As Dealers Consolidate, Manufacturers Must Know Laws
As the Association works to improve relationships between shortline manufacturers and independent distribution networks, it’s helpful to understand the state laws that govern those relationships and how those laws may apply to contracts between dealers, their shortline manufacturers, and their major tractor suppliers.
By Trent M. Johnson
With very limited exceptions, states view the relationship between farm equipment manufacturers and their distributors or dealers (or whatever term the state uses for “reseller”) as sacrosanct. They are marriages, just harder to end, at least by the manufacturer. But while there are significant impediments to ending the manufacturer-dealer relationship, states generally do not force new marriages on the parties. When a dealer undergoes a change in control, whether by merger, acquisition or other restructuring, a forced marriage would be the inevitable result, if not for state law. States generally require a dealer to get a manufacturer’s consent if the dealer wants to transfer its rights to sell manufacturer’s products to a new party.
Why are changes of control relevant? Because they are a necessary result of consolidation, something that we all know has been happening and will continue to happen in the industry.
When it comes to changes in control, here are a few quick tips, which I will expand upon in the fall issue of Ag Innovator.
1) Know your reseller. You’ve spent a long time—perhaps generations—developing your products. They are your life’s work. And who sells them matters. What if, as a result of a change in control, a direct competitor owns the company that sells your product? Obviously, this is an extreme example, but it brings home the issue. You need to know who owns and controls your reseller. Consider yourself entitled to this information.
2) Make sure your agreement says that you have the right to approve or deny a change in control. Ideally, your written dealer agreement should give you this right. If you don’t have a written agreement, you should (end of sermon). If you have a written agreement, but it doesn’t speak to changes in control, see tip 4.
3) Confirm state law contemplates manufacturer approval. As mentioned above, the vast majority of state laws give a farm equipment manufacturer the right to approve or deny in a dealer agreement a sale or a transfer or change in control. However, some have notice and/or “reasonableness” requirements. Make sure you comply with state law requirements before responding to a request for approval from your dealer. One note: In general, if a distributor does not ask your permission, a manufacturer has a unilateral right to terminate the relationship.
4) Develop written standards for approving or denying a change in control. Given the current environment, and the size of the distribution network, a manufacturer could receive multiple requests to approve changes in control. To show you are treating similarly situated dealers similarly, you should develop written standards that set forth a profile of an “approved” dealer, i.e. a dealer to whom that you would allow your current dealer to transfer dealership rights. The profile could address things like experience with a product category or type, technical expertise of personnel, capitalization and overall financial condition, facilities and infrastructure, and geographic location. These standards are especially helpful for manufacturers who don’t have written agreements, or who have written agreements that don’t address changes in control. Make sure you emphatically state the standards are guidelines and that you have sole discretion to determine whether to approve or deny any particular change in control request.
Johnson is an attorney with Foley & Lardner LLP. He specializes in dealer contract and distribution law. Association members are entitled to no-cost, 60-minute, confidential consultations with Johnson. The benefit renews with each legal question.