Open-Source Software Risks in M&A: The Critical Role of Legal and Audit Collaboration

Open-source software (OSS) has become a critical component of modern software development, accounting for approximately 90% of all existing programs and applications. However, when businesses are involved in mergers and acquisitions (M&A), the use of OSS introduces unique compliance challenges. Ensuring that all open-source components are properly licensed and comply with regulatory and contractual obligations is essential to avoid legal risks. This is where the collaboration between legal experts and auditors plays a crucial role.

Why Open-Source Software Compliance Matters in M&A

In an M&A transaction, the acquiring company takes on the assets, intellectual property, and liabilities of the target company. If the target company’s products rely on open-source software, any licensing or compliance issues can translate into significant risks. Non-compliance with OSS licenses can lead to legal disputes, code re-engineering costs, and even reputational damage. 

For example, some open-source licenses like the GNU General Public License (GPL) require companies to disclose their source code if they distribute or modify the software, which may conflict with the business goals of the acquiring company. Failing to address these concerns before closing an M&A deal can create costly post-acquisition surprises.

The Role of Legal Experts in Open-Source Software Compliance

Legal experts in intellectual property and technology law are vital in the due diligence process of M&A transactions involving software companies. Their primary responsibility is to identify and assess any OSS used within the target company’s products or services. This process involves:

1. License Review and Compliance Check: Legal experts meticulously review the open-source licenses attached to various components. They ensure that the licenses align with the company’s compliance policies and future business plans. For instance, they will evaluate whether a license demands source code disclosure or imposes restrictions on commercialization.

2. Risk Identification: Legal professionals analyze the risk of license non-compliance, such as potential lawsuits or the risk of losing proprietary rights over software. If any issues are found, they provide strategic advice on how to mitigate these risks. This may involve negotiating indemnities, requiring the target company to remediate compliance issues before the acquisition, or deciding to move forward with the awareness of possible risks.

3. Contractual Safeguards: To ensure that the acquiring company is protected, legal experts also include provisions in the acquisition agreement that address any potential OSS compliance concerns. These provisions might stipulate warranties and representations about OSS usage, indemnities for legal exposure, and remediation requirements.

The Role of Auditors in Open-Source Software Compliance

Auditors, especially those specialized in software compliance, complement legal experts by providing a technical perspective. They help ensure that OSS licenses are adhered to from a practical implementation standpoint. Their role typically includes:

1. Software Bill of Materials (SBOM) Audit: Auditors often start by creating or reviewing a Software Bill of Materials (SBOM), which is a detailed list of all software components, including open-source dependencies. This helps provide transparency into the codebase and ensures that no unlicensed or poorly documented components have been overlooked.

2. Code Scanning and License Verification: Auditors use specialized tools or innovative methods to scan the codebase for OSS components. These methods automatically identify licenses associated with each component and highlight any discrepancies or compliance risks. Auditors then verify that the OSS licenses have been followed, including any obligations regarding distribution or modification.

3. Reporting and Recommendations: After auditing the codebase, auditors provide a comprehensive report detailing their findings. This report highlights areas of non-compliance, the severity of each issue, and eventually recommendations for how to bring the software in line with legal requirements.

Collaboration Between Legal Experts and Auditors

Effective open-source compliance in M&A deals requires close collaboration between legal experts and auditors. Legal professionals rely on auditors to provide technical insights into the software components, while auditors depend on legal experts to interpret the legal implications of their findings.

1. Due Diligence Coordination: During the due diligence phase, legal and audit teams must work together to ensure a thorough review of the target company’s use of open-source software. This includes sharing findings, discussing potential risks, and proposing joint strategies to address compliance concerns.

2. Mitigation of Compliance Risks: Once risks are identified, both teams could collaborate on creating an action plan. Legal experts may draft contractual terms to protect the acquiring company, while auditors help ensure that any technical fixes are implemented correctly before the deal closes.

3. Post-Acquisition Compliance: The collaboration doesn’t end when the deal is signed. After the acquisition, the acquiring company often needs to continue monitoring its OSS compliance, especially if the target company’s software evolves. Legal experts and auditors can help establish ongoing compliance processes to avoid future legal issues.

Conclusion

In M&A transactions involving tech companies, ensuring open-source software compliance is critical to mitigating legal and financial risks. By working closely with legal experts and auditors, companies can safeguard their intellectual property, avoid OSS-related liabilities, and ensure a smooth post-acquisition integration.

Note: The preceding text is provided for informational purposes only and does not constitute legal nor business 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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