Open-Source Software Licensing Risks in M&A: What to Look Out For
A very important aspect that is often overlooked in mergers and acquisitions (M&A) is that the integration of open-source software (OSS) within a target company's products can introduce significant legal and financial risks. While OSS offers advantages such as cost savings and accelerated development, its use is governed by licenses that may impose stringent obligations on proprietary software. Understanding and mitigating these open-source software licensing risks is crucial for a successful M&A transaction.
Understanding OSS Licenses and Their Implications
Open-source software licenses generally fall into two categories: permissive and copyleft. Permissive licenses, like the MIT License and BSD licenses, allow for relatively unrestricted use, modification, and distribution of the software, posing minimal risk to proprietary developments. In contrast, copyleft licenses, such as the GNU General Public License (GPL), impose "reciprocity" requirements. These requirements mandate that any derivative works or modifications be distributed under the same OSS license, potentially obligating companies to disclose their proprietary source code.
Risks Associated with Open-Source Software in M&A
Copyleft Obligations: Incorporating OSS under strong copyleft licenses into proprietary software can compel a company to release its source code publicly, undermining its competitive advantage and business model.
License Compliance: Failure to adhere to OSS license terms can lead to the termination of usage rights, legal disputes, and financial liabilities. Ensuring compliance is essential to maintain the right to use and distribute the software.
Intellectual Property Risks: Some OSS licenses may include clauses that affect patent rights, potentially limiting a company's ability to enforce its patents or exposing it to infringement claims.
Security Vulnerabilities: Undisclosed or improperly managed OSS components can introduce security risks, leading to data breaches and compromising the integrity of the software.
Case Study: Cisco's Acquisition of Linksys
An illustrative example of OSS risks in M&A is Cisco's acquisition of Linksys in 2003. Post-acquisition, it was discovered that Linksys's products contained OSS licensed under the GPL. Cisco's failure to comply with the GPL's terms led to a lawsuit by the Free Software Foundation, resulting in a settlement that required Cisco to release the source code of the affected products and make a monetary donation. This case underscores the importance of thorough OSS due diligence in M&A transactions.
Mitigating OSS Risks Through Due Diligence
Conducting comprehensive open-source software due diligence is vital to identify and address potential risks:
Open-Source Software Audits: Engage auditors to inventory OSS components, assess license compliance, and detect security vulnerabilities. This process provides a clear understanding of OSS usage and associated obligations.
License Analysis: Evaluate the compatibility of OSS licenses with the company's business objectives and proprietary software to prevent conflicts and ensure compliance.
Policy Implementation: Develop and enforce internal policies for OSS usage, including guidelines for selection, approval, and documentation of OSS components, to maintain control over OSS integration.
Some Final Thoughts…
The integration of open-source software in proprietary software presents both opportunities and challenges in M&A transactions. While OSS can drive innovation and reduce costs, it also introduces licensing obligations that, if not properly managed, can lead to significant legal and financial consequences. Thorough OSS due diligence, coupled with strategic business protections, is essential to navigate these complexities and safeguard the value of the transaction.
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.
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Open-source software can be a game-changer, but in M&A, hidden licensing risks can lead to major headaches. Compliance is key to avoiding costly surprises. Have you encountered open-source issues in acquisitions before? Let’s discuss!
The missing link between Legal and Engineering | Interested in Open Source, Open Source Program Offices (OSPOs), InnerSource, and helping organizations to lower the risks (IP, cybersecurity) from 3rd party component use.
4moSource code audit and due diligence should be done for every M&A transaction (I believe that today it is almost impossible to have an M&A without any SW involved). However, I have learned that still, many M&A transactions do not include source code audits and due diligence. If it was my money, I definitely would like to understand what is under the hood and how much it will cost to fix the issues.