Negotiating Software-centered M&A Transactions | Practical Law

Negotiating Software-centered M&A Transactions | Practical Law

A discussion of key considerations for parties negotiating M&A agreements in the software industry or where software is a key asset, including links to relevant resources setting out and explaining important contract provisions.

Negotiating Software-centered M&A Transactions

Practical Law Legal Update 6-618-4575 (Approx. 5 pages)

Negotiating Software-centered M&A Transactions

by Practical Law Intellectual Property & Technology
Published on 01 Sep 2015 • USA (National/Federal)
A discussion of key considerations for parties negotiating M&A agreements in the software industry or where software is a key asset, including links to relevant resources setting out and explaining important contract provisions.
IP counsel play a crucial role in M&A transactions where the seller is in the software industry or software is a key asset. During the transaction process, the buyer's counsel must ensure that:
  • The seller has clear right and title to or the right to control (for example, by exclusive license) the IP rights in all proprietary software intended to be acquired by the buyer.
  • The seller has the right and power to convey its software IP rights in the contemplated M&A transaction, whether by transfer or succession.
  • Counsel can identify known or potential liabilities relating to the software's development and use.
This requires conducting a thorough legal due diligence investigation and negotiating IP and Information Technology (IT) contract provisions addressing the specific software and business concerned.

Due Diligence Considerations

Buyer's counsel should use the due diligence process to scrutinize the seller's proprietary software products and related products and services. This includes investigations into:
  • The software development process, including identifying all participating developers, including company employees and third parties.
  • Whether the software is owned exclusively or with other co-owners, or licensed all or in part from a third party.
  • The framework for maintaining the software and ensuring it meets the buyer's performance needs and the software's specifications.
  • The scope and nature of any encumbrances or contractual relationships relating to the software, including:
    • current or future-springing liens or encumbrances on the software or related IP;
    • third-party licenses or other rights to the software;
    • commitments to provide services and other obligations to third parties relating to the software; and
    • current or potential future restrictions on the software's use, reproduction, modification or transfer.
Buyer's outside IP counsel should engage in inquiries with the company's technical leads, as well as company counsel who work with the development teams and are familiar with the development process.
For an overview of diligence and other IP and IT considerations in M&A transactions, see Practice Notes, Intellectual Property: Stock Purchases and Mergers and Intellectual Property: Asset Purchases.
For sample due diligence inventory and request lists focusing on software and IT assets, see:

Specific Software and IT Representations and Warranties

M&A agreements in the software industry typically include representations and warranties specifically addressing the seller's proprietary software products and related products and services. Provisions typically included and that should be tailored based on the relevant industry or business include the seller's representations and warranties concerning its:
  • Disclosure of the company's software products and services.
  • Disclosure of the company's use, modification and transfer of any open-source software.
  • Protection of the company's source code and any source code escrow arrangements.
  • Software's conformance to specifications.
  • Software's freedom from viruses and malicious code.
  • IT's performance and security.
  • Privacy and data security compliance.
  • Research and development activities.
For sample software and IT representations and warranties, see Standard Clauses, Software and IT Representations and Warranties. For more on these provisions and links to sample language in recent private acquisition and public merger agreements, see Practice Note, What's Market: M&A Agreements in the Software Industry: Sample IT Representations and Warranties.

Negotiating and Drafting General IP Reps and Warranties

In addition to software and IT-specific provisions, where the seller or target company is in the software industry, the agreement's general IP representations and warranties are typically more robust and heavily negotiated. Among the key IP representations and warranties are those covering:
  • Disclosure of IP, including registered and unregistered IP relating to proprietary software and services.
  • Functionality and sufficiency of the company's IP assets.
  • IP ownership and maintenance.
  • IP validity and enforceability.
  • Non-infringement by:
    • the seller of any third party's IP rights; and
    • third parties of the seller's IP rights.
For model IP representations and warranties, see Standard Clauses:
For more on these provisions and links to sample language in recent private acquisition and public merger agreements, see Practice Note, What's Market: M&A Agreements in the Software Industry: IP Representations and Warranties.