Due diligence is a fundamental component of any commercial transaction. In M&A, attention to contract assignment rights is indispensable as it illuminates whether the target’s most valuable agreements can, in fact, continue to be useful to the post-closing enterprise without triggering counterparty consent, default, termination, or diminution of value.
Assignment rights in contract due diligence
Many commercial, intellectual-property, financing, and customer contracts contain anti-assignment, change-of-control, or “deemed assignment” provisions that, if overlooked, can derail a purchaser’s integration strategy or force costly renegotiation under adverse conditions. Moreover, understanding assignment constraints often informs a transaction’s structuring decision (i.e., whether to adopt a stock purchase, merger, or asset acquisition) because the legal characterization of the transaction often dictates whether a consent requirement is triggered. Accordingly, thorough diligence is not a perfunctory checklist item but a value-preserving exercise that anchors transaction certainty, protects the buyer’s investment thesis, and fortifies the overall legal architecture of the deal.
CA Technologies v. Allstate & StanCorp highlights assignment risks
A newly filed complaint in the US District Court for the Northern District Of California (CA, Inc. (d/b/a CA Technologies) v. Allstate & StanCorp) highlights the need for companies (especially acquiring companies) to remain diligent on the review of contract assignments in software license agreements to assess how the proposed transaction could impact a company’s intended use of third-party licensed software after the closing of a transaction. At its core, CA alleges that Allstate continued using, and allowed its divested business to benefit from, CA’s workload automation software after the sale of Allstate’s Employer Voluntary Benefits unit to StanCorp, even though the governing agreements expressly limited use of the software to Allstate’s “internal operations” and contained no divestiture or third-party rights. CA’s theory is rather straightforward: once the business was divested, any reproduction, distribution, or use of the software for the benefit of the divested company exceeded the scope of the permitted use of the license and resulted in copyright infringement. Presumably Allstate recognized this, as the pleaded facts in the case allege, amongst other things, that Allstate had engaged CA in discussions concerning a limited post-closing license to assist with the transition of the divested company, but Allstate proceeded with closing the transaction (and continuing to use the software) without finalizing such an agreement with CA.
Key takeaways for software licensees in M&A transactions
Three quick takeaways for software licensees: (1) scrutinize the assignment and “change of control” clauses in every critical software agreement well before signing the purchase agreement; (2) don’t assume legacy confidentiality provisions are mere boilerplate; disclosing licensed code or credentials to a buyer can independently breach contractual secrecy obligations; and (3) if you need transitional use, negotiate it up front and in writing. Post-closing cease-and-desist letters (like CA’s) escalate quickly into eight-figure claims.
In an era where enterprise software underpins virtually every M&A transaction, respecting the express terms of a license’s scope is not just good housekeeping, it is essential risk management to practice proper due diligence prior to closing a transaction.