Warranties in a corporate sale form part of the protection for a buyer. A “warranty” is a contractual promise regarding a statement of fact at a point time. When selling a software business, the warranties will generally relate to the same areas as the due diligence, being:
- Technical – that the software functions
- Ownership – that the target owns the software
- Infringement – that the software doesn’t infringe any third party rights
- Contracts – around the disclosure and contents of the target’s contracts
Technical warranties may not extend to warranties about the functionality and quality of the software, but are likely to relate to bugs, complaints and other issues.
- Warranties often focus on a fixed period prior to completion, for instance that there have been no significant bugs or errors in the three years up to completion.
- Warranties may also be required about viruses, and vulnerability to viruses.
- The greater protection here will generally be due diligence and the retention of key staff to ensure that the incoming owner can have a meaningful handover in how to maintain, support and develop the software. If the sellers are staying on, this will generally be dealt with through a separate services agreement.
Ownership warranties will be quite high level and self explanatory. If any open source or third party software is incorporated into the target’s software, this needs to be clearly carved out of the ownership warranties.
Infringement warranties will relate both to existing disputes and to potential infringement.
- Sellers should be quite comfortable in providing warranties about any disputes they have been involved in (e.g. they may be able to warrant that they have not received notice of any infringement regarding their software), but may be more cautious around providing blanket warranties that the software does not infringe any third party rights.
- Warranties around potential infringement may be restricted by reference to the seller’s awareness. For example “To the best of the seller’s knowledge…”
- Open source or third party software should also be carefully considered here, and may be subject to a more restricted warranty.
Contractual warranties generally focus around the content and disclosure of contracts. Due diligence can achieve more in this area than in relation to issues like ownership, so fewer warranties are usually required.
- Unless every contract has been reviewed, buyers may request warranties that the target’s contracts do not include certain provisions (such as a change of control clause for the customer)
- Sellers will often have to provide warranties regarding the completeness of their disclosure, for instance, they may need to warrant that they have provided every software contract worth more than a certain value.