IS YOUR SOFTWARE LICENCE TRANSFERABLE?

You have thrown out the old letterhead, the sign painters have done their job and you have remembered to answer the telephone using the new company name, the first day after the merger… it is your software supplier on the other end with a reminder that the licence you paid for last year is non transferable and if you want to continue to use your software, you must pay a transfer fee. What does this mean? It may mean that you cannot continue to use your copies of their software without fear of a claim of copyright infringement.

It is very common for software licences to be granted on a non-exclusive and non-transferable basis. This means that the software developer may licence the software to multiple parties, but each party may not transfer their licence to any other party - this may include your newly merged business. If the merger has resulted in a new company or partnership being formed or assets from your company, including software, being transferred to another company or partnership and your software licence is non-transferable, you cannot continue to use your software, without the consent of the software owner.

A similar issue arises in the resale of second-hand PCs. If the software licence is not transferable or in some cases where the original licence documentation is not provided, another licence fee may be payable to the software owner.

In addition to the software licence issues did you transfer all intellectual property to the new entity? If the value of these assets increase from the time of the merger or takeover to the time when they are eventually transferred, there could be expensive consequences, particularly in relation to tax issues.

Similar issues arise when a business expands by creating new sibling or parent companies - although the original company may still exist and be in operation, the software used by that company is not necessarily going to be legally usable by any parent or sibling companies without the payment of additional licence fees.

So how do you transfer contracts such as your software licence to a new entity? The law provides two methods - assignment and novation. Assignment results in a new party being entitled to the benefits under the contract. In the case of a software licence, this would include the right to have the supplier fix software bugs and access to upgrades. The downside of assignment is that contract law only allows you to assign benefits, not obligations of the contract. This means that although the new party is able to enjoy the use of the software, the original owner remains liable to pay for it. On the other hand, novation results in the original contract coming to an end and a new contract being prepared so both the benefits and the obligations will pass to the new company.

As a customer, you should carefully read your software licensing agreement before signing to determine how restrictive it will be should your business expand in the future, or if you are looking to merge or takeover a company, whether the licence will allow continued use of the software.

Commonly, software licences seek to restrict the use of software by:

• designating specified equipment, duration, numbers of users or particular sites that may use the software
• not allowing your agents (such as contractors used in outsourcing) to use the software
• preventing the assignment of the right to use the software to another party

Due diligence enquiries made prior to a merger, takeover or expansion should include a careful examination of software licences before you commit to the transaction to ensure that you do not purchase the assets of a business only to find that considerable fees will be payable to the software suppliers in order to continue using your valuable and important IT assets.