The software and technology sectors continue to be at the forefront of mergers and acquisitions (M&A) activity in 2025. When a company with substantial proprietary software is being acquired, it is crucial that the purchase agreement include software-specific representations and warranties to properly protect the target company’s most valuable asset.
Before drafting software representations and warranties, the buyer needs to spend time during the diligence process to ensure the seller has taken proper steps to protect its ownership of the software, including reviewing the target company’s agreements related to software development, licensing and distribution. The buyer should take steps to confirm that no third party has the right to make a claim of ownership over the software, which should include a review of software development agreements, employment agreements and contractor agreements for proper non-disclosure and assignment of inventions clauses, as well as the scope of any third-party licensing agreements. The buyer should also take measures to ensure that the target has granted only limited licenses to access and use the software (not ownership rights) to any customer or strategic partner, and that the target has adequate remedies in the event of any unauthorized access or use of the software. In addition, the buyer should take the time to understand what technological, physical, and administrative safeguards were put in place by the target company in the development of the software to protect the software from any potential vulnerabilities.
The buyer’s due diligence findings will impact the drafting of the software representations and warranties in the acquisition agreement.
The most foundational software representations and warranties address the target company’s exclusive ownership of the software and its proprietary nature. Such representations typically require the target company to represent that it has exclusive possession and control over the source code, including the right to assign all rights in the foregoing to a buyer free and clear of any encumbrance. Additionally, the target company will typically be required to make a representation that there have not been any unauthorized disclosures of the source code to a third party, and that it has taken adequate measures to protect the source code from any such disclosure. These representations are very important to ensure that the buyer receives exclusive ownership of the software in the transaction. If the target company has not registered a copyright for the software, the buyer may want to consider filing a registration with the U.S. Copyright Office, especially if institutional financing is involved or sought.
Another critical representation typically required by buyers is that the software does not infringe or misappropriate the intellectual property rights of any third party. This representation should include verification that the target company has all necessary rights and permissions to commercially distribute the software, including any third-party software components that are embedded into and distributed with the software. This should include any open-source software components. It is crucial that the buyer understand any required flow-through licensing terms in relation to its future commercial exploitation of the software. To the extent that any open-source software is incorporated or integrated into the software, the target would usually be asked to represent that its usage of the open-source software complies with the applicable open-source code licensing, and that the use and incorporation of the open-source software does not require, as a condition of use, the disclosure and distribution of the target company’s owned software in source-code form at no charge.
Additionally, even if the buyer determined during the diligence process that the target company had taken adequate security measures in the development of the software, the buyer should still consider whether the general representations regarding the lack of litigation or threatened claims should be expanded to specifically reference claims under the Digital Millenium Copyright Act (which prohibits third parties from circumventing technological safeguards to access copyrighted software without authorization).
Lastly, the buyer should consider requiring the target company to represent that there are no bugs, defects, viruses or errors in the software that would impact its value or functionality, or that could disable or erase the software without the consent of the user or permit unauthorized access to the software.
The foregoing is a list of some of the key software-specific representations a buyer should consider. A related point of consideration is whether any of the software representations should be excluded from the limitation of liability caps. The limitation of liability provision typically has carve-outs for certain fundamental representations and warranties. If the software is the target company’s most valuable asset, a strong argument could be made that the representation of exclusive ownership should be considered a representation that is fundamental to the transaction and should be excluded from such caps.
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