Mergers & Acquisitions for Sales Reps
Mergers & Acquisitions and Their Impact on Sales Representatives
What does the phrase Mergers & Acquisitions refer to?
Mergers & Acquisitions (M&A) occur when one company purchases another, or merges with them into a new company, resulting in a change of ownership.
Why are M&A important to sales reps?
M&A are important to sales reps because M&A concerning their Principals can result in the termination of their Sales Representation Agreement (SRA). It all depends on whether the SRA is made “binding on successors.” And on whether the purchaser is buying the Principal in its entirety (in which case they are liable for your commissions), or only purchasing assets (in which case they are not liable for your commissions).
And even if the SRA is binding on successors, most SRA have 30 day termination provisions. And if you have no relationship with the new management, a termination can still result.
M&A can also assist sales reps and agencies with purchasing other agencies to increase their lines and revenue.
We assist sales reps with both aspects: protecting their rights in case of M&A by their principals, and assisting them in the M&A work to purchase other sales agencies.
Key legal concerns for sales reps during ownership transfers
The number one legal concern is whether your SRA is binding on successors. Typical contract language in that regard would state “This agreement is binding on the parties and their successors, heirs and assigns,” or something along those lines.
If your SRA does not have such language, then the new ownership can simply ignore it. That’s a problem you can avoid by working out unpaid commissions with the original ownership before the M&A becomes effective.
Even if your SRA is binding on new ownership, they can often terminate on 30 day notice. So it is highly advisable to take affirmative action and reach out to them early to negotiate a new contract.
Navigating a merger or acquisition?
Contact us today to protect your contracts, commissions, and customer base in case of an M&A by your Principal. We can also assist when a sales rep wants to purchase another sales rep’s agency.
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Common Legal Issues in Mergers & Acquisitions
Contract Survivability
The most important legal aspect for a sales rep concerning M&A is whether their current SRA is binding on new ownership. Refer to the contract language to make this determination. Retain legal counsel knowledgeable about the law on sales reps to assist with this analysis.
Unpaid Commissions
Unpaid commissions are also a huge concern in an M&A. If the purchasing company is only buying your Principals’ assets, and not the Company outright, new ownership may not be liable for your unpaid commissions.
An independent sales rep must make a demand for past commissions due promptly when they learn of an M&A to be sure that the old ownership acknowledges the debt and pays it before the sale closes. The best option is to demand that the unpaid commissions become part of the M&A documents, so earned commissions are paid from the purchase price.
Territory Reassignments
Territory reassignments, and even elimination of part or all of your territory, can result if a company purchasing your Principal has its own independent sales reps. There may be nothing a sales rep can do about this; but it’s worth a try by seeking to renegotiate your territory, if needed.
When a sales rep has long term relationships with particular customers who trust them, it may make sense to negotiate an account by account territory including these legacy customers, instead of seeking a Geographic territory.
Changes to Commission Structures
It may likewise be sensible to renegotiate your commission structure in an attempt to accommodate new ownership – to gain some leverage so they do not just continue to use their own sales reps.
Non-Compete Enforcement
If an M&A results in a non-compete conflict need because of your line card and representation of other companies, new ownership may demand that you stop representing their competitors. This may seem bad at first but it can actually be used as leverage to get other more favorable terms, such as a long-term contract with protections on pipeline sales.
Also, large manufacturers sometimes have several divisions and the division you represent might not be competitive with the business of the new ownership group. This should be pointed out to new ownership in an attempt to maintain your other Principals.
Key Legal Protections During Mergers & Acquisitions
Federal Protections
- Uniform Commercial Code (UCC)
The UCC can protect a sales rep during an M&A by recognizing that correspondence between the distributors and their Principals can form the basis of a contract, without a formal written agreement.
- Federal Trade Commission (FTC) Regulations
FTC regulations can likewise protect a sales rep during an M&A by prohibiting “unfair trade practices.” So, if the new ownership group terminates an SRA simply to increase their profit margin, at the expense of the sales rep’s long-term commission expectations, that can be looked at as an “unfair trade practice,” which become actionable in court. Meaning, it can form the basis of a lawsuit.
State Protections
- California’s Sales Commission Protection Act
Under California law, a sales rep’s commissions must be paid according to the provisions in their SRA or the Principal will be held liable for triple the commissions owed, plus the sales rep’s attorney fees.
- New Jersey’s Sales Commission Protection Act
Under New Jersey law, a sales rep’s commissions must be paid within 30 days of termination (or within 30 days of their due date), or the Principal will be held liable for quadruple the commissions owed, plus the sales rep’s attorney fees.
- New York’s Sales Commission Protection Act
Under New York law, a sales rep’s commissions must be paid within 5 days of termination (or within 5 days of their due date), or the Principal will be held liable for double the commissions owed, plus the sales rep’s attorney fees.
- Illinois’ Sales Commission Protection Act
Under Illinois law, a sales rep’s commissions must be paid within 13 days of termination (or within 13 days of their due date), or the Principal may be held liable for up to triple the commissions owed, plus the sales rep’s attorney fees.
Steps to Protect Sales Rep Agreements During Mergers & Acquisitions
Step 1: Review Your Contract or Agreement
- Look for termination language, commission payment terms, and assignment provisions.
- Highlight these provisions for discussion with an attorney who understands independent sales rep contracts, and laws that protect sales reps.
- Note that even if a contract allows only 30 day notice to terminate, with no strings attached on commission payments, a sales rep may still have the right to commissions on post-termination sales for which they were responsible.
Step 2: Investigate & Document Unpaid Commissions
- Gather emails, purchase orders, shipment and invoice records as evidence.
- Corroborate this data with customers if possible.
- Prepare a spreadsheet documenting unpaid commissions.
Step 3: Request Written Clarifications from New Owners
- Present data on unpaid commissions.
- Get a response as to whom they will be paid by and when.
Step 4: Send a Demand Letter if Terms Are Violated
- Document commissions owed.
- Demand past due commissions by a stated date.
- Threaten a lawsuit if the commissions are not paid by the date stated.
Step 5: Negotiate a New Contract As an Alternative to a Lawsuit
- Consider agreeing to a lower commission percentage in return for a longer duration contract.
- Modify other terms to reflect new ownership and other new, agreeable provisions.
How a Contract Attorney Can Help with Mergers & Acquisitions
Contract Review and Analysis
Have a contract attorney evaluate SRAs for vulnerabilities and threats to your sales commissions, prior to an M&A.
Drafting Amendments and Assignments
If the new ownership group decides to retain your services, have a contract attorney help you negotiate and prepare an updated SRA reflecting new ownership and new negotiated provisions to which you have agreed.
Enforcing Commission Payments and Contract Terms
If new ownership indicates they intend to breach your SRA, an early letter from counsel can possibly prevent that by utilizing the great leverage sales reps usually possess based on punitive damage statutes and legal doctrines protecting commissions.
Litigating Breach of Contract Disputes
If a threatening letter from counsel does not have the desired effect, contract attorneys specializing in the law on sales reps can file a lawsuit which can result in a settlement that was not obtainable before it was filed.
FAQs About Mergers & Acquisitions Affecting Sales Representatives
It depends on whether or not the SRA is binding on successors, assigns… If it is not binding on new ownership, you need to collect your commissions from the current ownership before they dissolve their company
If the SRA is binding on successors, then its provisions will control how much notice you get before termination.
It is better to recover unpaid commissions before an M&A is finalized. If you wait until the transaction is completed, the new ownership may not be liable for your commissions, and the old ownership may have disappeared, the company dissolved. Meaning, there may be no one left to sue.
Possibly, if the new ownership group is interested. But they often have their own sales reps; so it’s better to negotiate a new contract before the merger is effective. That way, you still have the old ownership group to go after if something goes wrong with negotiating something new.
Protect Your Rights During Mergers & Acquisitions
- It is essential for a sales rep to protect their commissions, customer base and territory during ownership transitions. We focus on protecting these assets for sales reps.
- Facing a merger or acquisition? Contact our attorneys today for a free consultation and ensure your rights are protected.”