April 2026
Introduction
Mergers and acquisitions of technology companies present a number of unique issues. Often, the target company’s software represents a material portion of the value of the company. For that reason, prospective buyers need to thoroughly examine and be comfortable with the rights of the target company with respect to that software. That is more difficult if the target company purchased the software from a prior owner or developer. Regardless of the original source, the buyer needs to confirm that the target has not already licensed the software to one or more third parties. Confirmation of this will usually involve a detailed review of material contracts and strong representations and warranties in the acquisition agreement.
However, if the software was developed by the target in-house, there are a number of things the prospective buyer needs to incorporate into its due diligence of the target company.
First, the buyer should confirm that the target’s employees and independent contractors involved in the development had signed appropriate non-disclosure and assignment of invention agreements. The second question is: did development of the software involve use of any open-source software?
Open Source Software Considerations
In general terms, open-source software (“OSS”) is software available to the public without any requirement to pay royalties. However, use of OSS typically involves the user agreeing to a license agreement. These OSS license agreements permit the user to use and modify the OSS, but they can vary considerably in terms of restrictions.
Some OSS license agreements permit the user to use the OSS software and to incorporate it into proprietary software developed by or for the end-user. In some cases, the license may preclude other users from accessing the proprietary software in which the OSS is impeded. Other licenses contain provisions that permit other users the right to access and use proprietary products that are based upon or incorporate the OSS. In essence, they make the proprietary portion of the software available for use by third parties under the existing OSS license.
Clearly, this can significantly devalue the proprietary portion of the target’s software. The sharing provisions of the license are usually triggered when the proprietary portion of the software is made available to others, whether under a typical licensing arrangement or via a SAAS platform (“Software as a Service”).
It is critical for a proposed buyer to determine whether a target’s software is based upon or incorporates any OSS, and if so, what impact the OSS license agreement may have on the buyer’s ability to protect its investment.
If we can provide any additional information, please contact Bill Miller at wmiller@bizlawma.com.
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