| Buying and Selling Automobile Dealerships - Duties | | | | particular purpose or purposes; (b) in the furtherance of |
| Negotiating the ContractDuties of and to | | | | which a know party or parties was intended to rely; |
| ShareholdersThe sale of control of a corporation at a | | | | and (c) there must have been some conduct on the |
| premium is not in and of itself a breach of duty. A | | | | part of the accountants linking to that party or parties, |
| "premium" is that amount an investor is willing to pay to | | | | which evidences the accountants' understanding of |
| gain control of a corporation.But, a sale of control | | | | that party or parties' reliance. See: Ultramares v. |
| under the following circumstances may be actionable:1. | | | | Touche and Credit Alliance Corp v. Arthur Anderson |
| The sale of control is in effect a disposition of control | | | | and Co.2) The Foreseeability Approach holds that an |
| over a business asset which the corporation may not | | | | accountant is liable to a third party whose reliance on |
| use to the corporation's advantage. Example: if a | | | | the accountant's services was reasonably foreseeable |
| majority shareholder sells his shares to a party that is | | | | to the accountant. Accordingly, an accountant who |
| paying a premium for control over certain transactions, | | | | prepares an audit report is liable to a third party for |
| but who otherwise would not pay a premium for the | | | | negligent misrepresentation if it is reasonably |
| corporation itself. | | | | foreseeable that such third party might obtain, and rely |
| 2. The majority shareholder failed to disclose receipt | | | | on, the audit report. This is an expansive view of |
| of a premium when a purchaser attempted to acquire | | | | accountant liability and even a number of the small |
| the minority's share; | | | | group of states that adopted it, have retreated from it. |
| 3. The majority shareholder failed to disclose | | | | New Jersey, for example, passed a more restrictive |
| favorable employment contracts, profit sharing | | | | statute: N.J. Stat. Section 2A: 53A-25 (L. 1995, 2000).3) |
| agreements and the like. | | | | The Restatement Approach adopted over half the |
| 4. If the offer is to purchase all shares at the same | | | | states that holds an accountant is liable to third party if |
| price, but the majority first buys-out the minority at a | | | | he supplies information to a third parties that is actually |
| lower price, without disclosing the higher offer the | | | | foreseen as a user of the information for a particular |
| minority shareholder.Although the law is still developing | | | | purpose. In other words, for liability to attach the plaintiff |
| it appears the minority may be eliminated at a lower | | | | must be a member of a limited class to whom the |
| price, if there is a legitimate business purpose.State | | | | accountant intends to supply the information, or to |
| case and statutory law is diverse on the question of | | | | whom the accountant knows the recipient intends to |
| minority shareholder rights. Given two identical fact | | | | supply it, and who suffers a loss through reliance on |
| situations, a sale by majority shareholder could, for | | | | the information for substantially the same purposes as |
| example, give rise to a cause of action in California, | | | | the bona fide client. For example, the accountant may |
| while conforming to Delaware law. In sales involving | | | | be held liable to a third party lender if the accountant is |
| several shareholders, the attorneys for each | | | | informed by the client that the audit report would be |
| shareholder should research the question of | | | | used to obtain a loan, even if the specific lender |
| "premiums", with respect to both the state of | | | | remains unidentified or the client names one lender and |
| incorporation and the state wherein the company's | | | | then borrows from another.Libel and SlanderEvery |
| principal place of business is located.Duties to Other | | | | jurisdiction has statutory definitions for libel and slander, |
| PurchasersProbably the biggest case in this area was | | | | the elements of which include a false and unprivileged |
| a Houston jury's award of $7.53 billion in actual | | | | publication by writing or orally, which has a tendency to |
| damages and $3 billion in punitive damages to Penzoil | | | | injury a person with respect to his office, trade, or |
| Co. In 1984, Penzoil was negotiating a takeover deal | | | | business. Included are statements impugning the |
| with Getty Oil Co., which Texaco eventually purchased | | | | competency of a dealer to manage the affairs of a |
| for $10.2 billion. Penzoil then sued Texaco for $14 billion, | | | | dealership.During the course of negotiations, a buyer |
| charging that Texaco coaxed Getty into jilting Penzoil | | | | sometimes become frustrated with a seller's actions |
| takeover deal.Intentional interference with contractual | | | | and expresses those frustrations by impugning the |
| relations, intentional interference with prospective | | | | seller's ability to operate a dealership. Such statements, |
| business advantages and related torts are "hot ticket | | | | while generally harmless, assume a magnified |
| items" and general and punitive damages are almost | | | | significance, when the purchaser is negotiating to |
| unlimited. This exposure provides another reason both | | | | acquire a financially troubled dealership. At best, under |
| buyer and seller should involve their attorneys to a | | | | such circumstances, lenders are apprehensive; at |
| greater extent than just having them review the | | | | worst, they are neurotic. Invariably, at some point during |
| Buy-Sell Agreement.Opinions as to PerformanceSellers | | | | the negotiations, a purchaser will meet the seller's |
| inevitably opine how well a dealership will do with | | | | lender and at that point in time -- more than any other |
| additional capital or a new owner and the courts have | | | | -- the prospective purchaser must realize that he has |
| generally supported the adage "No one can predict the | | | | the ability to damage the seller and must be disciplined |
| future" and refused to recognize a cause of action | | | | enough to be discreet when commenting upon the |
| based upon one party's predictions, to the other | | | | seller's status, or abilities, regardless of how determined |
| regarding future events, performance, opinions, or | | | | a lender's inquires may appear.Interference with a |
| intentions.Statements such as "there are no bad | | | | Contract or Prospective ContractWhether or not a |
| franchises -- only bad operators"; the store was "a | | | | prospective buyer becomes the ultimate purchaser, |
| gold mine"; or that the buyer would make more money | | | | the prospect has a duty not to intentionally or |
| than before have been held "purely opinion, puffing, or | | | | negligently interfere with a contract, or, in many states, |
| conjecture as to future events" and as a matter of | | | | a prospective business advantage, of the seller. Again, |
| law not actionable.Automobile dealerships are | | | | during the course of negotiations, there are occasions |
| anomalies in the field of buying and selling businesses | | | | when a purchaser is tempted to say or do something |
| because by the very nature of the business both | | | | in order to frighten a competitive bidder and preserve |
| parties must be amongst the most knowledgeable | | | | an exclusive business opportunity. Such actions are |
| people in the field, as the seller has already been | | | | proscribed and when called upon to determine the |
| qualified by both the factory and a financial institution | | | | legitimacy of the purchaser's actions the courts will |
| as having that special knowledge and extra skill | | | | generally consider the following factors: (a) the conduct |
| necessary to be approved as a dealer; and the buyer | | | | (b) the motive; (c) the interests of the other with which |
| by virtue of the fact that the buyer intends to | | | | the actor's conduct interferes; (d) the interests sought |
| purchase the dealership has represented that he | | | | to be advanced by the actor: (e) the social interest in |
| possessions the knowledge and skill necessary to | | | | protecting the freedom of action of the actor and the |
| obtain factory and finance approval, or that someone | | | | contractual interests of the other; (f) the proximity or |
| on his team possesses the necessary qualifications.In | | | | remoteness of the actor's conduct to the interference, |
| Denison State Bank v. Madeira the defendant | | | | and (g) the relationship between the parties. See |
| purchased an automobile dealership and in addition to | | | | Second Restatement of Torts and Buckaloo v. |
| refusing to pay his loan, he cross-complained against | | | | Johnson.SummationThe increased dollar value, of |
| the bank alleging the bank misrepresented and omitted | | | | dealerships, combined with the higher level of |
| material facts about the dealership when he | | | | sophistication of today's automobile dealer, versus the |
| purchased it. In reversing a jury verdict against the | | | | automobile dealer of twenty years ago, has led to |
| bank the appellate court stated the defendant was a | | | | more dealers being willing to litigate, when they have |
| knowledgeable car man and although he testified he | | | | been damaged. Recently, that litigation has expanded |
| trusted and relied upon the Bank to furnish him | | | | from dealers suing manufacturers, to dealers suing |
| complete, honest information, he could not abandon all | | | | dealers. If one had to predict the area in which litigation |
| caution and responsibility for his own protection and | | | | will expand, in the next ten years, one would have to |
| unilaterally impose a fiduciary relationship on the bank | | | | include in that prediction the area surrounding buy-sell |
| without a conscious assumption of such duties by the | | | | negotiations.The courts have held, time and again, that |
| bank. See too: Kruse v. Bank of America where the | | | | hard bargaining is part of the American system |
| court stated the plaintiffs could not have reasonably | | | | [Sheehan v. Atlantic International Insurance Co., but |
| expected what they said they expected from the | | | | they have also noted, that the notions of fair play and |
| bank's promises and assurances.But Beware: In | | | | a sense of propriety are also a part of that system. |
| Martens Chevrolet, Inc. the owner of the dealership | | | | [Rich Whillock, Inc. v. Ashton Development, Inc.] And, |
| was negotiating with the plaintiffs to sell his dealership | | | | while many scholars agree that the most successful |
| and in response to plaintiff's inquires as to the | | | | negotiations result in solutions where both parties, to |
| profitability of the dealership the owner indicated that it | | | | one degree or another, win, the courts recognize that |
| was "mildly profitable" and offered produced a | | | | each party not only has a duty to protect their own |
| handwritten trend sheet prepared by his accountants | | | | interests and that of their shareholders [Cosoff v. |
| supporting the statement and stating that the audited | | | | Rodman (In re W.T. Grant Co.], but that people who do |
| statements of the dealership's operations were not | | | | not affirmatively perform that duty [due diligence], have |
| complete or available.After the purchase, the buyer | | | | no cause of action against their opponents, because |
| learned that the dealership was operated at a loss as | | | | the opponents did not perform the duty for them. [See: |
| reflected in audited statements prepared prior to the | | | | Dennison State Bank v. Madeira, 230 Kan. and Macon |
| negotiations and sale sued alleging breach of contract, | | | | County Livestock Market, Inc. v. Kentucky State Bank, |
| deceit and negligent misrepresentation against the | | | | Inc.].In summation, the negotiation table is a business |
| former owner. The Court assumed a duty existed | | | | table, at which, both parties are expected to be at their |
| between the former owner and the buyer and | | | | best with respect to preparation, presentation and |
| reaffirmed the tort of negligent misrepresentation | | | | determination. If one party is lacking in one of the |
| against the dealer.Special Rules for AccountantsThere | | | | categories, it is not the responsibility of the other party |
| are three different tests employed by other courts to | | | | to supplement the deficiency. To the contrary, the |
| determine what, if any, duty an accountant has to a | | | | participants have a duty to themselves, their families |
| third party, in preparing a financial statement for his | | | | and to their shareholders to obtain the best possible |
| own client. These tests were:1) The Traditional | | | | terms, without unjustly fettering the opposing party's |
| (Ultramares) Approach holds that before a plaintiff | | | | ability to respond.John Pico is a vice president of |
| could sue an accountant he had to have privity, or a | | | | Automotive Advisors. He has completed over 1,000 |
| relationship equivalent to privity. The Plaintiff must | | | | dealership transactions, and published the first books |
| establish (a) the accountants must have been aware | | | | copyrighted in the Library of Congress on Buying and |
| that the financial reports were to be used for a | | | | Selling Automobile dealerships. |