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 [email protected].