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Planning for Changes in Control and Welcoming Opportunities With the New Owner

Your best principal was just sold. Hearing those words is generally not welcome news to the established rep. In some cases, new relationships are forged and a mutually rewarding situation continues for the rep and new owner. In other cases, the new owner takes the business in a “different” direction, putting future sales and the rep’s commissions at risk.

In recent years, principal ownership changes have increased consistent with the trend of increased merger and acquisition activity. The purpose of this article is to provide guidelines and a framework for addressing a change in control of your principal from a relationship, opportunity and risk management perspective.

Definition of Change in Control

In general terms, many agreements will define a “Change in Control” as a greater than 50 percent change in the ownership of a company. Frequently, carve outs are made for transfers to “friendly members” such as affiliates, pre-existing owners or family members. The bottom line is that if a greater than 50 percent interest in the company changes over a 12-month period, a Change in Control has occurred. Frequently agreements also provide that a sale of greater than 50 percent of the operating assets would also constitute a Change in Control.

Planning Point: The definition of a “Change in Control” is negotiable. The utmost care should be taken to customize the definition to cover anticipated contingencies to the fullest extent possible.

Assignability Provisions

An assignment provision allows the rights and responsibilities under a contract to be transferred to another party. Most manufacturers are reluctant to permit reps to assign their contracts, out of concern for the uncertainty of the replacement reps’ performance. However, most reps permit assignments in hopes of having at least an opportunity to sign on with the new owner.

Planning Point: Assignability provisions are negotiable like “Change in Control” definitions. The same care should be used to anticipate when an assignment might be permissible and even desired. It is also advisable to take steps to confirm that commissions earned to date plus post-termination commissions will be paid.

Business Implications of a Change in Control

Unless a contract provides to the contrary, an owner could sell a rep contract as part of the sale of his or her business. If working conditions change, opportunities are reduced, or a line conflict arises, the rep has at least an argument that the contract has been terminated and post-termination commissions are due. To the extent the new owner pays commissions due under the contract on a timely basis, this will stand for ratification of the agreement in most cases.

Mutual or Written Consent for Assignment

A contract provision requiring a rep’s approval on a Change in Control, from experience, might be difficult to accomplish. Most closely-held business owners would not agree to such a provision. However, one common approach is to have each side mutually agree that the assignment of their rights and responsibilities needs to come at mutual written consent. Reps will have more leverage in situations where their sales volume is substantial and movable to another manufacturer.

It is important for reps to remain open-minded with respect to continuing on with new owners. This is heavily dependent on whether their opportunities are the same or greater with the new ownership, or at least “good enough” to continue with the new ownership even if some opportunity has been lost.

Practice Point: If a rep determines that the new ownership is less than ideal, a provision in the underlying requiring consent for an assignment would provide the rep with some protection. Alternatively, the rep could give some thought to having alternate suppliers available on short notice.

Termination as a Result of a Change in Control

Market conditions in many industries would point to an established rep getting 90 days’ notice of a termination and one years’ worth of post-termination commissions. If a contract does not permit assignment, it could mean that the seller is responsible for paying commissions earned to date and post-termination commissions. The rep, knowing of an asset transition, might have the ability to attach those assets in the event these commissions are not being paid.

There are some cases in which acceleration of commissions might be forthcoming. The thought process is that since the owner is about to get a payday in selling their business, they also ought to be willing or required to pay all of the commissions that go along with the sales that generated the business valuation.

Conclusion

It is important to keep a watchful eye on change in control and assignment provisions in contracts, both as a principal and as a rep. They can become important guidelines in the event of a change in control. Understanding how these provisions work and looking for strategies to deal with the opportunities and challenges in the transition can have a significant impact on the end results.