The use of open-source software (OSS) is ubiquitous. Depending on what license governs the type of OSS a company uses and how it uses the OSS, OSS use impacts the valuation of the intellectual property (IP) used by a company or transferred in a merger or acquisition (M&A). Thus, OSS-related representations and warranties have become an integral part of the IP representations and warranties in M&A transactions and financings.
OSS representations and warranties generally consist of the following key components:
- A definition of OSS. It is important for the definition of OSS to be as broad as possible. Most OSS definitions will define OSS as software that is subject to or licensed, provided, or distributed under any “open source,” “copyleft,” or other similar types of license terms and then list out the various types of OSS licenses. The definition of OSS should also include any license meeting the Open Source Definition (as promulgated by the Open Source Initiative) or the Free Software Definition (as promulgated by the Free Software Foundation) or any substantially similar license.
- A full list of the company’s use of OSS for due diligence purposes. This list should include each item of OSS (a) incorporated into, integrated, bundled, linked, or distributed with, or used in the development or compilation of any company product; (b) a description of the license terms (and version) under which such OSS is licensed; and (c) the manner in which such OSS is incorporated into, integrated, bundled, linked, or distributed with, or used in the development or compilation of any company product.
- OSS compliance and contribution representation. The company should represent and warrant that it has identified all OSS used by the company, that its use of OSS complies with the appliable licenses, and that it has not contributed any proprietary software to an open-source project or made it available as OSS.
- OSS policies. The company should represent and warrant that it has policies regarding the use of OSS, it has provided such policies to the acquirer or investor, and it has not deviated from such policies.
- No use of viral OSS. A key representation and warranty is that the company has not modified, included, incorporated or embedded in, linked to, combined or distributed with, or used in the delivery or provision of any company product any OSS in a manner that (a) requires the company software to be disclosed in source code form, (b) requires any company proprietary software to be licensed for the purposes of making derivative works, (c) places restrictions on the consideration the company may charge for distributing its software, or (d) obligates the company to grant any third party any rights or immunities to technology or IP rights owned by the company.
The foregoing representations and warranties provide useful information to the acquirer or investor regarding a company’s use of OSS and, if the indemnity and limitation of liability in the transaction agreement are appropriately structured, provide financial recourse for the company’s breach of the representations and warranties.
However, buyers and investors should be wary of inadequate disclosures and knowledge qualifiers to the representations. Also, it is key for the buyer or investor to review all of the company’s uses of OSS and discuss this with key company employees who are knowledgeable about such use, as certain uses of OSS could significantly impact the valuation of the company’s IP.