M&A-friendly technology license agreements

Back in the day, when I was in-house counsel at Sun Microsystems, Sun was the frequent target of takeover rumors, particularly during the height of the late '90s dot-com boom. Then-CEO Scott McNealy would typically respond to press inquiries about such rumors with the same refrain: Sun is always for sale if the price is right.

Maximizing shareholder value may mean selling the company or its intellectual property. Ensuring that the company's outbound license agreements are M&A-friendly is a paramount objective for tech company counsel. It's especially important to appreciate the unique challenges posed by an exit in the form of an asset purchase, in which the buyer leaves the seller's customer licenses in place after closing.

Many tech startups exit via a sale of software and IP for cash, combined with the buyer's extension of employment offers to key engineering staff. Because the buyer is purchasing ownership and taking possession of the target company's IP, the target needs a means of continuing to license to and support the target's customer base for a limited period.

The solution is a post-closing grant-back license and (backline) support agreement between the buyer and the target, in which the target is granted a license to the sold assets in order to deliver updates, upgrades, and bug fixes to the target's customers, and to use the technology to fulfill support and warranty obligations.

Post-closing, the buyer wants all extant licensees of the purchased technology to cease using it as soon as possible. Consequently, this grant-back license agreement between the buyer and target often includes restrictions against the target engaging in new development projects, delivering new versions (other than recompilations of the existing code base), finding new customers or revenue, or disclosing source code. The buyer will likely require the target to use best efforts to terminate all ongoing projects, support, and licenses.

Are your outbound agreements conducive or anathema to such asset purchase exits? An extensive discussion about this matter, red flags, and sample contract language (with redlined variations) can be found at Redline (redline.net): http://redli.ne/2cTBlgi.

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