The License That Can Hold Up the Sale of Your Company

The most common way to structure the sale of a company is a reverse triangular merger. The buyer forms a subsidiary and merges it into the company, and the company survives as the buyer’s wholly owned subsidiary. Since the company is still the party to its contracts, nothing is assigned, at least on the usual view, and its customer agreements stay in place unless a customer negotiated a consent or termination right. The licenses the company takes in are different, and they’re often what buyer’s counsel flags in diligence.

The default rule

Under federal law, a nonexclusive patent or copyright license is generally treated as personal to the licensee. The licensee can’t transfer it without the licensor’s consent unless the license says otherwise. The rule protects the licensor’s control over who its licensees are, since a licensor that agreed to license one company didn’t necessarily agree to license another. The rule reaches most commercial software a company installs or ships in its product, because software is licensed under copyright. Contracts for hosted software, APIs and data usually restrict assignment in their own terms, and some add a right to terminate if the licensee changes hands. Patent licenses signed to settle a demand letter are personal by default too, and they often cover only the licensee’s own products, which leaves the buyer’s products outside the license.

Reverse triangular mergers

Whether a reverse triangular merger triggers any of this depends first on the drafting. Many licenses define assignment to include a merger, a sale of stock or any change of control, and under that kind of clause the merger structure doesn’t help.

Where the clause only prohibits assignment, including assignment “by operation of law,” the Delaware Court of Chancery has held that a reverse triangular merger generally isn’t an assignment (Meso Scale Diagnostics v. Roche Diagnostics, 2013). A federal court in California reached a different result for a software license in an unpublished 1991 decision. It held that the merger transferred the license under California law, and that federal copyright law didn’t allow the transfer without the licensor’s consent. The buyer there competed with the licensor (SQL Solutions v. Oracle). Because the question is less settled outside Delaware, buyer’s counsel will often ask for consent on important licenses anyway, even where the company has a good argument it isn’t needed.

The consent request often tells the licensor about the deal for the first time, and gives it leverage it didn’t have when it signed. Some licensors simply consent. Others ask for a fee, a price increase or a longer commitment first, and a licensor that competes with the buyer may refuse. If the buyer has made the consent a condition to closing, the licensor also gets a say in when the deal closes. That leverage is greatest for a license the product can’t run without, from a licensor that competes with the buyer or knows it can’t easily be replaced.

Negotiating the clause

Assignment is often negotiated when the license is signed. A common ask is a carve-out that permits assignment without consent in a merger, change of control or sale of all or substantially all of the business the license relates to, as long as any successor assumes the license in writing. Where the licensor won’t agree to that, common middle grounds include the same carve-out excluding the licensor’s direct competitors (where the fight becomes how broadly “competitor” is defined); a consent right, with consent not to be unreasonably withheld; and no consent right, but a right to terminate for a short window after notice of the sale.

A carve-out in the assignment clause doesn’t necessarily reach the rest of the license, though. A license that calls itself nontransferable in the grant, or gives the licensor a change-of-control termination right in a separate section, can still give the licensor an argument that the license didn’t survive the deal, or a right to end it after closing. That’s why buyer’s counsel reads the grant, the assignment clause and the termination provisions together.