Taking over distribution

There can be various reasons for a supplier to want to take over distribution from its existing distributor although usually these fall in to two broad categories – money and service.

Take the situation where the distributor is doing well but the supplier would like to have more control over pricing. Within the EU this poses a problem. Sure prices can be controlled but doing so will result in an infringement of EU competition law and, almost certainly, the competition law of the member state in which the distributor operates. Fines, bad publicity, invalidity of the agreement, and the possibility of claims for damages by third parties (oh, and by the way, under UK Competition law the possibility of directors and senior managers facing imprisonment) later, the supplier may actually wonder whether taking back control of distribution was worth it!

Alternatively the supplier may be motivated by the need to improve service in the distributor’s market. If the distributor’s service is poor, action will be needed quickly. If its satisfactory, perhaps more time can be allowed in planning to take over the distribution. But either way, as a first step it is critical to ensure that what you consider to be a distribution agreement is exactly that.

The reason for confirming the type of agreement with which the supplier is dealing is because the laws of many countries (both inside and outside the EU) provide for compensation to be paid to an agent on termination of the agency agreement unless the agent has committed a serious breach of that agreement. But the supplier should not think that once it has ensured that the agreement is a distribution agreement (and not an agency agreement) that there are no further issues to consider. This is because the national laws of some countries (for example, Belgium, Germany and Spain spring to mind) may well provide for the supplier to pay compensation on termination of the distribution agreement even if the supplier has given notice of termination as required by the relevant law.

So before going further, a supplier should consider whether the result intended by taking back control over the distribution can be achieved in another way. For example, does the distribution agreement allow for it to be modified by reference to territory or new products or channels to market? At the same time a check should be made to ensure that the trademarks covering the territory have not previously been registered by the distributor!

Where the distributor is performing well. Somewhat different considerations apply. This is because it will be important for the supplier on taking control (if not before when undertaking the due diligence exercise) to assess how the distributor’s good performance has been achieved! Is it down to the distributor or the brand of the supplier or the quality of the good supplied?

Another factor which is sometimes overlooked is the connections which the distributor has in the distributor’s territory. It is all very well for the supplier to take back control of distribution but if the distributor has good connections to local regulators, the question needs to be asked what is the supplier doing if such relationship cannot easily be transferred to the supplier?

So is there an alternative to taking back control of the distribution? One possibility may be to invite the distributor to be involved in a joint venture with the supplier. Yes it is likely that the joint venture relationship will have its own issues in terms of equity stakes and the exercise of control, but it may result in a win win situation for both supplier and distributor.


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