M&A Due Diligence: Assessing Open-Source Software Licenses

In mergers and acquisitions (M&A) transactions, the assessment of open-source software (OSS) license compatibility has become a critical due diligence task. As companies increasingly rely on OSS to build and enhance their technological capabilities, understanding the complexities of OSS licenses is essential to avoid legal and operational risks. This article delves into the importance of OSS license compatibility assessments during M&A transactions, highlighting key considerations and best practices.

The Rise of Open-source Software in M&A

With 9 out of every 10 lines of code present in every program or app, it seems redundant to say that open-source software has become a cornerstone in the tech industry due to its flexibility, cost-effectiveness, and collaborative nature. Companies leverage OSS to accelerate development, innovate, and reduce costs. However, the diverse landscape of OSS licenses, each with its own terms and conditions, introduces potential legal challenges, especially during M&A transactions.

In an M&A context, the acquiring company inherits the target company's software assets, including any incorporated OSS. This inheritance necessitates a thorough examination of the OSS licenses to ensure they align with the acquirer's compliance policies and business objectives. Failure to adequately assess OSS license compatibility can lead to legal disputes, financial liabilities, and operational disruptions.

Key Considerations in OSS License Compatibility Assessments

Identification and Inventory of OSS

The first step in assessing OSS license compatibility is creating a comprehensive inventory of all OSS components used by the target company. This inventory should include details such as the OSS version, the specific licenses governing each component, and any modifications made to the original software. Automated tools, software composition analysis (SCA) platforms and OSS audits can aid in this process by scanning the codebase and identifying OSS components and their associated licenses.

Understanding License Obligations

Once the OSS inventory is established, the next step is to understand the obligations and restrictions imposed by the various OSS licenses. Common OSS licenses include the MIT License, Apache License 2.0, GNU General Public License (GPL), and the Lesser General Public License (LGPL). Each license has distinct requirements regarding distribution, modification, and attribution.

For example, the GPL requires that any derivative work based on GPL-licensed software must also be distributed under the GPL, potentially leading to compulsory open-sourcing of proprietary code. In contrast, permissive licenses like the MIT License impose minimal restrictions, primarily requiring attribution.

Compatibility and Conflict Analysis

Analyzing the compatibility of different OSS licenses is crucial. Some licenses are inherently incompatible with others due to conflicting terms. For instance, combining code under the GPL with code under a license with stricter proprietary restrictions can create a legal conflict. During M&A due diligence, it is essential to identify any such conflicts and evaluate their potential impact on the business.

Risk Mitigation Strategies

To mitigate risks associated with OSS license incompatibility, companies can adopt several strategies:

License Harmonization: Where possible, standardize on a set of compatible OSS licenses across the codebase to minimize conflicts.

Code Refactoring: Modify or replace OSS components with incompatible licenses to ensure compliance.

Legal Counsel: Engage legal experts specializing in OSS licenses to navigate complex legal landscapes and provide guidance on compliance strategies.

Contribution Back to OSS Community: Where compliance requires code sharing, contributing improvements back to the OSS community can foster goodwill and reduce potential legal risks.

Best Practices for OSS License Management in M&A

Early Integration of License Review: Incorporate OSS license compatibility assessments early in the M&A due diligence process to identify and address issues proactively.

Continuous Monitoring: Implement ongoing monitoring of OSS usage and license compliance post-acquisition to ensure continued adherence to license terms.

Clear Policies and Training: Develop and enforce clear policies on OSS usage and license compliance and provide regular training to development teams on OSS best practices.

Collaboration with Developers: Engage with development teams to understand the practical implications of OSS licenses and integrate their input into compliance strategies.

Conclusion

Open-source software license compatibility assessments are a vital component of M&A due diligence. By thoroughly identifying OSS components, understanding license obligations, analyzing compatibility, and implementing risk mitigation strategies, companies can navigate the complexities of OSS licenses and ensure a smooth, compliant acquisition process. As the reliance on OSS continues to grow, so too does the importance of robust license management practices in safeguarding the legal and operational integrity of M&A transactions.

Note: The preceding text is provided for informational purposes only and does not constitute legal advice. The views expressed in the text are solely those of the writer and do not necessarily represent the views of any organization or entity. This information should not be relied upon as a substitute for obtaining legal advice from a licensed attorney or other qualified legal professional regarding your specific situation.

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