MT Expert: Open season on Open Source

Businesses need to be very careful with open source software, say Reed Smith's David Boutcher and Bob Stankey.

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Last Updated: 31 Aug 2010

More and more businesses are making use of Open Source Software to develop technology – the obvious attraction being that it should allow you to use, modify and distribute software code without charge. This is also particularly attractive for a growing business looking to keep costs at a minimum – but if you’re not careful, it can present significant pitfalls when you come to exit...

These days, software can often be THE key asset of a business. So it’s no surprise that it has become an increasingly significant issue for M&A deals in the technology sector. In particular, we’re finding that open source software can have a dramatic effect on M&A and the value of a business that uses it.

That’s because there are some key differences between OSS and other types of licensed software. It may be difficult to obtain updates; users may be prevented from making patent infringement claims when others are using similar software; and there are special obligations that apply to its use. This could mean that companies who use it may not fully own or control their products.

Although there are at least 70 different OSS licences, the most common category is the ‘reciprocal licence’.  If your company uses this kind of licence to create a product, you must make that product’s software available in source code form so others can use, modify, distribute and incorporate the software into other software – without charging a licence fee. You’ll be subject to these reciprocal obligations even if your company depends on software licensing revenue or the sale of equipment containing embedded OSS software – which may mean that you have to make your most valuable asset available for free to anyone who wants it.

Today, sophisticated buyers of technology companies carefully review the software code that a target company uses.  If you can’t identify the licences governing your use of OSS, you’re going to run into trouble during due diligence – and not just because you’ll find it hard to respond to their enquiries. Would-be buyers are likely to seek a discount in the purchase price, because of legal uncertainties over intellectual property rights.

In addition, if you haven’t managed your OSS risks properly, it might make buyers worried about your ability to protect IP and commercialise your products more generally. This can also have an effect on your valuation – and might even result in potential purchasers walking away (as was rumoured to be the case when Oracle abandoned a bid for OSS vendor JBoss). 

British companies still don’t seem to take OSS risks as seriously as their counterparts in the US. But if you’re planning a sale, you must be able to respond to due diligence enquiries about IP ownership and your use of OSS – and you must be able to demonstrate that IP issues do not threaten future revenue streams. The same is true if you’re thinking of taking investment: venture capitalists, eager to protect their returns, are also requiring that their portfolio companies manage OSS issues properly. 

In short, poor IP management can be a real problem for any kind of exit. Get it right now, or it could be open season on your Open Source investments.


To contact David or Bob, please call: 020 7247 6555 or email: dboutcher@reedsmith.com/bstankey@reedsmith.com

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