Transfer Software as Part of a Reorganization

Short answer: software license transfer M&A and corporate reorganization scenarios have one controlling question: what does your assignment clause say? Your customer can transfer your software in a reorganization only if your agreement says they can. Transfers on a merger, acquisition, stock sale, asset sale, or internal restructuring are governed by your assignment clause plus state and sometimes federal law, and getting it wrong has cost customers six figures.

It seems like a simple question, but can your customer move your software or licenses to another entity? The right place to answer it is up front in the agreement, and too often the language does not clearly cover every situation: internal transfers, external transfers, reorganizations, mergers, stock sales, and asset sales each behave differently.

Four Questions That Decide a Transfer.

Every software license transfer M&A scenario runs through these four questions in order:

• What type of transfer is it? Who were the users before, and who are they after? Is it a stock sale, an asset sale, a merger, or an internal reorganization?
• What does the contract say? Does the assignment clause allow or prohibit transfers, and in which situations? Does a change of control count as an assignment?
• What does state law say? State contract law usually matters, and it may interpret or override the clause, especially anti-assignment language.
• What does federal law say? In one case the court held that federal patent and copyright law governed, not state law, because using software outside the granted scope implicates the owner’s exclusive rights under 17 U.S.C. section 106.

A $450,000 Lesson.

A 2009 case essentially held that the contract and federal law controlled. The customer transferred a license, which was tied to a specific computer, to another internal entity, even though the agreement said the transfer was not permitted. The court made the customer pay more than $450,000, in effect re-buying the software, because moving the license even internally breached the agreement. Exceeding the scope of a license is not just breach of contract; it can be copyright infringement, because the licensee acted beyond what the owner authorized. That is the same access-versus-scope problem behind whether a third party can access or use your software.

How to Draft the Assignment Clause.

For a vendor, the move is to make your software non-transferable by default and then define the exceptions you are willing to grant. Spell out whether a change of control (merger, acquisition, stock or asset sale) counts as a prohibited assignment, whether internal transfers between affiliates are allowed, and what the customer must do to get your consent, often “not to be unreasonably withheld.” Anti-assignment terms are generally enforceable, but courts read them narrowly, so say plainly that a change of control triggers the clause if that is what you intend. Getting ahead of the software license transfer M&A question — before a deal is announced — is the only reliable way to control the outcome. Done right, the customer cannot quietly move your license to a much larger acquirer, and you keep the chance to re-price when the user base materially changes. This is the same discipline behind the restrictions you put in any license and behind defining what the license actually measures.

Frequently Asked Questions on Software License Transfer M&A.

Can my customer transfer the license in a merger without asking? Only if your agreement allows it. If your assignment clause treats a change of control as a prohibited assignment, the customer needs your consent first.

Is an internal transfer between affiliates really a breach? It can be. In the 2009 case an internal transfer breached the license and cost the customer over $450,000, because the agreement prohibited it and the license was tied to a specific machine.

Why might federal law override my state-law contract analysis? Because using software beyond the granted scope can be copyright infringement, not just breach, which pulls federal copyright law into the analysis alongside your contract.

Any software company should think these issues through before the customer asks. I hope this helps.

For the foundational decision between an EULA structure and a SaaS subscription structure, which drives what transfer language goes in the contract, see SaaS Agreement vs. Software EULA: Which Template Do You Need?

Disclaimer:

This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.