Copyright©2003 IMDA
When a
manufacturer merges
Take steps now to protect yourself if an important principal gets
bought
By Barbara Kramer
Chances are,
you have – or will – encounter this situation: After months of rumors, you get a
phone call that a key manufacturer is being bought. Sometimes the phone call
never even comes, and the first you learn of such a sale is from an article in
the Wall Street Journal.
With so much consolidation among manufacturers of medical devices,
every specialty distributor and rep should be prepared for the possibility that
an important principal will be bought or will merge with a competitor.
The best time to begin preparing for such an eventuality is at the
beginning of your relationship, that is, when you are negotiating your contract
with the manufacturer.
Several key contract provisions are relevant to a future sale. The
most basic is the “successor and assigns” clause, which states that the contract
will be binding upon any successor or assign of the contracting parties.
Although basic, this clause must be carefully drafted to ensure that it will be
enforceable in the event of an asset sale.
More creative clauses can also be included in a contract. For
example, the specialty distributor or rep can ask for a specified payment in the
event of a termination resulting from a sale or merger. Many manufacturers will
readily agree to substantially fixed payouts or meaningful payouts based on
formulas such as gross margins earned in the prior eighteen months.
Manufacturers will often agree to such clauses, presumably because they are
dealing with hypothetical situations, and because such provisions give all
parties some certainty in the event the company is sold.
Even distributors and reps who have failed to address the
possibility of a sale or merger in their original contract have at times
successfully renegotiated their contracts after news of a sale has surfaced. In
fact, several of our clients have done so.
When it happens…
As soon as you learn that a sale or merger of a principal may be
imminent, you should take steps to assess your rights. Review your contract and
any applicable statutes, and learn how the corporate changes might affect your
business. After you have a complete understanding of your legal position, you
may consider discussing with the manufacturer how the sale will affect your
relationship with the manufacturer. If you cannot be terminated (because of a
“successor and assigns” clause or some other contractual protection), provide
appropriate notice to the manufacturer. You may also want to try to meet with
the new manufacturer to discuss future plans for the distribution network and
your role. All of these steps must be taken carefully, since they could have
serious implications in the event legal action becomes necessary.
You and your sales force
One of the most important steps you can take to protect your
position when one of your manufacturers goes through a major change (for
example, a sale, merger, or change in distribution strategy, such as shifting to
a direct sales force) is to devote significant time and attention to your
contractual relationships with your own sales force. The use of carefully
tailored contract provisions and appropriate non-compete clauses can prevent a
manufacturer from raiding your employees or independent contractors.
Our clients who have paid attention to these matters have often
negotiated extremely valuable buy-outs with manufacturers who wanted to hire one
or more of their people. In contracting with its own sales force, the
distributor or rep usually has great control over the contract. So don’t ignore
this valuable tool!
Your overall goal should be to build a fence around your sales
organization that will protect you from becoming an easy target for termination
and that will prevent greedy manufacturers from hiring away your salespeople.. A
multifaceted approach, combined with planning, will result in the strongest
possible fence.
Barbara Kramer is a partner with in Kramer and Kramer, LLP,
IMDA’s legal counsel.
She is in the firm’s Michigan office and can be reached at (734) 930-5452 or
bkramer@kramerandkramer.com.
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