Tech & Sourcing @ Morgan Lewis

Contract Corner

Adding corporate flexibility to IT-related commercial contracts can make seemingly unrelated mergers and acquisitions (M&A) transactions a bit less complex. Although many contracting parties already consider assignment rights and restrictions in relation to certain successor scenarios, the divestiture scenario—where contractual rights are not simply transferred in whole—deserves a closer look.

We frequently get involved in “carve out” M&A transactions where there is the sale, acquisition, or spinoff of business units or operations that were part of the seller but not the entire seller enterprise. In these deals, there is often the need to enter into an ancillary (though frequently complex) agreement for the postclosing provision of services from the seller to the buyer on a temporary basis until the buyer can stand up or fully migrate to its own systems and processes. These agreements—referred to as transition services agreements (TSAs)—typically involve, among other things, IT-related services that were previously provided by the seller across the seller’s enterprise, including to the divested units or operations, and may involve shared systems and services ranging from infrastructure to network, application, collaboration, and end-user computing.

At the core of most IT-related services is access to and use of third-party software that may be licensed at the enterprise level and on which the divested units or operations depend for a period of time. As part of the M&A diligence process, the parties will need to assess whether the underlying software-related agreements allow for use of the software and related services by a previously affiliated party. Many agreements, particularly older agreements, may require consent to allow for such use. A key learning from working on these TSAs is that, when negotiating software licensing and service agreements, it may be a good idea to include a divested entity provision, where practical, that allows for use in a TSA scenario for a limited or “temporary” period of time. Having such a term included in your software contracts likely will save time in the event of a divestiture, including by avoiding the need to obtain such consents.

Key terms to include in a divested entity provision include the following:

  • What constitutes a “divested entity”—how is the term defined?
  • What is the term of the permitted period of use by the divested entity?
  • What is the scope of the permitted use? For example, given the transitional nature of a divestment, consider whether the seller’s and/or the divested entity’s permitted use should extend to the other’s business operations (in addition to its own).
  • Who is responsible for fees associated with the divested entity’s use?
  • If pricing is at an enterprise level and the divested entity will be billed separately, what are the fees going forward for (1) the seller and (2) the divested entity?
  • Will the divested entity be required to agree in writing to the terms and conditions of the seller’s agreement and applicable order(s)?
  • Can the rights and/or services be unbundled so that the divested entity can “take over” the rights and/or services that it uses (with a corresponding ramp-down in the rights and/or services held by the seller)?
  • How are costs allocated if additional work is required to allow for use by the divested entity (e.g., additional licenses, segregation or separation services, or creation of a separate instance)?
  • What categories of data are involved and how will access to and control over such data be adjusted?

Another issue, which warrants its own blog post but is worth noting for trying to clear a path for divestitures, arises in development deals. Namely, if there is preexisting vendor intellectual property included in a deliverable that is licensed to the seller for use with such deliverable, does the license extend to divested entities if the deliverable is sold to, or also used by, such divested entity?

Some early planning and negotiation related to corporate flexibility (in its various flavors) can save significant headaches, time, and resources down the road.