Overview
In two 2024 decisions, the Ohio Court of Appeals interpreted the Ohio statutes governing a manufacturer’s right to disapprove proposed dealership sales. In April, the Court upheld Honda’s disapproval of a proposed sale based largely on the buyer’s poor sales performance. In November, the Court held that GM could not reject a proposed sale even though the proposed buyer planned to relocate the dealership 15 months later. What can manufacturers learn from these two decisions?
In its April 2024 decision in Frye v. Am. Honda Motor Co., Inc., the Ohio Court of Appeals, Tenth District, upheld Honda’s decision to disapprove a proposed sale from one dealer in northwest Ohio to another Honda dealer whose dealership was 20 miles away. The proposed buyer had a poor track record on sales performance and had not met other of Honda’s criteria, such as service retention and minimum facility requirements. In disapproving the proposed sale, Honda considered not only its standard retail sales effectiveness metric, which applied a statewide market share measurement, but also worked with an expert, who considered several adjustments to that metric, including a northeast Ohio standard, a Cleveland metro standard, and a calculation that removed all domestic brands. The proposed buyer’s relative level of performance remained deficient under those adjusted calculations. The selling dealer filed a protest with the Ohio Motor Vehicle Review Board, and, after seven days of hearing, the Board’s hearing examiner recommended that Honda had good cause to disapprove the proposed sale. The Board affirmed, as did the Court of Common Pleas on appeal. The Ohio Court of Appeals likewise affirmed, reasoning that, among other things, Honda's adjusted retail sales effectiveness metrics “accounted for local market conditions” and “constituted reliable, probative, and substantial evidence demonstrating that Honda had good cause to turn down the proposed transfer to [buyer].” 2024-Ohio-1554, ¶ 52, appeal not allowed, 2024-Ohio-2718, ¶ 52.
Among other take-aways from that decision, a manufacturer who initially sees red flags as to a proposed buyer’s sales performance should evaluate whether those red flags hold up under alternate sales performance calculations. In addition, a manufacturer should consider working with an expert to analyze and address concerns that the seller or buyer raises as to sales performance metrics.
In its November 2024 decision in Gen. Motors, LLC v. AutoSmart Chevrolet, Inc., the same Ohio Court of Appeals rejected GM’s attempt to approve the proposed sale of a dealership but at the same time disapprove the buyer’s proposal, contained within the buy-sell agreement, to relocate the dealership 15 months later. Notably, the Ohio dealer statutes contain two provisions that appear to be at odds with each other. Under Ohio Rev. Code 4517.56(A), to trigger the application of the buy-sell statute, the proposed buyer must have “indicated a willingness to comply with all of the requirements of the franchise then in effect[.]” Most dealer agreements require that the dealer operate solely from the approved dealership location. Yet, the same statute, in subsection (E)(5), restricts a manufacturer’s right to disapprove a proposed sale that includes a proposal that the buyer relocate the dealership: “[t]he fact that the proposed transferee proposes to relocate the business of the transferor, provided that the relocation facility meets the franchisor’s facility standards” does “not constitute sufficient good cause for failing to approve a sale or transfer to … a prospective transferee” (though the Board may consider that fact in determining the franchisor lacks good cause to approve the proposed sale). In AutoSmart, a Chevrolet dealer asked GM to approve a proposed sale of its dealership to a buyer who planned, 15 months later, to move the dealership from Hamler to Mt. Orab (unmentioned in the decision is that, as indicated by Google maps, the new location is about 150 miles south in a different area of the state). GM approved the sale but refused to allow the relocation. The seller and buyer filed a protest with the Ohio Motor Vehicle Review Board, which ultimately ruled against GM. The Court of Common Pleas affirmed. The Ohio Court of Appeals likewise affirmed, reasoning that “approval of the proposed relocation was a material term of the purchase agreement” because “completion of the purchase agreement was contingent on GM's approval of the proposed relocation.” 2024-Ohio-5617, ¶ 19. As the Court summarized, “where approval of the relocation was a necessary term for completion of the sale, denial of the relocation was a constructive denial of the sale.” Id.
Putting aside the obvious disappointment that the Court’s decision forced a manufacturer to accept a relocation proposal, embedded in a buy-sell agreement, that would not transpire for at least 15 months and would locate the dealership 150 miles away in a different area of the state, a manufacturer should evaluate whether other grounds exist to disapprove the proposed buy-sell and/or the proposed relocation. (In this case, it appears that GM identified other grounds but did not pursue them). A manufacturer should also consider, depending on applicable law, whether exercising a right of first refusal is a viable option. In addition, a manufacturer should evaluate whether, under applicable law, the selling dealer’s inclusion of objectionable terms in a proposed buy-sell agreement might violate a manufacturer’s rights under its dealer agreement with the selling dealer.