Reorganizations are slowly becoming commonplace in the life of the company (groups), be they transformations of a smaller or larger volume. If these also affect the legal personality of the company, including separation, spin-off, merger, and amalgamation, we must also deal separately with the licensed assets within the assets of the company. In the event of a change of ownership (such as a company acquisition), we must proceed with similar caution, whether it is a group of companies, either in the previous or in the new group.
During a transformation, the management of licensed assets is relegated to the background – either because of its complexity or because of its lower value relative to other assets in the company. Some licenses are listed as tangible assets in books, so we inevitably address the issue. However, the approach of treating our perpetual licenses like any of our other tangible assets involves a lot of risks. Our series of articles is a guide to what issues we need to look at in connection with a company transformation, in order to make the right decision regarding licensed assets. It is important to emphasize that each license agreement must be examined individually, and each agreement may contain provisions on how to proceed in the event of a company transformation.
What kind of transformation is happening? – legal perspective
First, we need to examine whether the transformation will create a new entity, what will happen with the “old” entities, and who will be the successor.
When transforming, we can talk about division or merger. Depending on exactly how the restructuring takes place, we distinguish between separation and spin-off within a division and merger and amalgamation within fusion.
Separation: during the separation, the former company will be dissolved, and instead, two new legal entities will be created, which are the legal successors of the previous company. The document on the division (division plan) must provide for which property or property right, which company is the legal successor. At the moment of separation, the owner or holder of these assets will be the legal successor named in the document.
Spin-off: upon spin-off, the “former” company remains an independent legal entity, one of its organizational units becomes independent. It becomes an independent legal entity. The document sanctifying the spin-off (division plan) must provide for the assets in respect of which the new, independent legal entity is the legal successor. Here, too, the assets are transferred to the new entity by operation of law.
Merger: In this case, a former, separate company “loses” its legal personality and becomes part of a pre-existing legal entity. Usually, all of its assets are transferred to the latter entity by operation of law.
Amalgamation: Two companies with previously separate legal entities unifying, their legal entities cease to exist and a new independent legal entity is created. This new entity will be the legal successor of the two previous companies by the force of the law, “inheriting” their entire assets.
Who is the successor of the license?
Unfortunately, the succession described above is a very simplified approach to licensing, and we need a more complex examination, mainly because it is often a group of companies and a member company, not a single company.
First, we need to examine to whom the vendor has authorized the use of the software and under what conditions (e.g., does the contract contain a full corporate commitment for all affiliates). In the simplest case, the licensee is a single company, but this can often be extended to some affiliates or even to an entire group of companies. In this case, it will be governed by how the contract specifies who may use the licenses.
This definition can be an exhaustive list, i.e. the right of use is limited to the companies listed in the contract (or its annex). In this case, if a new entity joins the group, it will not automatically be able to use these licenses, or if it is purchased with the same type of license, it will not be subject to pre-determined benefits, plus rights or obligations. This type of definition is often accompanied by a change of control clause that if the ownership structure of one of the listed companies changes, i.e. leaves the group of companies, it can no longer be licensed under this agreement.
The other method is to define the scope of entitlements by a non-enumerated definition, so in the case of a specific ownership structure (ownership or influence), the new entity is covered by the personal scope of the contract, thus becoming entitled to purchase and/or use licenses under the contract.
In the following articles of the series, we will deal with records and document management during the transformation, as well as the audit risk and risk mitigation arising from the restructuring.