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In mergers and acquisitions, open source issues have become a significant concern. Open source considerations may affect the representations, warranties, indemnities, value and structure of a merger or acquisition transaction. Typical documentation used to “paper” merger transactions may have to be modified to reflect open source issues. For example, damages from a breach of representation due to open source may be “carved out” from indemnification coverage in some cases.

Fundamentally, open source issues impact a merger or acquisition transaction because buyers need to know what rights and liabilities are being transferred. Thus, if open source code is disclosed during due diligence, the buyer will need to determine the effect open source code has on the risks being evaluated by the buyer in the proposed transaction. For example, even though open source software being used by a target was only modified for internal use, it is possible in an asset transfer transaction that the open source derivative work rules may apply to the transfer of software assets containing open source code. Below are some questions to consider in merger and acquisition transactions:

• Which assets are affected by the open source code?
• How is the open source code incorporated in the assets?
• What open source licenses apply to the assets?
• Will the open source code trigger the derivative work licensing requirements?
• Can the open source code be replaced with proprietary code if necessary?
• What is the value of the asset/assets affected by open source?
• Do the affected assets represent a substantial source of revenue to the organization?
• Are the affected assets part of an integrated software solution or suite of products?
• Are the affected assets used solely for the internal operations of the company?

These are just some of the questions relating to open source that may arise in a merger and acquisition context. Resolution of some of the issues will require both legal and technical assistance. Companies are providing technical assistance on the diligence for the open source issue as a new business model. One company has developed technology that enables companies to conduct an automated scan/audit of Java code files in order to pinpoint open source components found, including the names of the applicable open source licenses. This technology could prove very useful to acquiring companies in an acquisition transaction. Another open source auditing product can be run in background on a target developer’s computers. The product will monitor in real time any downloads of source code affected by the developer’s computer and appropriately flag open source components. 

Many potential target companies, who do not intend to redistribute open source they license and modify internally, may still find that open source issues will affect the sale of their company. If the sale is viewed as redistribution, the open source redistribution requirements may be triggered. Open source risks have become a significant diligence issue in many mergers and acquisitions.

Open source issues need to be included on todays due diligence lists. The treatment of open source at a target company may affect representations, warranties, indemnification, covenants and other contract provisions. Open source issues may affect the risk assessment and structure of the transaction. These issues are likely to become more important in mergers and acquisitions in coming years as the presence of open source software in global businesses continues to grow.

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