Don't trip up over Commercial Agents when selling your business

A company decided to sell off a division of its trading business. As part of the due diligence process undertaken by the buyer, agreements with two commercial agents were disclosed. The agents had been engaged by the company for around 19 years.

As is usual in an asset purchase agreement, the agreement provided that the buyer would assume the obligations and liabilities of the seller under the contracts (excluding employment contracts, which are caught by TUPE) from the date of completion of the transaction. 

The agreement also confirmed that it would constitute an assignment to the buyer of the benefit of all contracts capable of assignment without the consent of any third party, with effect from the completion date.

As a consequence, the buyer took over the agency agreements from the date of completion of the transaction and the agents worked with the buyer from then on. 

However, intervening events meant that the buyer’s business was severely impacted, with the consequence that the buyer served notice to terminate the agency contracts. 

The agents claimed compensation from the buyer in accordance with the Commercial Agents (Council Directive) Regulations 1993 (“Regulations”). They pointed back to the full length of their agreement both with the selling company and the buyer in order to calculate the compensation payable. The compensation claimed was in the region of £160K.

The buyer was able to defend the claim on the basis of the terms of the asset purchase agreement and the fact that the buyer had paid the selling company for the goodwill of the business. A new agreement for the purposes of the Regulations arose on completion of the purchase. This meant that any measure for compensation arising from the buyer’s termination of the agreements only applied from the completion date onwards. 

The original agency arrangements terminated on the completion date in relation to the selling company and the agents should have considered a claim against the company for termination of their agreements at that time.

Sellers need to be aware of any agency relationships within the business being sold and ensure that the agency arrangements are dealt with appropriately to avoid unexpected claims for compensation. 

A buyer will not expect to pay for the goodwill of a business and take on the potential liability of claims that might arise under the Regulations in connection with any agency contract, that relate to the period prior to their purchase of the business; liability for this will therefore usually fall to the seller, unless alternative terms can be negotiated.

Being aware of these types of statutorily governed relationships means a seller might look to address the agency relationship, perhaps converting it to an employment relationship ahead of sale (with some form of incentive). The arrangement also needs consideration in any share sale of a company that has the benefit of agency relationships as a buyer is likely to factor this into the price to be paid.

You should also be aware that the Regulations will continue to apply following the end of the Brexit transition period, as currently all EU laws are to be adopted into UK law.