How to Improve Your Company’s Forms Software License Agreement – Part 2: Assignment

***This article is part of a ten-part article published by Koley Jessen to help software licensors improve their software license agreements.

Key points to remember:

A software license agreement must:

  • prohibit the customer from assigning the contract to a third party without the prior written consent of the licensor;
  • expressly declare that all assignments in violation of the Assignment Clause are null and void; and
  • discuss the rights of the licensor if the client undergoes a change of control.

Assignment provisions govern a party’s ability to assign some or all of its rights, obligations and liabilities under a contract to a third party. Generally, if the contract does not contain an assignment clause or otherwise address a party’s right to assign the contract, the default law allows a party to assign the contract to a third party without the consent of the other contracting party. This general rule is not always true for intellectual property licensing, but licensors should take a safe approach and work on the assumption that the default law (absent contractual terms to the contrary) will allow the customer to assign the contract without the consent of the licensor. As a good starting point in their software license agreement, licensors should prohibit the customer from assigning the agreement to a third party without the licensor’s consent.

The simple example that we will use to illustrate the importance of addressing assignment rights in a software license agreement is a licensor licensing enterprise software to a small company (“SmallCo”), and SmallCo being subsequently acquired by a large multinational corporation (“BigCo”). In one version of the example, SmallCo is acquired by BigCo through an asset sale. In another version of the example, SmallCo is acquired by BigCo through a stock sale. In the latest version of the example, SmallCo is acquired by BigCo through a merger.

There are many different reasons why the licensor may want to prohibit SmallCo from assigning the software license agreement to BigCo and causing BigCo to use the software as a new counterparty to the agreement. BigCo may be a competitor or potential competitor of Licensor. Also, the licensor may be missing out on additional revenue because BigCo would now have a business license in exchange for SmallCo’s presumably lower business license fee. Additionally, the licensor may have difficulty meeting its other obligations in the software license agreement (eg, maintenance and support) if the other party is BigCo and not SmallCo.

If Licensor has a standard attribution clause in its Software License Agreement form with the “null and void” language referenced above, Licensor has largely protected itself against SmallCo assigning the Software License Agreement to BigCo in an asset sale scenario. A sale of assets would require BigCo to become the other party to the software license agreement by SmallCo assigning the agreement to BigCo, but the software license agreement expressly states that SmallCo has no right to do so. Moreover, the “null and void” language says that SmallCo does not have the legal power to do so. Thus, if SmallCo were to purport to assign the Software License Agreement in violation of the Assignment Clause, the purported assignment would not be effective – BigCo would not be a party to the Software License Agreement and would have no further rights under the software license agreement. In addition, many software license agreements would provide a right of termination to the licensor if the customer purports to assign the software license agreement in violation of its terms.

In the stock sale example, it is unlikely that SmallCo will need to assign or transfer the software license agreement in any way. On the contrary, the ownership of SmallCo changes. The parties to the software license agreement remain unchanged in the stock sale example, meaning that the parties to the agreement remain the licensor and SmallCo. Therefore, the standard assignment provision would likely not protect the licensor from a situation where SmallCo is acquired by BigCo in a stock sale. This language says that SmallCo does not have the right or authority to transfer the software license agreement to another party, and SmallCo did not do so in this stock sale example.

The stock sale scenario may be less of a concern for the licensor because the other party to the software license agreement is still SmallCo (not BigCo). So, depending on the precise wording of the corporate license, extended BigCo-wide use rights for the software may or may not be a concern. However, whether or not the acquisition is an asset sale or a stock sale, the licensor may be uncomfortable with a competitor or potential competitor who owns SmallCo.

If the licensor wishes to protect itself from the example of the sale of shares where SmallCo remains the contracting party but is now owned by BigCo, the licensor must expressly state in its software license agreement that changes of control are considered assignments under the assignment clause, insert a “change of control” clause, or both. Change of control provisions, in essence, state that the licensor has the right to terminate the software license agreement if a certain percentage of customer ownership changes hands. Then, in our example, the licensor would have the option of terminating the software license agreement if SmallCo were acquired by BigCo through a stock sale.

Finally, in the merger example, SmallCo may or may not need to assign the software license agreement to BigCo or another entity. Mergers can take many different forms, and various laws set out different rules as to whether or not a merger involves an assignment of a contract “as of right”. If drafted correctly, the “change of control” provision in the preceding sentence, which gives the licensor a termination right, would likely protect the licensor in the merger example. In addition, the licensor must ensure that its assignment clause specifically states that SmallCo may not assign the agreement “whether voluntarily or involuntarily, directly or indirectly, or by operation of law, merger, consolidation or otherwise”. . This wording would likely be interpreted by a court to prohibit the assignment or transfer of the Software License Agreement to BigCo (or any other entity) in a merger of BigCo and SmallCo.