By Mike Scott
Legal News
The type of work that area law firms are completing for the automotive sector is starting to shift – for the better.
Since 2008, much of the work that a number of firms were handling for the OEMs (Original Equipment Manufacturers) and suppliers of various sizes included distressed business reorganizations and bankruptcies. While some of that still exists, it typically is confined to smaller suppliers rather than Tier Ones.
The stabilizing of General Motors and Chrysler/Fiat also has helped.
Not only did the restructuring work within the industry come about because of lower auto sales, but because of such factors as the higher cost of many raw materials in the manufacturing process, said Tricia Sherick, professional development partner and commercial law, bankruptcy and reorganization attorney with Honigman Miller Schwartz and Cohn in Detroit.
“That’s one area where the pressure started in the supply base and it quickly trickled up to the OEMs,” Sherick said.
“For a period, much of our new business (in automotive) was with our distressed practice sector and OEM and suppliers bankruptcies,” Sherick continued. “That has always existed, but (after 2008) those instances increased by extraordinary levels.”
Now, he said, such distressed work is returning to the point where the industry was before the severe economic downturn that rippled around the globe.
Such needs as purchasing, supply-side work, and commercial contracting work has increased within the automotive sector. In addition, Honigman has experienced an increase in the amount of merger and acquisition work it is handling, Sherick said.
“I think interest is returning there and automotive is an attractive sector again for investing,” Sherick said.
According to Sherick, there are “unique opportunities for suppliers who want to take advantage of this uptick, such as suppliers strategically acquiring competitors.”
While transactional work in the automotive sector has increased for business lawyers, that doesn’t mean that such deals are as plentiful as they were over much of the past two decades, said Robert Walawender, a principal who heads the Corporate Group for Miller Canfield in Detroit.
The OEMs and suppliers are still operating in a year that is likely to see 12 to 13 million vehicles sold in North America rather than the 17 to 18 million that were bought annually a decade ago.
However, the overall uptick in legal business for automotive clients is being largely driven by two factors — international transactions and next generation vehicles and technologies, according to Walawender.
“There are more inbound deals that we are seeing from emerging markets such as China, India and Mexico,” Walawender said.
“You have more new players in the market that are looking to make investments,” he said.
There also is a paradigm shift in the automotive sector that is impacted by venture capital deals and financing that are available for suppliers and manufacturers to alternative
technologies, he said.
Currently, this is leading to more partnering and collaboration among OEMs and the various tiers, some of which are non-traditional automotive companies.
“Contract negotiations are all about risk allocation and right now that is a bit of an unknown,” Walawender said.
Two areas where law firms are engaging more with automotive clients are with intellectual property (IP) work and regulatory issues, said Aleksandra Miziolek, a member with
Dykema in Detroit.
A number of automotive companies are buying IP assets such as trademarks and looking to protect their property, which is increasing as more research and development returns to the industry.
Other automotive clients are either re-entering the public market after reorganization, or publicly trading stock such as General Motors, Chrysler and suppliers like Lear and Cooper Standard, Miziolek said.
Meanwhile, next generation suppliers and OEMs, many of which are involved in offering specifically targeted vehicles and parts, also are looking to “go public” for the first time.
“You have this whole new group of OEMs that are involved in the manufacturing of specialized vehicles like electrical and wheelchair accessible vehicles,” Miziolek said. “When it comes to securities work, it’s important for us to work with clients on what much be disclosed and to identify industry risk factors.”
It is likely that more supplier consolidation will take place out of necessity, Sherick said.
One reason for this is that many OEMs have cut the numbers of makes and models they produce, leading to less supplier needs from a macro standpoint.
But those most likely will be cases of the strong companies acquiring the weaker ones.
That is already leading to an increase in interest from private equity investors and transactional clients, according to Sherick.
In addition, this can have a positive impact on a firm’s intellectual property practice as more research and development dollars become available within the industry.
The increase in regulatory activities and tax incentives also has driven more diverse types of work for law firms who work with automotive clients, Sherick said.
This gives firms that offer legal-driven value added opportunities.
Alternative energy technologies, for example, can be funded through various grants, which require the satisfying of specific criteria.
“As loans become more available to the sector, there is the potential for even more work,” Sherick said. “The legal industry does tend to mirror the economy and where the
trends are, and we’re seeing that here.”
The entry of new alternative technology firms in the automotive sector is also increasing the need for legal consulting from experienced automotive attorneys, Walawender said.
Firms that traditionally have worked with automotive clients are providing more counseling to newer entries into the industry, particularly for technology firms located on the
West Coast where experienced automotive lawyers are fewer in numbers.
“Many of these clients are coming to the realization that they need to know how to do business in the automotive industry,” Walawender said. “In some cases they are looking
to avoid mistakes or fix those that have already been made. We are doing a significant amount of counseling as to the legal structures and relationships within the industry with
these new clients.”
Investment in the Midwest particularly is ramping up from global companies, largely because there are so many suppliers in this region, Miziolek said.
That has been made possible by the ability of Tier Ones to improve their balance sheets, allowing for the opportunity of more acquisitions. And these companies have become healthier as they disposed of non-core assets.
“So we’re looking at antitrust laws and working with the Department of Justice because they have been actively looking at transactions,” Miziolek said. “I think all this activity is reflective of a healthy, vibrant industry.”
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