Suppose Ms Y's company uses the X-Software Component in products for (A) the aircraft industry, (B) agriculture, and (C) education, all three products are likely initially developed within the same company. Separate companies, for each product are usually created only after one product succeeds in the market, leading to A-BV, B-BV, and C-BV over time.

Acquisition

If a buyer is interested in acquiring A-BV, it would want to confirm that A-BV holds the copyright for the entire software used for the aircraft products it produces. Since the buyer pays a significant purchase price, it need assurance that A-BV can continue its operations without interruption in the future. This is particularly crucial if it turns out that A-BV does not own or have the proper user licence for the X-Software Component.

If A-BV owns the copyright to the X-Software Component, the buyer will be satisfied but B-BV and C-BV face a risk in using it for their agricultural respectively education products if A-BV would deny their usage rights. This issue must be resolved during as part of the takeover. If A-BV doesn’t own the copyright to the X-Software Component, the situation is mirrored and A-BV would face the same risk as B-BV and C-BV described in the previous sentence.

Most common ‘solution’: the licence agreement

To partially address the continuity risk, a software licence agreement can be entered into with A-BV as the copyright owner/licensor and B-BV and C-BV as users/licensees. If A-BV doesn't own the X-Software Component's copyright, the buyer can request its transfer to A-BV or alternatively settle for A-BV to become a licensee. partially To partially address the continuity risk, a software licence agreement can be entered into with A-BV as the copyright owner/licensor and B-BV and C-BV as users/licensees. If A-BV doesn't own the X-Software Component's copyright, the buyer can request its transfer to A-BV or alternatively settle for A-BV to become a licensee.

Bankruptcy

A software license agreement only provides a partial A software licence agreement only partially resolves the issue, as a trustee in Dutch bankruptcy may decide to a ‘passive default’ under the software licence agreement if the copyright owner of the X-Software Component goes bankrupt. ‘Passive default’ in the context of a bankruptcy typically refers to a situation where the bankruptcy trustee fails to take actions necessary to fulfil its contractual duties. In the example at hand such ‘passive default’ could relate to neglecting contractual maintenance obligations or refusing to provide for data access in SaaS products. It becomes mor problematic if the bankruptcy trustee sells the copyright to the X-Software Component to a third party, that is not a party to the software licenced agreement and therefore not bound by it. If such third party buyer is a competitor of the licensee that may be detrimental for the licensee and its business continuity may be at risk.

In essence, the two BV’s using the X-Software Component under a license agreement, but not owning the copyright, face a bankruptcy risk under a software licence arrangement. This negatively impacts their business value and future sale price. If Ms Y spots this at an early stage before A-BV, B-BV, or C-BV become the object of an acquisition, restructuring might resolve the issue.

Copyright protection measures

Throughout the years, several copyright protection measures have been implemented to reduce the bankruptcy risk.

• (i) The foundation structure (in Dutch: stichting), in which the copyright on the X-Software Component is transferred to a foundation set up for such dedicated purpose, which will act as licensor to (licensees) A-BV, B-BV and C-BV. The foundation may not incur any debts (this is enshrined in its purpose statement) which virtually excludes a bankruptcy risk. However, proper agreements must be made with the licensees that resemble terms and conditions of a software licence agreement.
• The Community,(in Dutch: gemeenschap), in which the copyright of the X-Software Component is transferred to A-BV, B-BV and C-BV collectively, resulting in each company holding an ‘undivided share’ in a ‘community owned copyright’. Again, careful arrangements must be made regarding use, reproduction, modification and other rights affecting the X-Software Component, along with excluding the right to claim partition of the community. Furthermore, limited rights and/or security interests can be established on each of A-BV, B-BV and C-BV’s undivided share’ in the community to provide additional protection.
• The separation,(in Dutch: splitsing), which splits (i.e. ‘forking’) the copyright on the X-Software Component, allowing A-BV, B-BV and C-BV to become separate copyright holders in their respective sectors: aircraft, agriculture, and education.

In some cases, further development might generate a new copyright for software that includes the X-Software Component, which could mitigate bankruptcy risks. To my knowledge, none of these measures have been tested in bankruptcy court.

Tax authorities

Finaly, bear in mind that tax authorities will scrutinise each copyright transfer for taxable events.

If the X-Software Component is transferred to A-BV, the seller will be taxed on any book profit realised on such transfer. Post-transfer, A-BV will probably capitalise the component on its balance sheet, allowing for tax depreciation. It is essential to address the seller's taxation, A-BV’s capitalisation, and the tax benefit A-BV gains from depreciation during the takeover negotiations. The tax authorities may evaluate the value of the X-Software Component independently, but are likely to take into account the purchase price paid by the buyer for A-BV, especially when the software is crucial to business operations of A-BV and if the period between the X-Software Component’s transfer to A-BV and the takeover by the buyer is brief.

Takeaway

Today, envisioning a business without software seems inconceivable. Software often represents a company's most significant asset and plays a crucial role in acquisition processes. To sidestep potential problems during takeovers, companies should proactively establish the optimal legal framework for the use and potential development of their software well before any sale. This foresight can prevent contentious debates over the purchase price during negotiations, resulting in substantial benefits.