Legal Updates

A middleman is not entitled to commission for that part of the transaction made after expiry of the tail period of the middleman agreement

May 16, 2024

A seller in a transaction for a sale of a company refused to pay the middleman for exercising the purchaser's unilateral option to purchase the remainder of the company's shares, even though the terms of the option appeared in the purchase agreement concluded through the brokerage of the middleman, including because of the fact that that middleman agreement was limited to one year and the sale of 75% of the company, and the option was exercised after lapse of such year.
The Court rejected the middleman's contention because exercise of the option was beyond the scope of the middleman agreement. A middleman (except for real estate brokerage) is entitled to a commission only if the following two cumulative main conditions are met: the existence of a middleman agreement; and being the effective factor in tying the deal. Here, there was a middleman agreement drafted by the middleman who knew about the two stages of the transaction but the agreement referred only to the sale of 75% of the company and the middleman was the effective factor only of the initial engagement between the parties and the transaction. Moreover, the right to a commission in the agreement is not unlimited in time and depends on the "continuity" period (known as the "tail" period) which exists after the expiration of the middleman agreement, different from a statement that the middleman agreement also applies to the option in any future circumstances. Thus, as the option to purchase the rest of the shares was unilateral of the purchaser of the shares, it was exercised after the end of the period of the middleman agreement and the agreement limited the commission to the first part of the transaction, the middleman is not entitled to a commission for the part for which no agreement applies and in any case was also not the " effective factor" for binding this part of the transaction.