After 5 years, the James Hardie cases have come to a close. On 3 May 2012, the High Court delivered a judgment that is in line with the recent trend of tightening the responsibilities of corporate officers.

What do directors need to know?

Review before you approve any significant documents during meetings, including previous minutes.

Each director should personally review minutes of board meetings and documents tabled before the board before approving them to ensure their accuracy.

This is not a mere administrative act, but a critical risk-minimising exercise as minutes are strictly taken as a record of what has transpired at a board meeting.

If your review of minutes or documents tabled at a board meeting raises concerns, you must let those concerns be known as soon as possible – even after the board meeting.

Are you a company secretary who is also in-house counsel? What do you need to know?

You have a very high responsiblity to critically analyse external advice and to protect the company from legal risk.

Company secretaries who are also in-house legal advisors have a high degree of responsibility to protect the company from legal risk. This duty goes beyond statutory responsibilities to include additional duties derived from your role and responsibilities in the corporation.

Furthermore, you must properly consider and critically analyse external advice given to the board. If you hold any reservations in relation to external advice, you may have an obligation to make your concerns known to the board.

Finally, your role is viewed as a combined one and it not possible to divide your capacity into that of company secretary some of the time and that of counsel at other times.

What do corporate advisors and senior executives need to know?

You owe duties of care and diligence in the decision-making process.

Persons, such as high-level advisors and senior executives, who are not company secretaries may be considered officers of the corporation if they participate in decision-making that affects the whole (or a substantial part) of the company’s business.

Participation in decision-making does not equate with actually making the decision. It includes contributing to the decision-making process.

If this is you, then you may owe duties of care and diligence to the company. You must exercise caution and judgment in every instance of your conduct in contributing to that decision.

What happened?

James Hardie Industries announces that is has enough funds to meet asbestos-related claims

In 2001, two subsidiaries of the James Hardie Group were exposed to major liabilities associated with asbestos related claims. The Group restructured itself to separate those subsidiaries from the Group.

At the same time, a foundation was established by the Group to compensate the victims of asbestos related diseases who had claims against the two subsidiaries.

In February 2001, the board of directors of James Hardie Industries Limited (JHI) made an announcement to the Australian Securities Exchange (ASX) that the foundation had sufficient funds to meet all anticipated compensation claims.

That announcement was misleading because the foundation was underfunded by $1.5 billion.

ASIC takes action

In 2007, ASIC brought proceedings against JHI’s directors and Mr Shafron, its company secretary and general counsel.

ASIC sought civil penalties against them for failing to exercise due care and diligence in approving and releasing the ASX announcement.

Round 1: NSW Supreme Court

At trial, the NSW Supreme Court found that the directors had breached their duties in approving the ASX announcement at a board meeting. ASIC had tendered the board minutes to the court, and the court accepted them as evidence of what had transpired at the board meeting.

The court determined that Mr Shafron was an officer of the corporation either because he was a company secretary or because he was an individual who participated in making decisions that affected a substantial part of JHI’s business.

The court also found that Mr Shafron had breached his duties by failing to advise the board adequately. Specifically, he should have advised the board that the ASX announcement “was expressed in too emphatic terms” and that there were serious questions about the economic advice that the board had received.

Round 2: NSW Court of Appeal

Some directors appealed. They argued that the NSW Supreme Court should not have held that the minutes had been tabled or approved.

The court agreed and overturned the NSW Supreme Court’s decision. It accepted that the board minutes relied on by ASIC contained a number of inaccuracies and that witnesses called by ASIC could not properly remember the tabling of the resolution in relation to the ASX announcement.

Unfortunately for Mr Shafron, the Court of Appeal still held that he had breached his duties as an officer of JHI. He had unsuccessfully tried to argue that he was acting in his capacity as general counsel and not as company secretary and, therefore, the Corporations Act 2001 should not apply to him.

ASIC and Mr Shafron appealed to the High Court.

Round 3: The High Court

The High Court overturned the decision of the NSW Court of Appeal and held that the directors of JHI had breached their duties.

Mr Shafron was unsuccessful as well. The Corporation Act did apply to him because his role in participating in the decisions of JHI brought him within the definition of “officer”.

Most importantly, the High Court held that, in the absence of contrary evidence, the board meetings were proof of the matters and resolutions contained in them. This is despite the fact that the directors had argued that the minutes had contained inaccuracies.

Questions? Contact our Corporate Law team.

What is the new National Business Names Register?

The current system of business name registration is administered by each state and territory independently. This fragmented system means that businesses are required to register their business names in each state or territory.

From 28 May 2012, ASIC is set to maintain the new national register of business names (Register) established under the Business Names Registration Act 2011 (Act).

What are the benefits of this change?

The Register will help to:

• save time because businesses will only need to complete one registration;
• save money by eliminating the costs associated with registration and renewal in each state and territory;
• reduce administration by enabling businesses to attend to one registration Australia-wide;
• increase certainty by having a nationally available public register to search and identify business names;
• increase transparency by making the details of the entity carrying on a business under a business name available to the public.

What do you need to know if your business name is currently registered?

You must notify ASIC when certain things happen

The Act requires notification if the following events occur:

• changes to information. You must notify ASIC of any change to the information recorded in the Register within 28 days of that change;
• disqualification. You must immediately notify ASIC if you (as the business name holder) or a person involved in the management of the entity carrying on the business under that business name becomes disqualified. You are considered disqualified if you are disqualified from managing a corporation under s 206B(1) of the Corporations Act 2001, or if you are convicted (even overseas) of an offence that involves dishonesty and is punishable by imprisonment of at least 3 months;
• bankruptcy or insolvency. If you become bankrupt, or if your entity becomes insolvent, then your debtor representative must notify ASIC within 28 days of their appointment. If the business name was transferred to the Register from a state or territory, then this notification must be given within 28 days of the registration.
• appointment of a legal personal representative (e.g. executor or administrator). If the holder of a business name dies and a legal personal representative is appointed (such as an executor of a will or the administrator of an estate), then the legal personal representative must lodge the notice of the grant (such as the grant of probate or letters of administration) with ASIC with 28 days of the grant. If the business name was transferred to the Register from a state or territory, then this notification must be given within 28 days of the registration.

What’s better than a business name? A trade mark.

Registration of a business name does not give you the exclusive right to use that name. Without being able to establish prior goodwill and reputation associated with a business name, businesses may fail to prevent the competition from registering similar names.

To protect a business name, businesses should consider registering a trade mark – which gives one exclusive ownership rights in that name. A trade mark is national. A trade mark is stronger.

Contact our Commercial and Intellectual Property Law teams for questions about business names and trade marks.

What you need to know

If you design, operate and own a cloud-based system that enables users to make copies of works protected by copyright, then you may be liable for copyright infringement as a maker of infringing copies.

What happened?

TV Now

Optus offered the TV Now service.

TV Now allowed customers to download an app that enabled them to choose programs to record. Clicking “record” triggered an automated process, causing recordings of those programs to be made in data centres. The automated process and data centres were designed and owned by Optus.

Customers could then play back their chosen recordings at a more convenient time on their mobile phone, iPad or computer.

The dispute

The AFL and NRL had an exclusive licensing arrangement with Telstra.

They argued that the TV Now service infringed on their copyright in broadcasts of games. TV Now threatened their revenue stream.

Optus did not infringe copyright…

At trial, Mr Justice Rares found that Optus did not infringe copyright because it was the customers who had made the alleged infringing copies of the broadcasts. TV Now was akin to a VCR or a DVD recorder.

And the customers did not infringe copyright because they were able to rely on the time-shifting exemption in the Copyright Act 1968. That allowed them to make recordings of broadcasts for private and domestic use.

… yes they did.

The AFL and NRL appealed to the Full Federal Court (FFC).

On 27 April 2012, the FFC held that just because a customer hit record did not mean that the customer was the only maker of the infringing copy.

By capturing broadcasts and designing, owing and controlling the automated copying TV Now service with the sole purpose of recording free-to-air broadcasts, the FFC said that Optus was the primary maker of those alleged infringing recordings – perhaps jointly with the customer.

And since customers could rely on the time-shifting exemption, Optus was left on its own, without a defence.

What next?

The courts appear to have artificially delineated between home-recording devices and recording systems in data centres that act in concert with end users. The court’s reasoning that relies on 20^th century technology is an uncomfortable situation for cloud service providers.

But the court is there to interpret the wording of the Copyright Act as it is. It is the law then, that needs to try and keep up with technology.

One gets a sense that the FFC feels this when it said: “We have found the questions raised in the appeals to be of some difficulty and considerable uncertainty”.

While Optus takes its appeal to the High Court, the law, as it stands, calls for caution in the cloud.

Contact our Technology Law team.

Software is not infallible. No matter how cautious the developer or how competent the user, software can and does hit bumps when put through its paces.

Software support agreements won’t prevent the hiccups, but they can smooth out the ride for users and customers, give developers and licensors the chance to fine tune their product and manage the expectations of customers and support service providers.

What is “support”?

Support and maintenance refer to a range of services. It’s definition is malleable and takes its colour from:

• the nature of the software;
• the reasonable expectations of users of the software and customers that rely on them;
• software licence and development agreements;
• the ability of suppliers to provide support;
• users’ capabilities;
• the software operating environment;
• the overall expectations and capabilities of the parties.

Against the backdrop of the considerations listed above, support can touch on:

• performance levels;
• on-site and off-site assistance;
• help desks;
• priority and escalation;
• fixing bugs and errors;
• updates.

What should suppliers and customers think about?

suppliers

When negotiating or preparing a support agreement, suppliers need to make inquiries such as:

• what hardware will the software be loaded on?
• what are the capabilities of customers?
• what technical know-how and IT support is or can be available to customers other than the support provider?
• what are the customer’s security needs?
• what will be the impact of the software on the customer’s business?
• how does the customer maintain the integrity of its IT solutions?

customers

Suppliers tend to draft the support agreement in the first instance. It makes sense since a supplier is best able to gauge its abilities. However, customers should bring additional questions to the table, including:

• what will be the costs of support?
• how can the price of support be protected/maintained?
• how will warranty periods and obligations in licence/development agreements affect the support services provided?
• will there be priority levels and what should they be?
• what will be the response times?
• what are the supplier’s obligations in relation to restoration and what will be the consequences of poor or failed restoration?
• how will the software be updated and maintained?
• how will security issues and data integrity be addressed?

It’s all about service levels

Disappointment and disputes stem from the failure of parties and their advisors to manage the expectations and capabilities around support.

Remembering the various factors discussed beforehand, it comes down to how the support provider can maintain the software so that it matches the description of the software made to customers: How do we get this to work the way we’ve said it should?

what services could be provided?

The scope of support services can cover:

• explaining the software;
• addressing software manuals and other documentation;
• assisting or guiding customers in using the software;
• giving recommendations based on hardware;
• attending to crashes, unintended results and defects;
• maintenance and correction of corrupted data;
• addressing defects caused by modifications of the software;
• fixing errors arising from using the software in a manner not intended, recommended or designated;
• fixing operating system or equipment errors;
• training users of the software;
• modifying the software, including modifications that go outside the original licence or development agreement;
• fixing defects that go outside warranties.

Of course, the level of support will be priced accordingly.

Support charges: the price of support

Price should always be certain or should be clearly ascertainable. It is important to ask:

• can the supplier increase prices over the term of the support agreement (e.g. in line with changes to the Consumer Price Index)?
• how much notice should be provided to the customer before increasing prices?
• can the customer choose to terminate the support agreement if the price changes are unacceptable?
• what if the customer requests additional services beyond the support agreement?
• what if the supplier is asked to take unnecessary steps in rendering support?

Remember, disputes are inversely related to certainty in price and price mechanisms. Get price right from the the start.

Prioritising and responding to software issues

Support requirements are not equal. Some issues are more pressing than others. Therefore, parties should build into support agreements:

• a criteria for prioritising issues;
• the response and escalation required at each level; and
• customers’ obligations in obtaining support such as providing reports and information to suppliers about faults.

What if service levels are missed?

performance rebates

It is extreme to equate missing a service level with an immediate breach of the support agreement that allows the customer to terminate the relationship.

Instead, performance rebates may accrue to the customer where the supplier falls short in meeting service levels. The formula for calculating performance rebates should be agreed at the outset of the relationship.

Performance rebates allow customers to hold support providers accountable while allowing a buffer for suppliers in the event of substandard performance.

what if there is continuous substandard support?

Of course, continuous failure to meet service levels could trigger:

1. the customer’s right to terminate the support agreement and claim damages; and
2. the customer’s right to seek the services of another software support provider.

How much liability should suppliers take on?

The monetary liability of software support suppliers can be either capped or unlimited.

capped liability

The consequence of not capping a supplier’s liability is to make the supplier an insurer for losses suffered by customers. In determining the appropriate cap, suppliers could ask:

• what are the risks and consequences of breaching the support agreement?
• what are the full range of losses that could be suffered by customers if service levels are not met or if the support agreement is not breached?
• what is the strategic importance of this customer or market/industry segment?
• is our business able to absorb and survive the blow of a higher cap?

unlimited liability

Despite the risks, there are circumstances where uncapped liability is appropriate and should be acceptable, including:

• infringement of the intellectual property rights of third parties associated with software and documentation provided under the support agreement;
• misusing confidential information;
• intentionally breaching the support agreement;
• committing fraud.

Updates and new releases

Suppliers often require customers to install updates and new releases. This gives suppliers the advantage of only needing to support the latest version of software – saving time, money and effort.

If customers are required to implement updates and new releases in order to receive support, suppliers should also consider everything that a customer should do to optimise the improvement and build those requirements into the support agreement.

For example, customers may be required to upgrade hardware so that the software runs optimally and so that support can be provided efficiently.

Customer satisfaction VS supplier capability & performance

Software support serves the key purpose of keeping a client satisfied with the software. But that needs to be balanced with the capabilities and reasonable protection of the support provider.

Remember the balance and you will have clarity in the parties’ relationship and any issues that need to be resolved during operations.

The purchase of plant and equipment, fixtures and chattels can be central to a business acquisition. What is purchased depends on the business being acquired. Sometimes it’s everything used by the seller in the business. And sometimes it’s just the key items.

As these items can form part of the heart of a business, detailed investigations and their proper treatment in a sale agreement cannot be overstated. They are the tools of a successful business.

What is this?

plant and equipment

This is common or specialised equipment generally vital to the operations of a business. It does not include items bought and sold in the ordinary trade of the business or items used to produce goods that are sold in the usual trading of the business.

Examples include vehicles, machinery, tools, appliances, office furniture and office equipment.

chattels

For our purposes, a chattel is any tangible property that is movable and that is not land. This is a broad classification and includes plant and equipment.

fixtures

Fixtures are chattels that have become so attached to land (or improvements on the land) that they become an integral part of the land. Generally, in deciding whether something has become a fixture, you look at:

1. the degree of annexation. How attached is it?
2. the object of annexation. Is it attached for the permanent or temporary benefit of the land?
3. the intention of annexation. What inferences can be drawn as to the use of the item and the intention that the object remain in position for a substantial period?

While it depends on the circumstances of each case, examples of chattels that have been characterised as fixtures are:

• air conditioning units;
• site offices;
• replacements of things ordinarily part of a particular premises; and
• building design features.

The importance of having proper details in the sale agreement

Buyers and sellers have gone to court simply over what should be included in a sale. To prevent disputes between the buyer and the seller, the sale agreement should itemise all plant and equipment, chattels and fixtures that will be sold.

It is common for sellers to withhold some items from the sale. If the seller has this intention, then arguments can be avoided by including a list of excluded chattels in the agreement.

Additionally, it is not enough to just have a list of items being sold. For taxation purposes, each chattel, fixture and piece of plant and equipment should be assigned a value.

Be wary of fixtures

If the seller has affixed items owned by it to the business premises (or to the land on which the business is situated), those items might become fixtures and the seller might lose ownership of them.

If the seller doesn’t own them, the seller can’t sell them and the buyer can’t acquire them. Buyers have been surprised to find that they never actually acquired an item because it had become someone else’s property even before the business acquisition.

when is this not a problem?

There are no problems with fixtures when the seller owns the premises out of which the business operates and that premises is included in the sale.

when is caution needed?

The parties need to determine which items are fixtures and whether the seller has the right to include them in the sale when:

1. the seller owns the business premises, but does not include the premises in the sale. Here, the buyer is only granted a lease by the seller; or
2. the seller is only a tenant of the premises.

A tenant is usually allowed to remove its fixtures. However, to confirm the position, the parties should consult the lease document and any correspondence and documents between the landlord and the seller relating to those fixtures.

Finally, if an item is a removable fixture that can be sold, the buyer should ensure that it gets the same right to remove those fixtures under an assignment of the lease or under any new lease granted to the buyer.

Does the seller own everything?

Firstly, the parties need to confirm that the seller actually owns and has the right to sell all plant and equipment, fixtures and chattels included in the sale agreement.

Secondly, buyers should make inquiries to determine what security interests exist over those items. Investigating the Personal Property Securities Register is a must. These security interests must be released before completing the acquisition.

Finally, for an added layer of protection, the sale agreement should include warranties given by the seller to the buyer that:

• the seller has title to those items;
• the seller has the capacity to sell those items; and
• the seller will release all security interests before or at completion.

A breach of any of these warranties may give the buyer the right to claim damages from the seller to recoup its losses.

Dealing with items under hire purchase, leasing and financing arrangements

Plant and equipment, fixtures and chattels are often acquired by a seller under a financing, hire purchase or leasing arrangement with a third party.

Both buyers and sellers should review the contractual terms of these arrangements carefully. Failing to address this issue may allow a third party to repossess the item from the buyer after the acquisition and give that third party the right to sue the seller for damages. It can be a very costly oversight.

These arrangements may allow the seller to:

• purchase the item from the third party before the end of the term of the agreement and then sell that item to the buyer; or
• assign the financing, hire purchase or lease agreement to the buyer by obtaining the third party’s consent.

Which course of action is taken depends on the type of arrangement, the terms of the agreement with the third party and the requirements of the buyer and the seller revealed during negotiations.

If the arrangement is to be assigned to the buyer, then the business sale agreement should cover:

• descriptions. Describe the arrangement in detail and the items covered by that arrangement;
• financial obligations. Provide specific details of the financial obligations under the arrangement;
• seller’s performance until completion. require the seller to perform all its obligations under the arrangement up to completion;
• assignment of the arrangement. have a clause stating that the buyer agrees to assign that arrangement to the buyer;
• consent. make the assignment conditional on the consent of the third party to the arrangement;
• buyer’s assumption of liability. require the buyer to assume all liability under the arrangement once the assignment is effective;
• buyer’s indemnity to the seller. require the buyer to indemnify the seller for all liability associated with the arrangement from the moment that the assignment is effective;
• fresh arrangements. require the buyer to enter into a new but substantially similar arrangement with the third party if that third party insists on a new agreement instead of an assignment. This is more beneficial to a seller because, with an assignment, the seller still remains directly liable to the third party for breaches after completion with only a right to be indemnified by the buyer;
• costs. set out who is to be responsible for the costs of obtaining the third party’s consent or obtaining a fresh arrangement for the buyer, including legal costs incurred by that third party.
• failures in getting assignments or new arrangements. if the third party refuses to assign the arrangement or enter into a new arrangement with the buyer, have a mechanism for excluding those items from the sale and reducing the purchase price by an agreed dollar amount.

Protect the condition of chattels being acquired

The condition of some items matter more than others.

Furniture, carpets and partitions, for example, are generally less crucial to the operation of the business being acquired. It might not matter to a buyer that these items are of average quality.

Other items, such as machinery and office equipment, are important to the efficient functioning of the business. The integrity of these items should be maintained.

The interests of a buyer should be addressed as follows:

• for items that are not crucial. The buyer should inspect and take note of the condition of these items before entering into the business sale agreement. Combined with this inspection, the agreement should state that these items will be delivered to the buyer in the same condition as at the date of the inspection, with an allowance for fair wear and tear.
• for items that are crucial. The buyer should still inspect these items to ensure that they are functional to their satisfaction. Here, the sale agreement should require the seller to maintain the working order of those items until completion.
• repairs and replacements. Finally, the sale agreement should require the seller to repair or replace any item if that item falls short of the relevant standard above.

Don’t forget warranties, guarantees and service contracts

Plant and equipment may be:

• under warranty periods;
• covered by guarantees as to their performance or condition;
• serviced under equipment service contracts.

Buyers should acquire the benefit of these third party arrangements whenever possible. Where the warranty or guarantee period has not expired, or where service contracts exist, a buyer should review the terms of the relevant document to determine if it can be assigned. An assignment is usually not necessary if the arrangement extends to future owners of the plant and equipment.

You are only as good as your investigations

It boils down to being diligent and focussed in investigating each item owned by the seller in the business. From proper inquiries come the best outcomes for all parties. And that’s what the buyer and the seller really want.

Acquiring goodwill is crucial when purchasing most businesses. But like anyone who has played a strategy game knows, taking something is easier than protecting it. That’s where restraints of trade come in.

But it isn’t that easy. Why? Because the law shoots down restraints unless they are reasonable in the parties’ and the public’s interest. Not getting shot down is where it becomes tricky.

What are restraints of trade?

Restraints protect an acquisition by prohibiting particular conduct by the seller (and sometimes key personnel of the seller) after completion. Generally speaking, restraints might prevent them from:

• engaging in competitive business activities. This could prohibit the seller from manufacturing, distributing or selling products, or offering services that compete with the acquired business as at the completion date;
• getting into bed with competitors. This aims to stop the seller from assisting competitors, including financially, by promoting competitors or by offering expertise;
• having an interest in competitive businesses. This takes the prohibition against assisting competitors a notch higher by preventing the seller from having a proprietary interest in a competitive business, or even going so far as having an interest in the success of a competitive business.
• poaching clients/customers. Depending on the acquired business, this could include restraints that prevent the solicitation of the clients/customers of the acquired business. This might extend beyond clients of the business at completion and for a specified period before completion. It might also work in conjunction with a restraint to prevent the seller from acting for or engaging those clients in a competitive business after completion;
• disclosing or using confidential information, trade secrets or intellectual property. A seller who discloses or uses these assets could undercut or undermine the operation of the acquired business and the buyer’s standing in the market or industry;
• obtaining information from key personnel or attempting to lure them away. Having regard to the importance and role of particular key or senior personnel in the acquired business, the seller might be prevented from interfering with their employment, enticing them to deliver information or to lure them into a competitive business.

The important thing to understand is that the restraints imposed depend on the type of business and its sphere of operations. Investigation during the acquisition is key.

What makes a restraint enforceable?

The short answer is: You can never be 100% sure.

That’s because while a court called upon to determine the validity of a restraint will give a good deal of weight to the fact that the parties have agreed on particular restraints, it is not bound by that agreement. The court will reach its own conclusion based on all the circumstances at the time that the parties entered into the restraints.

step 1: determining the buyer’s legitimate business interests

The first step in creating enforceable restraints requires an understanding of how a court might analyse the situation:

• setting the boundary. Determining the business interests that the buyer should be entitled to protect by pinpointing the sources of goodwill and analysing the operations of the business (e.g. clients, IP, population density and trading areas);
• staying within the boundary. Ensuring that the restraints go far enough only to protect those business interests because prohibitions that go beyond that reasonable protection may be unnecessary and therefore unreasonable and unenforceable;

step 2: understanding scope, space and time

Reasonableness lies at the heart of an enforceable restraint. Therefore, a restraint may be effective if:

• scope. The seller’s or personnel’s prohibited conduct or activities is reasonable (e.g. it might not be reasonable to prevent a seller from investing in an international competitor that operates in different markets);
• space. The geographical area where the restraint operates is reasonable (e.g. a restraint that fails to discriminate between areas that the acquired business does and does not operate might be unreasonable); and
• time. The length of time that a restraint is imposed is reasonable (e.g. restraints that are unlimited in time will probably fail).

step 3: assuming that restraints will be put under a microscope

You cannot predict how a court will view a restraint. But you can minimise the risk of this known unknown by:

• presenting alternative restraints. It is wise to provide alternative restraints, point out which restraints are to apply (or various combinations may apply separately until partly struck down), and which restraints should apply if some restraints fail. For example, if a time limitation of 3 years is held to be unreasonable, then there the separate periods of 18 months and 1 year might be included with a statement that they remain unaffected.
• allowing offensive restraints to be severed. There should be a mechanism for allowing unreasonable restraints to be severed from the agreement to leave the reasonable restraints intact. Otherwise the entire restraint might fall apart, leaving the buyer with no protection.
• being sincere in defining scope, space and time. The parties should genuinely try to define the appropriate protection and not just include lists of alternative restraints drafted mechanically. Do that, and the court may determine that the parties are asking the court to make their agreement for them. It will not do that. Instead the court may decide that the list is uncertain by having to independently choose a single restraint from a bunch of alternatives. Uncertainty has no place in a contract.
• building the value of the restraint into the purchase price. A court will be more reluctant to find that a restraint is unreasonable if the result would be to allow the seller to keep all the sale proceeds without giving the buyer the benefit of the restraint component.
• keeping negotiations fair. To the extent reasonably possible, the bargaining positions of the parties should be levelled by ensuring that each party is given the opportunity to obtain competent legal and financial advice. Alternatively, the superior party should not abuse its stronger position. This is a significant factor for the courts.
• having a fall back position. If all else fails, there could be a procedure for calculating a sum of money to be paid by the seller to the buyer if the restraints are breached or are unenforceable. For example, a seller might be required to purchase the acquired business or part of it back from the buyer.

Investigation, fairness and competence

Restraints are delicate creatures in a business acquisition. And they can be one of the most important elements in the agreement.

Drafting them correctly requires investigation of the business, fairness and reasonableness in negotiations and competence in drafting. It is not to be compromised.

You’re running through the assets of a business and you hit the business name (if you didn’t, you’re not doing a very good job).

Do you want it? Well, that depends on the goodwill and reputation that has been built up and maintained by the use of that name.

Why is goodwill and reputation important to a business name?

A business name doesn’t give the owner of that name the sole right to use that name. So, if a competitor comes along a uses a similar name, the only way an owner can restrain the use of that name is to show the goodwill and reputation associated with that name.

A buyer of a business will want that kind of protection and so, apart from registering a trade mark, the established goodwill and reputation assists in the protection of that name.

What if there is no goodwill associated with a business name?

And what if there is no goodwill associated with a business name? For example, the business name of a new line of business within an established business might not have goodwill yet. Or it might be a new business name.

In this situation, if you really want that business name, you had better make sure that your agreement specifically refers to it. The practice of vaguely referring to “business names” in the definition of goodwill in a contract just isn’t going to cut it. And it’s even worse if you just say that you’re acquiring goodwill but fail to define what that includes.

In short, if you don’t refer to it, you might not get it.

What to do with a business name in a business acquisition and sale

Generally, it comes down to the intentions of the buyer. The choices may be:

• changing the nature of the business after acquisition. The seller can continue to use that business name or cease using the business name. Either way, the business name registry will need to be informed;
• the buyer likes its own business name or doesn’t want the seller’s business name. As above;
• the buyer wants to use the business name. The agreement should state that the buyer gets the right to use that name at completion and the appropriate ownership change forms should be filed with the registry. If it’s an unregistered business name, then the seller should register it beforehand and then transfer ownership of the name at completion;
• the buyer wants to use the business name, and it’s owned by a company. If the seller is a corporation and the business name is similar to the company name, then the buyer should require the company to change its name. If the business name isn’t similar, then it just needs to be registered and ownership transferred as stated in the point above.

It’s simple, but it’s often overlooked. This is one name you don’t want to forget.

You know the importance of goodwill. Part of accumulating goodwill means passing on client or customer relationships. That involves getting client records and stepping into ongoing negotiations with clients.

And sellers, don’t think that you can forget about all those files either. You’ll want access to those files and you need to make sure that the records are properly kept by the buyer.

The strategic uses of records

Records contain information. That knowledge can be used to:

• identify loyal clients;
• map out trends;
• plan marketing efforts;
• pinpoint active referral sources;
• determine creditworthiness; and
• perform financial analyses and modelling.

What should buyers get?

The categories of information that should be transferred depends on the type of business. You would generally identify this during the due diligence stage. The common items are:

• incomplete orders;
• correspondence and documents relating to ongoing negotiations and leads;
• records and files;
• client/customer lists;
• referral sources and files;
• financial records;
• orders;
• inquiries;
• documents held by the seller on behalf of clients;
• registers and documents required to be kept by regulations governing the industry in which the business operates;
• tenders.

What should sellers be concerned with?

Those same records will be important to sellers after completion. They contain relevant information for the period before completion. They also can be a source of risk.

Sellers need to remember that:

• they need to comply with legislation. Taxation and other legislation may require the seller to keep copies or original records;
• they need to file tax returns. So, any agreement should allow the vendor access for this purpose;
• they may be owed money. It will be necessary to retain or have access to information to pursue debts or to ensure that files are not released to clients by the buyer whilst money is still owed to the seller;
• they may need to defend themselves. If clients or customers make a claim against the seller after completion, access to information will be crucial for insurance or setting out a defence;
• they may need to safeguard information or documents for clients. Therefore, a seller should get indemnities from the buyer or extinguishing liability from the clients themselves.

Remember intellectual property

It’s not enough to get the physical records. Intellectual property, such as the seller’s copyright in records, is distinct from the material. This means that:

• the parties should conduct IP due diligence to determine, amongst other things, what IP is owned by the seller in relation to the information;
• there should be an assignment of IP rights;
• a seller should agree to refrain from using the identified IP and confidential information;
• a seller should agree not to make a claim against the buyer for using certain IP after completion.

Treat information with respect

Remember that information can be source of power and risk for both parties. Treat it properly. Treat it with an understanding that it can give you an advantage. But always treat it with respect.

A business is alive. It has its habits, its preferences and its dislikes. This means that buyers need to get a feel for the business before and/or after the acquisition. They need to ease into the driver’s seat to understand its operations and the key relationships. This is where calling for the seller’s assistance comes in.

What assistance is needed?

This depends on the type of business, the buyer’s experience in the industry and the business’ sources of goodwill (what is goodwill?).

Generally, the seller’s assistance can involve any permutation of the following:

• observation. This could involve the buyer’s active or passive observation of the seller’s conduct of the business;
• introduction. Here, the seller may introduce clients, suppliers, employees, referral sources or distributors to the buyer;
• instruction. The seller could impart its knowledge in relation to intellectual property, the operation of plant and equipment and business strategy.

Remember, the more detailed both parties’ obligations during the assistance period the better.

When should the seller provide assistance?

Assistance can take place before or after completion (or both). Knowing when to ask for assistance requires careful thought by a buyer.

assistance before completion

Some buyers like to learn about a business before completion so that they can hit the ground running. This might be fine in certain businesses where the buyer is experienced.

For buyers, the real problem with pre-completion assistance is that their lack of information may hinder their ability to know what assistance should be sought from the seller. Questions might only form once the buyer takes over the business. By that time, the seller might have moved on, leaving the buyer to fumble through the initial stages after completion.

This uncertainty can be reduced with a good pre-acquisition advisory team to guide the buyer and with proper due diligence early on to learn about the business.

For sellers, any pre-completion assistance should be approached with appropriate safeguards in relation to confidential information and intellectual property. Remember, the sale isn’t over until completion, so the risk of disclosing information and expending unnecessary time must be managed.

assistance after completion

Here, the seller might assist the buyer as a consultant, an employee or on a standby basis for a specified period. The people providing the assistance on behalf of the seller could be paid or remuneration could be built into the purchase price.

The real key here is keeping the seller motivated and giving it an incentive to provide meaningful and wholehearted assistance after it has pocketed the sale proceeds. This is especially the case where the seller’s assistance is only for a short period or where the seller’s representatives only provide short-term employment or consultancy arrangements.

In some industries (e.g. financial planning, accounting practices and other client-reliant businesses), the purchase price may paid in more than one instalment, with subsequent instalments dependent on the effective transition of the client relationship from the seller to the buyer.

In other industries (e.g. manufacturing), a buyer could withhold part of the purchase price until the seller completes a clearly defined checklist setting out its post-completion obligations.

It all depends on the industry, the business and what’s practical for both parties.

It’s about working together

Essentially, assistance is a two-way obligation. The parties need to identify what’s needed, what’s practical and what will provide the best outcome for everyone, including employees, clients and anyone else that has a relationship with the business. Success can depend on it.

No matter what market you’re serving, or your objectives in choosing a software solution, the software licence is the legal manifestation of objectives, rights, obligations and protections.

With all the effort poured into development and the deep importance of software as a commercial solution, why give the software licence agreement only cursory, sub-standard or even off-handed consideration?

Scope

This sets the boundaries around the licensee. As long a licensee doesn’t step outside the scope, all is good in the world.

what should the scope address?

Ordinarily, the scope should cover:

• subject. What is being licenced? Is there something more than the software?
• exclusivity. Will the licensee be granted a non-exclusive or exclusive right to use the software?
• geography. Will territorial limits be placed on the licence or will it be a worldwide licence? Will it only be limited to a designated location?
• time. For how long will the licence last? Will there be events that extend or reduce the term?
• end users. Will the licensee be allowed to permit end users of the licensee’s platform (if any) to use the software? Will there be a cap on the number of users?
• uses. To what uses can the licensee apply the licence? This requires careful consideration of the licensee’s purpose and corporate structure.
• restrictions. What can’t the licensee do with the licence?

sometimes, you need to be flexible

Hanging over all these prescriptive terms will sometimes be the licensee’s need to have flexibility. This may require the parties to negotiate more flexible terms, such as:

• sublicensing to allow the licensee to outsource operations or engage contractors;
• pricing options and models to accommodate the licensee’s growth from a per-user fee to organisational fees;
• options that take into account of the licensee’s corporate acquisition strategy;
• exceptions to restrictive access or user limitations (e.g. where the software is meant to add value to the licensee’s client-facing platform).

Intellectual property and confidentiality

how much protection?

To say that intellectual property is important in software licensing is an understatement. Software is the culmination of innovation, expertise, dedication and sacrifice.

It’s no surprise then that licensors will often want the fullest protection available to them under the relevant intellectual property legislation (subject to common sense at times, such as the licensee’s need to plan for disaster recovery). Confidentiality will also come into play here.

Of course, there will be exceptions to the strength of the protections sought under the agreement depending on the nature of the parties’ relationship and the project, for example.

infringement claims

Intellectual property disputes can be fiercely litigated. Therefore, licensors will want to set very clear procedures and obligations for third party infringement claims, such as when someone comes along and alleges that the licensed software infringes on that person’s intellectual property rights.

Conversely, licensees will want appropriate protections built into the agreement where intellectual property disputes arise.

Auditing the licensee

Audits allow licensors to keep tabs on licensees, making sure that the licensee is complying the the agreement. Audits can be a source of panic for licensees without proper software licence management. As it can be a sensitive exercise, the audit clause should clearly outline:

• notice before the audit;
• the auditors;
• when audits may be conducted;
• frequency;
• audit procedure;
• audit grievances.

Software maintenance

Rarely is software stagnant. Feedback, new developments and user or security issues feed into the licensor’s development arm, resulting in support or maintenance requirements and updates. Therefore, the licence agreement might address:

• how updates will occur;
• the licensee’s options when faced with a revision or update;
• maintenance schedules and the impact of maintenance on the use of the software, such as interrupted service, delays and bugs;
• the treatment of access information (e.g login details) for support exercises.

Liability

what might a licensor want?

The level of liability that a licensor might be willing to accept turns on various factors, such as the type of software, the licensee’s input in the software’s development and the purpose of the software.

So, while it will be impossible to set out the entire range of liability issues, the agreement may touch on:

• warranties. What warranties is the licensor willing to give (or is the licensee willing to accept) in relation to the software? It might range from no warranties (except those implied by the law) to a full set of specific warranties as to capacity to licence the software, performance or compatibility, for example.
• limitation of liability. Again, depending on the software and the parties’ relationship, the liability that a licensee might accept can fill a broad spectrum from merely replacing software to excluding liability in relation to damage caused to the licensee’s data.
• indemnities. To what extent will each party indemnify each other? For example, a licensor might want to be indemnified where a third party uses a software by reason of the licensee’s breach of the agreement and a claim arises.

what might a licensee want?

Countering the licensor’s attempt to limit liability and narrow the scope of possible claims will the licensee’s wish to be indemnified for matters such as:

• inconvenience or damage caused by intellectual property claims made against the licensor;
• termination and additional indemnity rights where the licensee is required to switch gears and shift to an alternative product licence;
• indemnity for certain intellectual property claims made against the licensee by reason of the use of the software;
• the licensee’s consent prior to settlement involving the licensor and a third party in claims involving the software.

Pricing and tax

The licence fee sometimes isn’t as straightforward as “here’s the fee”, “here’s when it needs to be paid” and “this is what happens if it’s late”. Events that will change pricing should be considered by both parties.

beyond the licence fee

Third party products and hardware equipment may sometimes also be incorporated into the software solution requiring more detailed pricing mechanisms. Alternatively, corporate growth strategy may require more flexible pricing arrangements.

get taxation advice

As with all commercial transactions, tax advice should be sought early on to structure the licence agreement beneficially. This is can be particularly prudent when dealing with international licence agreements.

Assignments, takeovers and corporate changes

Depending on the licensing circumstances, the parties might need to consider:

• the consequences and implications of mergers and acquisitions involving either party;
• disposal of either party’s business;
• changes to either party’s corporate structure, culture or even existence.

This may require the parties to consider termination rights, consent or additional security, for example.

Every situation is different

The overall point in software licensing is that there shouldn’t be commitment to a licensing arrangement without considering the environment in which the software is provided, the software itself and the parties.

Software strives to be unique. Perceptions of use and the objectives of licensors and licensees vary. What treatment will you give your software licence agreement?

Contact our Technology Law team for assistance in software licensing.