While open source software (OSS) has been around for decades,
companies are just starting to appreciate the importance of focused
OSS due diligence in the M&A context. In this context,
purchasers are most concerned with unknowingly inheriting the
target's OSS issues, such as reciprocal licences or deficient
code, or overvaluing the target based on misinformed assumptions of
the proprietary nature of its software. This is particularly
worrisome considering that less than 50% of companies have OSS
governance or monitoring policies and it is estimated that more
than 50% of source code is licensed pursuant to unknown or
reciprocal licences. Exacerbating these concerns is the fact that
most companies do not know what is in their source code, despite
being under the assumption they do.
Generally speaking, OSS is source code that is made available by
the copyright holder to the general public under a licence that
allows the licensee to freely study, change and/or distribute the
source code. While the commonality among such licences is
encouraging public collaboration in software development, the
nature of the licences sometimes differs with respect to the
reciprocal obligations of the user. For example, more restrictive
open source licences require derivative code to be made available
to the public under identical licence terms. In contrast, other,
more permissive open source licences, allow users to specify the
applicable licencing terms of the derivative code.
Considering that proprietary software is accounting for an
increasing percentage of many companies' valuations, it is
imperative that purchasers have a solid understanding of the
software they seek to acquire. Likewise, it is highly beneficial
for potential targets to be cognizant of their OSS and address any
related issues in order to make the company more appealing to
potential purchasers. Inadequate OSS due diligence and awareness
can lead to lost deals, delayed deals, lost revenue and target
devaluation. A purchaser and target having a firm grasp on the
licence terms applicable to a target's OSS can mitigate these
risks and result in a more efficient and cost-effective
For these reasons, it is important that a potential purchaser
and target work harmoniously in OSS due diligence where the target
has a material software component. Before signing the letter of
intent, the parties should always discuss the concept of OSS due
diligence. Some targets may be skeptical of allowing a potential
purchaser access to its source code. However, such concerns can
likely be alleviated through open dialogue and procedures designed
to protect the confidentiality of the target's source code.
Once the parameters have been set, OSS due diligence should involve
a collaborative effort between the target and either the potential
purchaser's internal technical team or a third party
specialist. The potential purchaser, or third party specialist,
should access the target's OSS to make an independent
assessment as to its impact on the transaction and request the
rectification of any issues prior to closing. The purchaser should
continue to integrate and monitor the acquired OSS with its own
standard processes and OSS policies post-closing to ensure a
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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A recent Saskatchewan Court of Queen's Bench decision allowed a court-appointed receiver to sell and transfer intellectual property rights free and clear of encumbrances, finding that a license to use improvements of an invention was a contractual interest and not a property interest.
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