A receiver of IT services can minimise the risks associated with the future sale of part or all of its business by ensuring that when it negotiates agreements with its IT suppliers it ensures that those agreements contain: (i) an ability for the recipient of IT services to transfer the agreement to an acquirer of its business assets without requiring the consent of the IT supplier; and (ii) a requirement for an IT supplier to provide equivalent services to an acquirer of specific assets of the recipient of IT services for a transitional period.
Purchase of a Business
When buying a business it is critical to ensure that the purchaser acquires all of the assets necessary to operate the business, both in terms of physical assets (such as plant and equipment) and contractual assets (such as software licences and IT services). Where only part of a business is being sold, the seller may need to retain ownership of some or all of the IT assets of the business.
Depending on whether the seller requires ongoing use of some of the existing assets of the business or is selling all of the assets, a number of different considerations need to be explored.
Transfer of software or services
Where possible, relevant IT agreements will be transferred to the purchaser by the seller under the sale agreement. However, the ability of a seller to transfer the IT agreements will depend on the terms of the agreement with the respective IT vendors. The terms of the contract may limit the seller’s ability to transfer the relevant assets to the purchaser of the business.
Assignment involves the transfer of rights under an agreement while novation involves the transfer of both rights and obligations. The distinction arises because, while rights can generally be transferred without the counterparty’s consent (unless they are personal in nature), obligations and liabilities arising under an agreement may not be transferred without the consent of the counterparty.
Accordingly, it is important to assess whether the consent of the contract counterparty is necessary to transfer the agreement to the purchaser. It is common for software agreements to contain an express prohibition on the assignment, transfer or novation of the agreement without the consent of the software vendor. Even where the agreement does not contain an express prohibition on assignment or novation, copyright licences are normally regarded as a personal right of the licensee not assignable without the licensor’s consent.
As a result, it will normally be necessary to obtain the consent of the IT vendor for the transfer of the software to the purchaser and the use by the purchaser of that software.
Where consent is required, the approach adopted to obtaining that consent will vary depending upon an assessment of a number of factors:
- the relationship the parties have with the vendor;
- the importance of the software/hardware or service;
- the contract value;
- whether there are any easily substitutable products or services;
- the risk profile the purchaser is wishing to adopt; and
- whether the software/hardware or service is required by the seller as well as the purchaser post sale.
Strictly speaking it is necessary to execute a novation agreement in order to give effect to a full transfer of an IT contract to the buyer and mere notification that the business has been bought will not constitute consent. Depending on the buyer’s relationship with the vendor, the vendor may happily consent to a transfer. In other cases it may be possible to wrap consent up with other discussions/negotiations the purchaser may be having with the IT vendor (eg bring the novation under an enterprise wide licence).
However, where the purchaser does not wish to undertake individual negotiations with each of the IT contact counterparties the purchaser may be willing to adopt the approach of notifying all of the relevant vendors of the transfer and then only negotiating and agreeing formal arrangements where a vendor raises an issue with the notification letter they receive. Obviously, there are a number of risks with this strategy, including the vendor taking action on the basis of unlicensed use of their software; eg seeking to prevent the purchaser from using or enjoying the benefit of the licence or requiring the payment of a substantial amount. Where the dollar value of the agreement is low and the purchaser is able to obtain similar or equivalent products and services quickly from alternative suppliers, it may be willing to adopt this approach.
Use by Seller and Purchaser
Where the seller requires ongoing use of the IT assets (in the context of a sale of only part of its business), it will be necessary to consider whether a “mirror and split” approach is appropriate. Under a “mirror and split” approach, the seller undertakes to replicate the relevant parts of its IT environment so that the seller can continue to use the IT assets to support the retained portion of its business. In this context, it is necessary to mirror not only the assets (eg software and hardware) but also the contractual arrangements underpinning the assets. This will involve negotiating with the relevant IT contract counterparty to establish this mirrored environment. Buyer and seller will need to agree who is responsible for establishing this environment.
Alternatively, it may be necessary for the seller to provide IT services to the buyer on a transitional basis while the buyer establishes its own stand-alone IT systems to support the purchased business. Before this can occur it will be necessary to verify that the relevant software contracts permit this kind of “bureau service” to be provided to a third party.
Where early consideration is not given to the issues surrounding the transfer of the IT assets, it may not be possible to complete the business sale on time without breaching the terms of the relevant IT contracts, or to establish a fully mirrored IT environment. Identifying which contracts will need to be transferred may itself be a time consuming task. Obtaining any necessary consents can be a particularly time consuming process, as there may not be any incentive for the party to the relevant IT contract to grant their approval. Indeed, some contracting parties may see an opportunity to gouge the buyer for additional fees.
The likelihood of these risks crystallising will be affected by the nature of the licensing party. A large provider of ‘out-of-the-box’ software may be unlikely to be concerned about assignment of licences for a product under a business sale. In such cases a notification letter assuming consent in the absence of a reply may be sufficient.
However, where a contract is for the supply or support of bespoke, tailored software, negotiations may take considerable time. There may be legitimate concerns over the provision of software to potential competitors, or practical considerations such as software compatibility and number of licensed users required where the software is licensed on a per user basis. Additionally, the supplier’s obligations around training and support may become more onerous if the buyer is unfamiliar with the software product.
Minimisation of risk
Contract negotiation – The best time to prevent these risks from arising is when an IT contract is entered into. Rather than acceding to a blanket clause that requires approval of any assignment, it may be possible to negotiate appropriate clauses which meet an IT contractor’s concerns without giving them the potential power to derail the sale of a business down the track. For example, concerns over a buyer’s ability to meet ongoing financial obligations, or sale to a competing IT contractor, can be dealt with by tailoring an assignment or novation clause. So, in this example, approval would only be required where the buyer fails to meet certain objective, measurable financial criteria, or where the buyer is either within a class of specific entities, or meets some other criteria.
Sale process – When the sale of a business is on foot, the key to minimising these risks is to act early. Swift notification of a potential transfer of business will allow time for identification of the at-risk contracts, and for the negotiation process to occur. If a contracting party is unwilling to consent to novation or assignment, it may be possible to prepare contingent arrangements or seek alternatives. The more time that the buyer has available, the less pressure a contracting party can bring to bear.