- Preparing IT Contracts for Corporate Transactions
- June 15, 2007 | Authors: Stephen Gold; Michael T. Hepburn
- Law Firm: McGuireWoods LLP - Chicago Office
In a period of high volumes of corporate activity – from private equity driven acquisitions and restructurings to industry driven consolidations and divestiture – corporate IT professionals and the lawyers that support them should be prepared for the all too inevitable transitions in corporate ownership that result. Just as a pre-nuptial agreement will protect the individual interests of a married couple, planning ahead for proper contractual provisions can mean everything when it comes to protecting disparate interests at the time of a divestiture or other transition. In the IT context, transition planning might address access to important enterprise-wide IT systems and core applications for such functions as payroll, accounting, resource planning, order fulfillment, IT helpdesks and other key systems. A transition services agreement can be created during a corporate transaction with much greater ease if the underlying agreements with the third-party IT vendors contemplate the potential for future divestment activity.
Divestiture-Related Problems with IT Services and License Agreements
Unfortunately, it is often only at the point when a divestiture or other transition is close to becoming a reality, that some companies look at whether the key enterprise-wide IT agreements permit the activities contemplated by the transition services needs of the transaction. All too often, a review of IT licenses and services agreements would reveal that the company is prohibited from, among other things, permitting the divested entity to use some of those key IT assets. While there are approaches to addressing the problem in the context of a transaction, sleepless nights for the IT team supporting a corporate transaction can be avoided if a “pre-nuptial” approach is in place well in advance.
“Post-Nuptial” Alternatives to Addressing the Problem
If no “pre-nuptial” divestiture provisions are put in place, upon discovering that its IT agreements contractually prohibit the performance of transition services, a divesting company is faced with one of two relatively unappealing prospects—especially when the desire of the divesting company is to divest as quickly as possible and move on—the divesting company can either (i) engage in a potentially expensive consents and approvals process in which the divesting company approaches its vendors with urgency and little leverage, or (ii) roll the dice for some or all of these agreements and permit the use by the divested entity for the length of the transition services agreement without seeking the appropriate consent—risking breach of contract claims and possible financial damages as a result.
The “Pre-Nuptial” Approach: The Divested Entity Clause
Companies can avoid these problems via the use of divested entities clauses like the following in their key IT licenses and services agreement.
A sample (for an IT services arrangement) is as follows:
Supplier agrees that if any Company Affiliate which is subject to this Agreement ceases to qualify for any reason as a Company Affiliate (“Divested Entity”), then Company shall have the right, exercisable in its sole discretion, at no additional charge to Company, to continue to use this Agreement to provide Services and sublicenses to the Divested Entity. Company shall continue to be responsible for payment with respect to the Services provided to or for the Divested Entity during a transition period (“Transition Period”) not to exceed one (1) year. At the conclusion of the Transition Period, the Divested Entity shall be solely responsible for all payments with respect to any services provided to and for the Divested Entity.
A sample (for an IT license) is as follows:
For the purposes of this license agreement, “authorized users” of the software and system shall also include any divested business units of Company for a minimum period of twelve (12) months after the date of divestiture of such business unit; provided that Company gives Licensor written notice of such use by such divested business unit.
These simple clauses give a customer of IT services or products the right to permit its divested entities to use the IT product or service for the benefit of the divested entity for a limited time (in these examples, 12 months) and lays out any preconditions to such use. Since, like a pre-nuptial agreement, the divested entity clause is negotiated in advance, it provides peace of mind, cost savings and time savings in the event of a corporate transaction requiring transition services. It is also far easier to negotiate in the context of a negotiation of the many points that are addressed in establishing an IT vendor relationship, rather than when going to the vendor on this singular issue.
Of course in many, if not most cases, critical IT license and service relationships are already in place. In those settings, there are several best practices that IT support teams can apply to address this issue. A periodic IT contracts audit would help identify problem areas. Beyond that, a review process for any contracting event (such as a renewal, an additional order, or a pricing change requested by the vendor) would create an opportunity to identify and ameliorate not only this issue but other contract issues that have arisen due to changing business and technology models. Finally, IT contract divestiture clauses should be included in the due diligence checklist and data room preparation for all corporate transactions that may lead to a need for IT transition services.
IT transition service arrangements and planning are some of the areas supported by the McGuireWoods Technology Transactions Practice Group. This practice group is part of the firm’s integrated Technology & Business Department, which provides legal services for business transactions driven by technology. These service areas are led by Department Co-Chair Steve Gold and Group Leader Mike Hepburn. For further information about this or any related topics, please contact us.