GM’s Strategy for Surviving Dealers Concerns Legal Experts

Legal experts say dealers concerned about the participatory agreements they received from General Motors Corp. yesterday likely have few to no options other than agreeing to the auto maker’s terms if they want to stay in business.

The participatory agreements, which are replacing GM’s current franchise agreements, are part of the auto maker’s strategy to improve its retail network.

The strategy also calls for the elimination of about 2,600 dealerships by October 2010.

Dealers have until June 12 to sign the agreement. Those who refuse to sign will have their franchise agreements placed in the “old GM” destined to be liquidated as part of the auto maker’s chapter 11 filing this week.

“I’m not sure I want to sign the agreement, or if I even want to continue being a GM dealer,” one dealer tells Ward’s after reading the new contract. He asks not to be named because of fear of repercussions from the auto maker.

Ted Smith, president of the Florida Automobile Dealers Assn., says the agreements amount to “corporate extortion.”

“And you can quote me on that,” he adds.

GM’s Mark LaNeve promises “modest” financial assistance.

Duane Paddock, owner of Paddock Chevrolet in Kenmore, NY, and the chairman of GM’s Northeast Dealer Council, says he “personally does not find the agreements as alarming as some dealers do.”

He says he has concerns he believes “are legitimate,” but there is nothing that will keep him from signing the agreement.

Paddock, who is one of the top-selling Chevrolet dealers in the world, declines to speculate on what GM’s intentions are with the new agreements.

He does say the dealer council is having conversations with GM about the new contracts.

A Chevrolet dealer in Florida, in an email to Ward’s, expressed concern prior to receiving the agreement, but later, after reading the document, says he thinks his dealership will be ok.

Susan Garontakos, GM’s manager-dealer and field communications, says the auto maker is “trying to make sure we have the best dealers as we move out of bankruptcy.”

The agreements are tailored according to each dealer’s specific situation. GM appears to be trying to fix what it believes are deficiencies in the way it previously approached its retail network.

GM developed the agreements based on “a thorough market study and a dealer performance analysis,” Garontakos says. “We’ve been lenient on certain aspects of the franchise agreement in the past.”

The auto maker wants to employ consistent standards across its dealer body, she says, adding, “We want to make sure they are in line with what the market is telling us.”

Attorneys who have read the agreement tell Ward’s GM is requiring dealers to comply with whatever facility upgrades it deems necessary. Other stipulations include sales, profitability and capitalization requirements.

Additionally, dealers selling other brands alongside GM vehicles have until the end of the year to remove the competing models from their property.

Dealers selling multiple brands on the same property should be okay as long as they had the foresight set up a separate address for the other brands before now, says Don Hall, president of the Virginia Automobile Dealers Assn.

On May 29, New Jersey Saturn dealer Stuart Lasser won the right to sell Kias at his Denville Saturn store when a federal judge issued a preliminary injunction prohibiting GM from enforcing an exclusivity provision in the Saturn franchise agreement.

The new agreements also stipulate that dealers surrender their right to refuse additional inventory. Dealers also surrender their right to protest should GM locate another dealership in their vicinity, Hall says.

GM is taking away the dealers’ due process rights, he says. “You’re (dealers) waiving all your rights under these agreements.”

Despite the harsh words, Hall admits dealers wanting to remain with GM will have to sign the agreement.

Michael Charapp, partner with Charapp & Weiss LLP, a McLean, VA, law firm, says the inventory and sales requirements concern him the most, because they appear to be vague and open ended.

“GM is using the cover of bankruptcy to get done what it’s been trying to do for years, and that is gain control of its dealers,” Charapp says. “I’ve never seen anything as oppressive as this.”

Yet, Charapp agrees dealers have few options but to sign. “It’s easy for me to be the guy telling dealers to fight this when it’s not my business at stake,” he says. “The problem is, there is no evidence from the Chrysler (LLC) deal that dealers have any real recourse.”

National Automobile Dealers Assn. Chairman John McEleney blasted the new GM requirements in testimony today to a Senate committee.

“If I sign it, I will be committing my business to spend hundreds of thousands of dollars that I know about today, and committing to millions of dollars of potential financial obligations in the future,” McEleney says.

“Also, I will be subjecting my business to sales performance standards that are not specified in the contract,” he adds. “Even worse, GM can alter the terms of these requirements at any time at its sole discretion. The final blow: I must waive any right of protest to any action taken by the manufacturer.

“This is a classic example of opportunistic and overreaching behavior by the manufacturers that has prompted the enactment by the legislatures of all 50 states of franchise laws. No other manufacturer has forced dealers to sign such an onerous agreement. This is NOT necessary for GM's viability, and federal funds are being used to empower GM to do this.”

Meanwhile, GM also sent “wind-down” agreements this week to 1,350 dealers whose franchise agreements will not be renewed. The agreements outline the 17-month process GM devised to help them shut down their businesses.

Dealers have till June 12 to sign the wind-down agreements. They have to agree not to close before Dec. 31. They also waive the right to sue GM prior to October 2010, when their current franchise agreements expire.

GM Sales and Marketing Vice President Mark LaNeve says the auto maker will provide financial assistance based on a formula that is the same for all dealers.

“It will be very modest, but as fair as we could possibly make it,” he says.

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