As a sales representative, you’ve spent years developing the brand name and recognition of your principal in the marketplace. You’ve generated new clients and coddled existing ones for your principal. Sales are up to the benefit of both representative and principal. Now, you’re told that the principal has sold its business and is moving on. Where does that leave you as a sales representative, especially with regard to your earned but unpaid commissions as of the date of the acquisition?

It depends on the answer to many questions as well as the relationship you may have with the buying and selling parties of the principal’s business. Such questions include:

• Was the sale of the principal made on an asset basis, or on a sale of stock basis?
• Did you have an “Assumability of Agreement” or “Survival” clause in your contract with the principal?
• Does the principal already have an existing internal sales force in effect, or does it already have its own set of independent sales representatives?
• What are the termination provisions in your contract with your principal?
• What are the payment provisions in your contract with your principal?
• In what jurisdiction would you pursue any claim?

Stock Sale vs. Asset Sale

Most, but not all, acquisitions these days are on an asset basis rather than as a sale of stock. In an asset sale, the buyer will purchase just some of the assets in an attempt to avoid the liabilities. Buyers of a business will pick and choose what assets of the principal they purchase, which sometimes does not include the contractual obligations of the principal to its sales representatives. In asset sales, there’s a well-recognized common law principle that a buyer of the assets of a business does not thereby become liable for the debts and liabilities of seller that were not expressly assumed by buyer. This is commonly referred to as “the rule on non-liability” of the buyer. This situation may leave the seller’s creditors (of which a sales representative may be one) without adequate recourse as often the selling entity will immediately dissolve following an asset sale, or it may be left insolvent.

A stock sale, on the other hand, is simpler, as the buyer continues to do business with the same vendors and service providers. In a stock sale, the contracts remain in place at the time of the sale and the buyer will remain responsible for unpaid commissions. Of course, following the acquisition, your principal is now controlled by someone with whom you as the sales representative have no experience. This new principal may decide to adjust or even terminate its relationship with you as the sales representative, which you would not have expected or anticipated with the prior owner.

What Protections May Be Available to Creditors of the Seller in An Asset Sale?

There are some protections available to a sales representative as a creditor of a seller in an asset sale, but they are not absolute, as the rule of non-liability of a buyer is a difficult hurdle.

Follow the Money

Don’t get too comfortable in assuming that you will get paid by the seller from funds that are transferred in the acquisition. It may be that there are not sufficient funds to satisfy the claims of the seller’s creditors. Creditors of a dissolved entity can generally pursue their claims against the owners of the entity under the applicable state entity dissolution statutes, but such statutes have limitations on an owner’s liability to creditors of the dissolved entity. Generally speaking, an equity owner’s total liability for all such claims will not exceed the total amount of assets distributed to such owner. Further, many of such statutes may shorten the time frame for making claims, so any delay should be avoided.

Contractual Defenses

Another such protection is to stave off the possibility of being left without adequate recourse in an asset sale through the sales representative’s contract with its principal.

For example, Clause 16 of MANA’s Manual for the Creation of a Rep-Principal Agreement reads: “Assumability of Agreement. This Agreement will be binding upon any purchaser of Manufacturer’s or Representative’s business. In the event of the sale or transfer of assets or business of Manufacturer, including but not limited to purchase orders, this Agreement shall be binding upon the successor or transferee to the same extent as though no sale or transfer has taken place. Further, Principal shall timely notify any prospective purchaser, successor or transferee of the continued obligation to pay commissions.”

More than likely, however, such a clause will not open avenues to pursue claims against a buyer in an acquisition via an asset sale that excludes the sales representative’s contract. A buyer invoking the rule of non-liability will argue that it was not a party to the sales representative’s contract with the selling principal and should not therefore be bound by it. If the acquisition of the principal was through a stock sale, the sales representative should be able to enjoy the benefit of this protection. However, if the acquisition was via an asset sale, and the contracts between the selling principal and the sales representatives were not part of the sale, then the sales representative most likely will only have recourse against the selling principal. Bottom line, in the event of an asset sale where your contract with the selling principal is not made a part of the acquisition, the “Assumability of Agreement” clause or a similar “Successors and Assigns” clause will probably not give you adequate recourse to pursue your claims against the buyer in the acquisition.

Judicially Determined Exceptions to the Rule on Non-Liability of a Buyer

There have historically been equitably determined exceptions to the Rule on Non-Liability of a buyer, but these are fact-specific doctrines that have been developed in only some jurisdictions and are not universally applied. Further, more recent court decisions have narrowed the scope and applicability of such protections. In other words, there may be successor liability to the buyer in an asset sale, even though the acquisition documents provide otherwise, but the numerous theories of successor liability, conflicting judicial decisions, and difficulty in predicting which law will govern make it impractical to evaluate.

Legal scholars have grouped these exceptions to the buyer’s non-liability rule into the following categories:

• Buyer specifically or implicitly retains certain of seller’s liabilities that would include the obligation for the payment of commissions.
• Buyer is a mere “continuation” of the principal.
• Or the transaction is a consolidation or merger of principal and buyer.

The application of these exceptions to the facts, however, is not only unpredictable but has resulted in court rulings that are in direct contravention to the plain meaning of the words used in the exceptions. Further, the results of the application of these exceptions vary greatly from one jurisdiction to another. In short, just because the acquisition resulted in a “continuation” of the business or because it was a “consolidation or merger of the principal and the buyer” does not mean that a creditor has an unfettered road to pursue claims against the buyer. In such cases, one needs to specifically analyze the prior court decisions and the statutes in the jurisdiction where you would pursue your claims as there is no general application.

Statutes

Notwithstanding the above-mentioned exceptions to the rule on non-liability of a buyer, some states (including my home state of Texas) have legislation in place to repeal some of these judicially created equitable exceptions. Texas has legislatively eliminated successor liability of a buyer by statute with few exceptions. For example, the Texas Business Organizations Code provides in part:

“Except as otherwise expressly provided by another statute, a person acquiring property described by this section may not be held responsible or liable for a liability or obligation of the transferring domestic entity that is not expressly assumed by the person.”

Other states have similar statutes. Such has been literally applied through precedent, regardless of existing equitable arguments that would justify a decision otherwise.

Most states (including Texas), however, make such statutory protection non-applicable when a transfer is a “fraudulent” transfer. While the fraudulent transfer legislation will vary somewhat from state to state, they generally provide that a transfer is “fraudulent” if it was made of the debtor’s property with the actual intent to hinder, delay, or defraud the debtor’s creditors. One does not have to be a legal scholar to recognize that proof of intent may be difficult to obtain. Further, the burden of proof will be on the sales representative as the claimant.

Practical Protection

A representative’s relationship with its principal is key here. A sales representative, as a team player, would hope that its principal will have its six (back) and vice versa. The principal and the sales representative should consider their relationship as more than that of just a manufacturer and a seller and more as team members. They should actively listen and communicate and recognize their own accountability. They should collaborate in problem-solving exercises. Through a team relationship, a trust is developed that will reduce the likelihood of one exploiting the other. If this is done, in the event of an asset sale, the selling principal should ensure that sufficient funds are received from the acquisition to pay commissions due, and that become due, through the terms of the sales representative’s contract with the principal. The selling principal should also want to see that his team member’s future is adequately addressed. The owner of a selling principal should recognize that his sales representative team is the very reason that his or her business has value, and hopefully, the buyer in the acquisition will recognize this as well.

Summary

Businesses are bought and sold every day. It’s the nature of the marketplace, and one can’t fault a principal (or a sales representative for that matter) if it jumps on an opportunity to sell its business. However, if a principal is selling its business, it may be a flag of caution and concern for a sales representative as the certainty of the future will be largely unknown. While the acquisition may bring newer, better and bigger opportunities with the buyer entity, on the other hand, it may mean that payments of outstanding commissions are in jeopardy. It may mean that a termination of contract notice is on its way to you. It may mean that you, as a sales representative, will need to find a new principal for such line. If your sales representative business becomes aware that a principal is selling its business, you should seek input from the buying and selling owners as to your future and consult with your attorney as to your options to address your concerns. Delay is discouraged. Don’t let fate guide you. Take an active role in addressing your future.

MANA welcomes your comments on this article. Write to us at [email protected].