Identifying unique considerations when one party is a foreign entity

Christian Scali

Halbert B. Rasmussen

The US auto retail sector has in recent years seen a growing number of foreign firms and individuals seeking to acquire dealerships. Meanwhile, US dealership groups are starting to look across the border for acquisitions.

In 2022, for example, firms from Mexico, Canada, Vietnam, and Finland were represented by Scali Rasmussen PC, a Los Angeles-based law firm, in several dealership acquisition and establishment transactions. These were some of many international transactions the firm has worked on. Scali Rasmussen has worked with clients in Canada, Mexico, and various European countries.

Chris Scali and Bert Rasmussen reveal some intricacies of doing cross-border deals.

Having profound knowledge of your profession and local rules, regulations, as well as being well-connected in your home country, and the ability to explain that to your clients is foundational.

A dealership buy sell transaction is remarkably complicated, involving legal, accounting, environmental, regulatory and many other layers. Scali Rasmussen can handle due diligence as well as licensing and permitting and – because of their experience with international transactions and their XLNC network – they can resolve unique issues that some regulatory bodies may be encountering for the first time.

It's not enough to be experts in the US distribution system, however. A knowledge of the non-US party’s distribution systems is also key. Scali Rasmussen has collaborators in Mexico and Canada and is involved in organisations related to the European distribution system, according to Scali, who was born in Ohio but is of Italian descent, has dual US-Italy citizenship, and speaks fluent Italian. That allows the firm to clearly explain the differences between a foreign and US distribution system.

When working on cross-border transactions, you must be prepared to deal with complex tax systems and variations in compliance with anti-bribery restrictions, in addition to varying legal, regulatory, and political environments. International deals require the ability to understand and adapt to important cultural differences that can affect not only a transaction itself, but the crucial integration phase as well. The ability to clearly communicate is indispensable.

“We find most of our foreign clients already have dealerships in other parts of the world, and they are used to a certain way of doing business,” says Scali. “It is very different from the way we do business here in the US automotive sector. It is kind of an education for them, and I’ve noticed they appreciate that we have that knowledge and can explain the difference.”

The foreign party needs to know what they are going to face when they come to the US, and specifically California, for the first time, says Rasmussen.

“This is a place where I think we can help avoid a lot of miscues,” he says.

For example, foreign clients may want to tell investors that they will be up and running very quickly. This requires an extremely problem-free transaction process.

“If you don’t do it right from the beginning,” says Rasmussen, “there is so much risk that deadline will not be met. And then everybody gets disappointed and sometimes bad things happen like an investor decides he has had enough.”

The US franchise system can be very difficult for a foreign buyer to navigate, especially if the potential non-US buyer is a private equity or family office. It helps if the investor has a prior relationship with the auto manufacturer, who must approve the transaction.

Non-automotive buyers may not have enough of a connection with the manufacturer to seal the deal, says Rasmussen, “while if you have an overseas entity with some dealership experience, they have a better shot at it.”

“That said,” he adds, “We have to keep in mind that a family office or private equity can assemble a team to make it an attractive offer.”

Having a local point of contact is important for any foreign entity looking to acquire automotive assets in the US, says Rasmussen. Most US regulatory agencies want to work with an individual here who is at least nominally in charge, he says, and they want that person to have a US driver’s licence and a social security number.

“So as mundane as it might sound, many times we have had clients who don’t have that person and it can really stop up the works,” he says.

Business model convergence drives more cross-border activity

Companies in Mexico and Canada recently have been actively acquiring auto franchises in California, but that wasn’t always the case. When he started doing automotive industry- related legal work several decades ago, significant foreign investment from anywhere, even Canada, was rare, says Rasmussen. That has changed dramatically.

He attributes the surge in Canadian and Mexican entities investing in the US retail auto sector to a convergence of business models. While NAFTA has certainly helped, the primary driving factor, says Rasmussen, is “more in terms of the relationship kind of approach.”

While Mexico and Canada are obvious acquirers of US automotive franchises, there is also a good deal of interest in the US market from European dealership groups, says Scali.

That is likely due to some changes in the European system that have caused “a lot of disgruntlements,” he says. “That might cause some people to come over here.”

The proliferation of electric vehicle companies also is driving a lot of international automotive work, says Rasmussen. Some foreign EV makers are not looking to open dealerships.

Instead, they are following Tesla and going with a storefront approach. That and the lack of an internal combustion engine – and the accompanying layers of approvals needed from the US Environmental Protection Agency and, if they are selling in California, the Air Resources Board makes market entry much smoother, says Rasmussen. “With EVs, there is no tailpipe.”

There is a “virtually limitless opportunity” to grow his firm’s international practice, says Rasmussen. Besides working with international investors looking to enter the US on both the buy side and the sell side, “we are also developing a network to help US entities invest overseas,” he says.

Scali Rasmussen has extensive experience in cross-border M&A deals, especially in the automotive industry. Having a global network of XLNC professionals from all over the world, they can quickly assemble international teams for cross-border deals.

XLNC MAGAZINE | No. 11 | Spring 2023


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