a specific geographic sales area, granting them exclusive rights to sell vehicles and provide warranty services within that territory.
While dealers have the freedom to open, relocate, or consolidate dealerships within their sales area, these moves are subject to Kansas law. To move a dealership, a dealer must file a formal petition with the state, giving notice of the intended move. Importantly, any dealer within ten miles of the proposed new location can file a protest to block the move.
In 2007, our seller protested against a competitor’s move under Kansas law, leading to a settlement agreement. In this agreement, the seller allowed the competitor’s move in exchange for a promise not to protest any future relocations by the seller, a promise documented in the settlement agreement.
Several years later, the seller sold its dealership assets to our buyer. Surprisingly, the settlement agreement was never mentioned in the purchase documents, and it seems the buyer was entirely unaware of its existence.
The buyer’s plan was to relocate the dealership after the current lease expired. They located a suitable property within the ten-mile radius of the competitor’s dealership and petitioned the state for the move. Predictably, the competitor filed a protest. Oblivious to the settlement agreement, the buyer engaged in an expensive legal battle until July 2019. It was then that the former owner of the seller brought the settlement agreement to the buyer’s attention and assigned it to them. The buyer promptly informed the competitor of this assignment, leading to the withdrawal of the protest.
With the settlement agreement now in their possession, the buyer took legal action against the competitor in a Kansas City federal district court. Among other claims, the buyer argued that the competitor had breached the settlement agreement by protesting the relocation. Their argument rested on the assertion that, as a third party beneficiary to the settlement agreement, the competitor owed them a duty not to protest.
However, the competitor sought the dismissal of the lawsuit through a motion for summary judgment, contending that Michigan law, which governed the settlement agreement, did not explicitly designate a buyer of the seller’s dealership as a third-party beneficiary. The district court sided with the competitor, and the buyer’s subsequent appeal to the Court of Appeals for the 10th circuit ended in defeat.
It’s worth noting that there was a dissenting opinion during the appeal process, suggesting that the trial judge should have allowed a jury to decide whether the buyer was indeed an intended third-party beneficiary of the settlement agreement.
See Reed Auto Of Overland Park, LLC v. LANDERS Mclarty OLATHE KS, LLC, Nos. 21-3225, 22-3043, United States Court of Appeals, Tenth Circuit (Filed August 24, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Telephone: 714 273-6291
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