Incorporation of open source software in software development has become the rule rather than the exception. It often means, however, that the developer does not own or does not have unrestricted rights in the software developed.
In the context of an M&A transaction, this has implications for a Japanese buyer looking to exploit post-acquisition software developed by the target.
What is open source software?
Open source software is, in essence, computer software available in source code form that is provided under licences allowing users to study, change, and improve the software freely.
Open source software is not subject to the same copyright restrictions as conventional commercially-produced software and is developed in a public, collaborative way that commonly subjects the software to rigorous peer review.
Key factors in the attractiveness of open source software for businesses are shorter development times, adaptability to new technology, and a lower risk of the software becoming obsolete. In addition, the popularity and spread of open source software has been rapidly accelerated by the development of the Internet and rise of Cloud Computing. (For a more detailed analysis of Cloud Computing regulatory and contractual issues please click on our October and November newsletters).
What are the issues?
Open source software is released under the so-called GNU General Public Licence ("GPL") and the GNU Lesser General Public Licence or similar licence, which are published by the Free Software Foundation. These licences are designed to ensure that developers can get access to the source code of the software, are free to distribute copies of it, can make modifications to the software and use pieces of it in new programs. These licences do, however, have a number of drawbacks.
A GPL will generally provide that there is no warranty for the open source software. A developer will also be subject to obligations under these licences when distributing or modifying the open source software. For example, if distributing copies of a GPLlicensed program (whether free-of-charge or for a fee), a developer must pass on the source code to the recipients.
The incorporation of third-party components that are utilised alongside the code in the developed applications can also be problematic. The individual licence terms for the different components may place restrictions on their use, particularly in terms of their distribution (as they are incorporated into the developed applications). Distribution of the developed applications by the developer may then cause a breach of, or invoke obligations under, the third party licences – such as payment of additional licence fees.
How does a purchaser address the risks?
- The buyer's acquisition team should work alongside its legal advisors to determine what open source code and/or third party components have been used in each piece of developed software. The associated licence terms should then be analysed to determine what rights the seller has in each of the pieces of developed software.
- The purchaser needs to assess carefully its commercial aims for exploitation of the developed software. For example, in a website context the incorporation of open source software will not be problematic since the purchaser is essentially purchasing a web service rather than a piece of software it intends to sell and distribute. To the extent that any deficiencies are identified in the rights required for the intended exploitation of the developed software by the buyer, third-party licences may need to be renegotiated to deal with them.
- The external lawyers should also work with relevant technical personnel to review the source code for any software which is claimed by the sellers to be proprietary. The question to be asked is whether any part of that code is based on code in software licensed under the GPL, and therefore subject to the terms of that licence.
- It is important, therefore, that where open source software has been used or incorporated into a developed product by a seller of a business, the purchaser of the business conducts an appropriate technical and legal IT due diligence of the software to ensure that the rights which will be obtained through the purchase of the business match the present and future needs of the business.