How to Prioritize Open-Source Software Compliance Issues During M&A Negotiations

In merger and acquisition (M&A) negotiations, open-source software (OSS) compliance increasingly emerges as a critical area for evaluation. Open-source components are commonly embedded within a company's software stack, bringing both benefits and risks. Failure to address OSS compliance properly can lead to costly post-deal complications, including licensing disputes, security vulnerabilities, and reputational harm. Here’s a step-by-step guide to prioritizing OSS compliance in M&A negotiations to protect and maximize the value of the deal.

Early Assessment of Open-Source Exposure

The first step in prioritizing OSS compliance is identifying the target’s open-source usage early in the due diligence process. This includes:

- Cataloging OSS components: Identify all open-source components used, directly and indirectly, in the software products through a complete audit.

- Reviewing documentation: Ensure that OSS usage is documented, including versions, dependencies, and any modifications to the code.

- Understanding license types: Different open-source licenses (such as GPL, Apache, MIT) impose varying requirements on the user. Certain licenses, especially copyleft licenses, can mandate that modifications or derived works be made public, impacting proprietary software.

A thorough OSS inventory allows the acquiring company to understand potential legal and operational implications and spot any red flags before entering deeper negotiations.

Evaluate License Compliance Risks

Once OSS usage is cataloged, evaluate compliance with each component's license requirements. Focus on identifying components governed by “restrictive” licenses (e.g., GPL or AGPL) as these may require:

- Disclosure of source code: Some licenses require source code disclosure if the software is distributed, which may impact proprietary rights.

- Patent rights obligations: Certain licenses require the user to grant patent rights to other licensees, which could weaken the buyer's patent position.

- Derivative works requirements: Understanding if and how OSS is incorporated into proprietary code helps assess exposure to requirements that mandate sharing modifications.

License compliance gaps can lead to legal liabilities, so prioritizing these evaluations allows parties to make informed decisions about remediation before finalizing the deal.

Assess Security and Quality Risks

Open-source software, while powerful, can carry security and quality risks, especially if outdated or poorly maintained. During M&A negotiations, it’s critical to evaluate:

- Vulnerabilities: Check for known vulnerabilities in OSS components. An unpatched vulnerability can pose security risks to the entire software stack, exposing the acquiring company to potential data breaches.

- Maintenance and update policies: Determine how frequently OSS components are updated and whether they’re actively maintained by the community or a vendor.

- Component compatibility: Evaluate whether the OSS components are fully compatible with the proprietary software and infrastructure. Incompatibilities can lead to costly rework post-acquisition.

These assessments provide insights into the stability and reliability of the software and help identify any OSS components that may need to be replaced or upgraded.

Establish Remediation Priorities

After identifying compliance gaps and security risks, the acquiring company should prioritize remediation based on risk level and potential impact on business operations. Common approaches to remediation include:

- Code modification or replacement: For components with high compliance risks, replacing or modifying them to use a license-compatible version can be a strategic solution.

- Source code disclosure: In cases where disclosure requirements apply, assessing the feasibility of sharing the modified source code with minimal impact on the proprietary elements can mitigate risk.

- Third-party solutions: Utilizing compliance tools or third-party services can streamline the monitoring and reporting of OSS compliance.

Remediation priorities depend on the OSS component's role in the software and its risk exposure. Clear prioritization ensures that critical issues are addressed before they lead to complications post-acquisition.

Set Up Ongoing OSS Governance

Addressing OSS compliance isn’t a one-time exercise; it requires ongoing governance. As part of the M&A negotiation process, establish or review existing policies on OSS management within the target company, including:

- Training and policies: Educating developers and legal teams on OSS compliance best practices can prevent issues from arising in the first place.

- Periodic audits: Conducting regular OSS audits to ensure continued compliance and identify new risks as the software evolves.

These governance mechanisms should be woven into the post-acquisition integration plan to ensure long-term OSS compliance.

Final Thoughts

Prioritizing OSS compliance issues during M&A negotiations is essential for protecting the value and integrity of the transaction. By systematically assessing and addressing OSS components, evaluating license and security risks, and establishing ongoing governance, companies can confidently move forward in M&A activities while minimizing the risk of OSS-related issues. This proactive approach enhances trust between parties and positions the acquiring company to achieve a seamless and secure integration.

Note: The preceding text is provided for informational purposes only and does not constitute legal nor business advice. The views expressed in the text do not necessarily represent the views of Fossity or any other organization or entity.

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