Implementing the transformation: focus on licenses
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.
In the previous part of our article series, we examined what transformations could be involved and looked at, and what determines the licensee. In this section, we deal with the operational part of the restructuring process: how we can define license assets and how to manage records and documents related to licenses.
Records – but are they adequate?
Various records form a list of a company’s assets. In the case of restructuring, we usually use these records, taking into account the assets included in them.
Concerning licenses, several registers may co-exist due to different legal obligations. On the one hand, there is a legal, accounting obligation for the company to record its property rights in the books, and on the other hand, most vendors require the registration of licenses – and use – as a contractual obligation. Unfortunately, accounting records alone are not suitable for the latter, so in many cases, there is at least one more record that is technical. In the case of two or more registries, there is a high probability that these registers are different, contain different numbers and types of licenses. One reason for this is the purpose of the register. In the case of a more technical record, it is advisable to track the actual rights (for example, if a purchased license allows the use of more than one software), as these financial records do not include all usable software products as separate items. Actual rights may also depend on the number of licenses (for example, we have purchased one license but it permits us to use a second copy on a secondary tool) or the payment for maintenance, which we should also not forget. Another reason for the discrepancy may be the possibility of an error due to our processes or administration. There are several cases where a license is acquired and paid – so it is entered in the financial records – but the related documentation does not reach the person or department responsible for managing the licenses, or a license other than the acquired license may be recorded in one of the registers.
In this case, the decision point is which register to use, as only the licenses that we have expressly provided for, can be transferred free of charge to the relevant legal entity upon the restructuring of the company. Subsequent adjustment after the transformation of the company, movement of assets between separate companies is only possible for a fee. In many cases, such transactions are restricted by software vendors or subject to their consent according to license agreements. It can happen that the vendor will not give consent, so a new license may be required to avoid disputes. It is possible to purchase second-hand software without the vendor’s consent, but in these cases, it is questionable whether the vendor will pass these changes on its own records or be obliged to provide support for the licenses concerned.
For our records to be updated before restructuring, it is advisable to compare the changes on a quarterly or semi-annual basis and the entire records annually, to clarify the reason for the discrepancies, and to correct them if necessary.
Documentation handling
The proper management of license documents is closely related to records and the movement of licenses between companies in line with restructuring. To prove our entitlements under the licenses, we must have some kind of document of license value: a registered license certificate or a contract with the vendor – failing that, we must have at least proper proof (usually an invoice issued by the vendor) that we have actually purchased the license. Both at the time of purchase and at the time of company restructuring, it is worth examining, especially in the absence of an appropriate vendor’s certificate (i.e. a license certificate or a contract with the vendor) the source of the purchase (from the vendor itself or from a distributor who can prove that it is entitled to sell the license in question).
Documents with a license value must be placed in the license warehouse of the appropriate company during the company transformation to be able to verify the legitimacy of the use of the software during a possible audit. During several transformations, documents reflecting the fact of the restructuring and the change of entity should also be treated together with the license documentation, especially if the vendor has not been previously notified of the change of entity.
In case of second-hand software purchase or adjustment after transition, we have to prove from the purchase of the license to the current status, that all members of the ownership chain have legally used and transferred the license; and that the licensed copy of the software has not been used by the previous licensee. To prove this, in addition to handing over the complete documentation, it is worth obtaining a statement from the previous licensee that he no longer uses the specific copy of the software included in the license, he has transferred the use to the new licensee, otherwise, the previous licensee must bear the consequences. This statement also has to be stored appropriately, along with the software documentation.
If we know that the vendor keeps a record of those entitled to use the software and the licenses sold to them, it is advisable to notify the vendor of any change in the person of the holder at the time of restructuring and transfer, using the appropriate form, if available. In addition, some vendors may require notification if the licensee changes during restructuring. The exact process of notification is usually included in the license agreement.
In the next part of the article series, we will deal with the management of subscriptions and maintenance contracts, and we will examine the risks inherent in company restructuring and possible ways to reduce the risk.
The original article was published in Hungarian in ITBusiness.hu.
