As more companies seek to spin out non-core businesses and the market for carve out divestitures heats up, counsel representing potential buyers and sellers should be prepared to identify and mitigate key risks that may arise in spinout transactions. A recent suit brought by Broadcom affiliate CA, Inc. ("CA") against Allstate Insurance Company ("Allstate") highlights one of the most common risks that arise in carveout divestitures – the so-called "Shared Technology" problem. CA's claims against Allstate present a strong reminder that prior to entering into a carveout divestiture, counsel must (i) identify all software, technology, IP and services that are used by both the divested entity and the selling parent (the "Shared Technology"), (ii) review and understand any applicable vendor contracts and IP license agreements governing that Shared Technology, and (iii) secure any necessary rights to enable both the selling parent and the divested business to continue using the Shared Technology after the divestiture. Failure to identify Shared Technology and secure rights for continued access to and use of Shared Technology post-closing can result in material risk of operational disruption and financial liability.
Background
Back in 2021 Allstate entered into a license agreement with CA's predecessor, Symantec, to license certain enterprise software applications, including the software currently marketed by CA as ESP Workload Automation and other applications (the "ESP Software"). In August 2024, Allstate announced that it had entered into an agreement to sell its Employer Voluntary Benefits business (the "EVB") to StanCorp Financial Group ("StanCorp"). The carveout divestiture was reportedly valued at $2 billion.
The Complaint
In CA, Inc. v Allstate Insurance Company et al., case number 3:25-cv-03862, in the U.S. District Court for the Northern District of California (filed May 5, 2025), CA alleges that in February 2025, between announcing the planned divestiture of the EVB to StanCorp and closing the sale on April 1, 2025, Allstate notified CA that it was divesting the EVB and that it intended to enable the EVB and StanCorp to continue using the ESP Software for a transitional period of up to two years after the closing. CA further alleges that (i) upon receiving the notice from Allstate, CA informed Allstate that the 2021 license agreement did not give Allstate rights to enable the EVB or StanCorp to continue using the ESP Software after the divestiture, (ii) Allstate responded by requesting a financial proposal from CA for securing rights to such continued use, and (iii) CA was surprised to learn that Allstate and StanCorp had closed the transaction on April 1 without first securing a license from CA to enable the EVB and StanCorp to continue using the ESP Software after the divestiture. CA asserts that by enabling the EVB and StanCorp to continue using the ESP software, Allstate is in breach of its 2021 license agreement for the ESP Software and that Allstate and StanCorp are liable for direct, contributory and vicarious copyright infringement. CA seeks at least $80,000,000 in damages, disgorgement of profits, and an injunction against any further access to or use of the ESP Software by the EVB or StanCorp.
As of the date of this client alert, Allstate and StanCorp have not yet responded to CA's complaint, but CA notes that in May, Allstate sent a letter to CA's counsel claiming that Allstate disagrees with CA's characterization of the applicable agreements and the underlying facts and that Allstate "has acted – and continues to act – in accordance with its rights and obligations under the relevant contracts."
In Spinout Transactions, Counsel Should Ensure They Have Identified Any Shared Technology and Applicable Contracts
Regardless of how the dispute is resolved, CA's complaint presents a strong reminder of the importance of (i) identifying all Shared Technology that is used by both the selling parent and the divested business and (ii) carefully reviewing each vendor contract and IP license agreement governing the Shared Technology in order to assess how best to secure any necessary rights to enable continued access to and use of the Shared Technology after closing the divestiture.
Failing to identify Shared Technology and to review any related vendor contracts and IP license agreements can create material risks to both sellers and buyers in a divestiture. Due to information asymmetries, buyers must rely on sellers to identify and disclose all of the assets that are used in the divested business, including any Shared Technology, and to disclose all of the applicable vendor contracts and IP license agreements. Buyers typically insist on representations and warranties from the seller that (i) the seller has accurately identified all third party software, technology, IP and services that are used in the business and (ii) the assets included in the sale, including vendor contracts and IP license agreements, are sufficient for the business to continue operating post-closing. Sellers must therefore be prepared to disclose any Shared Technology and all of the applicable vendor contracts and IP license agreements and to assess whether the vendor contracts and IP license agreements for any Shared Technology can be assigned to the buyer in part or sublicensed. Where Seller decides to retain any Shared Technology and the related contracts, it will need to disclose that Shared Technology and the related contracts as "excluded assets" and the buyer will want to negotiate to ensure that the divested business can continue to operate without those assets or to otherwise secure rights necessary for the divested business to access and use the Shared Technology.
Identifying Shared Technology Can Be Difficult and Time-Intensive
Identifying all Shared Technology can itself be an enormously difficult and time-intensive task. Large diversified companies typically rely on hundreds if not thousands of different third party software, technology, IP license and service agreements in order to operate their businesses. Shared Technology may include anything from centralized ERP and accounting software (e.g., SAP and Oracle), cloud-based human resources and customer relationship management services (e.g., Workday and SalesForce), IT infrastructure software and services (e.g., CA's ESP Software, Microsoft, ServiceNow), information security tools, design automation and development platforms, enterprise wide patent licenses or cross licenses, etc. Many of those solutions are procured centrally and shared across multiple business units. Knowledge of any specific Shared Technology may be dispersed across different functional areas, such as finance, HR, IT, and customer relations. Often, personnel of the business being divested, who may have the most relevant knowledge of Shared Technology, are not aware of the potential sale of the business and therefore cannot easily be consulted. Sellers contemplating a divestiture should, as far in advance as practicable, implement a robust diligence effort to identify all applicable Shared Technology and to collect the applicable vendor contracts and IP license agreements, and should work carefully to identify personnel in each applicable function who have the most relevant knowledge regarding any Shared Technology.
Reviewing Vendor Contracts and IP License Agreements Requires Time and Expertise
Reviewing the applicable vendor contracts and IP license agreements can also be a difficult and time-consuming enterprise. Counsel reviewing those contracts must have sufficient expertise regarding technology and IP license and service agreements to identify all applicable provisions, assess whether the seller has sufficient rights to enable the divested business to continue using the Shared Technology post-closing, and make recommendations regarding how to secure any necessary rights. Some vendor contracts and IP license agreements may include express provisions addressing what happens upon a divestiture, but many will not. Even where there is a divestiture clause, counsel will need to determine whether it applies to the specific spinout structure being contemplated and to assess any applicable restrictions. Some divestiture clauses, for example, are limited to sale of a corporate subsidiary of the seller but don't apply to a sale of assets. Divestiture clauses often also include material restrictions on use of the applicable software, technology, IP and services after the divestiture. Where there is no express divestiture clause, counsel will need to assess any restrictions on use of the Shared Technology by or on behalf of the divested business. Many software license and cloud services agreements, for example, have express restrictions on making the functionality or services available to third parties, including restrictions on use of the software as a "service bureau" – an antiquated term for providing access to third parties. Amongst the key allegations in CA's complaint against Allstate is that under the license agreements, Allstate's licenses to use the ESP Software "are restricted to the internal operations of Allstate only" and "are limited to certain authorized users" and that the agreements required Allstate "not to distribute or disclose the software to anyone other than Allstate's authorized employees."
Sellers Must Secure Sufficient Rights to Provide Transition Services
For Shared Technology that will not be transferred, buyers typically require a transition services arrangement under which the seller is obligated to make certain Shared Technology available to the divested business for a transitional period after closing. As reflected in CA's complaint against Allstate, for each Shared Technology contract that is excluded from the sale, the parties must determine whether the seller has sufficient rights to enable the divested business to continue using the software, technology, IP or services. If the applicable vendor contract or IP license agreement does not expressly permit use of Shared Technology by a divested business, then the seller will need to approach the vendor or IP licensor to request any necessary rights or licenses. Vendors and licensors often take advantage of the context and urgency of a pending divestiture to demand a steep price in exchange for permitting continued use of the Shared Technology by the divested entity, even if only on a transitional basis.
Failing to Secure Sufficient Rights Can Create Material Risks
As reflected in CA's complaint against Allstate, making Shared Technology available to a divested business without first securing any necessary rights or licenses from the applicable vendor or IP licensor can create substantial risk of business interruption and financial liability. CA alleges that it is entitled to at least $80,000,000 in damages based on Allstate's alleged breach of contractual restrictions in the applicable license agreements. CA also alleges that because continued use of the ESP Software by the EVB and StanCorp is unlicensed, such use constitutes infringement of CA's copyrights and that CA is therefore entitled to an injunction against further use and disgorgement of StanCorp's applicable profits.
Conclusion
In preparing for a spinout or carveout divestiture, Counsel for sellers and buyers should ensure that they have identified all Shared Technology, reviewed all applicable vendor contracts and IP license agreements, and secured sufficient rights for any continued use post-closing of any Shared Technology. Failure to do so can lead to material risks of business disruption and financial liability.
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