A recent case in the Queensland Supreme Court serves as a reminder for licensors and licensees to be forward-thinking when negotiating enterprise licence provisions, to ensure that the terms of the agreement accurately capture the parties’ intentions in the event that the licensee’s business undergoes a restructure or merger during the licence period.

It is common for large organisations to acquire software on an enterprise licence basis. For an enterprise licence, each company in the company group structure can use the software. Sometimes, incremental fees are payable if the company grows. In such licences, it is important to carefully define who makes up the enterprise, especially in the event of corporate changes.

In Glencore Queensland Limited v Ventyx Pty Ltd [2015] QSC 14, Justice Philip McMurdo was required to decide the scope of a software enterprise licence. Specifically, whether or not certain related companies should be considered part of the customer’s enterprise, and their employees counted when calculating incremental licence and support fees.

Lessons

Companies entering into enterprise licences (both licensors and licensees) should carefully consider the scope of the enterprise, and how the licence provisions will operate in the event of a corporate restructure or takeover situation. The specific language used to describe the customer’s related entities which made up the licensed enterprise was determinative. If different words had been used, the court may have found in favour of the licensor and required the customer to pay additional licence and support fees for companies which had no need to use the relevant software.

Licensors and licensees should plan ahead when negotiating enterprise licence provisions, and ensure that the licence is appropriate for all possible restructure and takeover scenarios.

The licence and fee calculation

In 2007, Mincom Limited (renamed to Ventyx Pty Ltd and now called ABB Enterprise Software Pty Ltd) licensed Xstrata Queensland Limited (now called Glencore Queensland Limited) and “Xstrata Copper Group Affiliates” to use its software. A separate software support agreement was signed at the same time.

The licence fee was payable upfront, but the customer was required to pay incremental licence and support fees annually, calculated based on the number of employees of Xstrata and the Xstrata Copper Group Affiliates.

Customer restructure

In 2013, Xstrata plc was purchased by Glencore International plc, resulting in all companies in the Glencore group becoming Affiliates of the customer. The question that arose was whether pre-merger Glencore entities (which were part of the Glencore group prior to its acquisition of the customer) would be counted for the purpose of the incremental fees.

Before the acquisition, the customer’s copper division had a separate Board, Executive Committee and dedicated management staff. After the acquisition, the customer’s copper division ceased to exist and its management responsibility for copper operations was transferred to the Glencore International plc copper department. None of its employees or officers were transferred. None of the pre-merger Glencore entities used the licensed software.

The licensor claimed that the pre-merger Glencore entities were Xstrata Copper Group Affiliates, and that their employees should have been included in the employee count for the financial year ending 30 June 2014.

The case revolved around an “Addition of Affiliates” clause in the licence agreement, providing that where an Xstrata Group Affiliate joined the customer’s copper division, the customer was required to add that Affiliate to the list of Xstrata Copper Group Affiliates. Affiliates were defined to include companies which controlled, were controlled by, or were under common control with the relevant corporation, whether direct or indirect, and whether through control of shares, votes, or the power to appoint or remove directors or otherwise.

Scope of the customer’s copper division

The key question was whether or not the pre-merger Glencore entities had joined the customer’s copper division. The customer argued that they had not, as the customer’s copper division no longer existed. The licensor argued that they had, and that the relevant copper division still operated although it had been joined with Glencore copper entities in a single management structure.

Justice Philip McMurdo agreed with the customer, deciding that because the customer was no longer involved in management of copper operations, the Xstrata Copper Group Affiliates could not be accurately described as the customer’s copper division. Even if a group of companies that could be described as the customer’s copper division still existed, the pre-merger Glencore entities had not “joined” it; they did not operate in that division. This interpretation was not absurd or obviously unfair, because the licensor was still entitled to licence and support fees in respect of companies actually using the software, although it would not receive additional fees due to the new affiliate relationship with other companies that did not use the software or receive support services.

Accordingly, the court declared that the employees of the pre-merger Glencore entities should not be included in the employee count.