The Importance of Identifying Shared Technology

In spinout transactions, counsel representing potential buyers and sellers should be prepared to identify and mitigate key risks that may arise in carveout divestitures. One of the most common risks that arise in carveout divestitures is the so-called “Shared Technology” problem. A recent suit brought by Broadcom affiliate CA, Inc. (“CA”) against Allstate Insurance Company (“Allstate”) highlights the importance of identifying Shared Technology and securing necessary rights to enable continued access to and use of Shared Technology after the divestiture.

The CA v Allstate Case

CA’s claims against Allstate present a strong reminder that prior to entering into a carveout divestiture, counsel must identify all software, technology, IP, and services that are used by both the divested entity and the selling parent (the “Shared Technology”). CA’s complaint alleges that Allstate notified CA that it was divesting the Employer Voluntary Benefits business (the “EVB”) to StanCorp Financial Group (“StanCorp”) and that it intended to enable the EVB and StanCorp to continue using the ESP Software for a transitional period of up to two years after the closing. CA further alleges that Allstate breached its 2021 license agreement with CA by enabling the EVB and StanCorp to continue using the ESP Software without securing necessary rights from CA.

• CA seeks at least $80,000,000 in damages, disgorgement of profits, and an injunction against any further access to or use of the ESP Software by the EVB or StanCorp.
• The CA v Allstate case highlights the importance of identifying Shared Technology and securing necessary rights to enable continued access to and use of Shared Technology after the divestiture.

Why Shared Technology is a Common Risk in Carveout Divestitures

Shared Technology is a common risk in carveout divestitures because it can be difficult to identify and disclose all of the assets that are used in the divested business, including any Shared Technology. Buyers typically rely on sellers to identify and disclose all of the assets that are used in the business, including any Shared Technology, and to disclose all of the applicable vendor contracts and IP license agreements. Sellers must therefore be prepared to disclose any Shared Technology and all of the applicable vendor contracts and IP license agreements and to assess whether the vendor contracts and IP license agreements for any Shared Technology can be assigned to the buyer in part or sublicensed.

Identifying Shared Technology

Identifying all Shared Technology can itself be an enormously difficult and time-intensive task. Large diversified companies typically rely on hundreds if not thousands of different third-party software, technology, IP license, and service agreements in order to operate their businesses. Shared Technology may include anything from centralized ERP and accounting software (e.g., SAP and Oracle), cloud-based human resources and customer relationship management services (e.g., Workday and SalesForce), IT infrastructure software and services (e.g., CA’s ESP Software, Microsoft, ServiceNow), information security tools, design automation and development platforms, enterprise-wide patent licenses or cross-licenses, etc.

Reviewing Vendor Contracts and IP License Agreements

Reviewing the applicable vendor contracts and IP license agreements can also be a difficult and time-consuming enterprise. Counsel reviewing those contracts must have sufficient expertise regarding technology and IP license and service agreements to identify all applicable provisions, assess whether the seller has sufficient rights to enable the divested business to continue using the Shared Technology post-closing, and make recommendations regarding how to secure any necessary rights.

• Vendor contracts and IP license agreements often include express provisions addressing what happens upon a divestiture, but many will not.
• Counsel will need to determine whether any divestiture clauses apply to the specific spinout structure being contemplated and to assess any applicable restrictions.
• Some divestiture clauses are limited to sale of a corporate subsidiary of the seller but don’t apply to a sale of assets.
• Divestiture clauses often include material restrictions on use of the applicable software, technology, IP, and services after the divestiture.

Securing Sufficient Rights

For Shared Technology that will not be transferred, buyers typically require a transition services arrangement under which the seller is obligated to make certain Shared Technology available to the divested business for a transitional period after closing. As reflected in CA’s complaint against Allstate, for each Shared Technology contract that is excluded from the sale, the parties must determine whether the seller has sufficient rights to enable the divested business to continue using the software, technology, IP, or services. If the applicable vendor contract or IP license agreement does not expressly permit use of Shared Technology by a divested business, then the seller will need to approach the vendor or IP licensor to request any necessary rights or licenses.

• Vendors and licensors often take advantage of the context and urgency of a pending divestiture to demand a steep price in exchange for permitting continued use of the Shared Technology by the divested entity, even if only on a transitional basis.
• Failure to secure sufficient rights can create material risks of business disruption and financial liability.

Conclusion

In preparing for a spinout or carveout divestiture, Counsel for sellers and buyers should ensure that they have identified all Shared Technology, reviewed all applicable vendor contracts and IP license agreements, and secured sufficient rights for any continued use post-closing of any Shared Technology. Failure to do so can lead to material risks of business disruption and financial liability.