Unlicensed Microsoft Software Results In Costly Mergers & Acquisitions Dispute

Mergers and Acquisitions are intricate affairs – despite obligatory due diligence activity, complexities can still arise. This is especially the case in the stock acquisition of On-Site Analysis, Inc. (“On-Site”), a company that was purchased by Spectro Scientific, Inc. (“Spectro”) in November 2014. Unfortunately, Microsoft license compliance was overlooked.

As part of the acquisition process, the groups involved in the sale of On-Site had agreed to an Escrow program, where $500,000 of the sale fee was held by an agent and to be called upon, if needed, to address unforeseen financial costs arising from the transaction. This, as it happens, was a very wise decision.

The issue arises at On-Site, which sold complex “oil analyzer” devices that need Microsoft software to run. In total, On-Site built 640 of these machines with unlicensed Microsoft software distributed in every unit. The Stock Purchase Agreement specifically stated that On-Site was “authorized to use the software, had obtained all necessary licenses, and was in compliance with all laws”.

Once Microsoft learned of this license oversight, it agreed to settle with Spectro for the current oil analyzer devices it possessed, for a fee of $66,000, which was paid in July 2016. This released both Spectro and its new acquisition On-Site. However, out of the 640 machines, 330 devices, which were previously sold to On-Site customers, were still running unlicensed software and Microsoft could not release those end-user organizations. Spectro states that this exposes it to future lawsuits by those legacy customers.

The seller of On-Site was the “George S. Mennen Irrevocable Trust Established for the Benefit of John H. Mennen” (the “Seller”). The Seller and the Escrow holding agent, was contacted by Spectro to demand payment from the Escrow funds that included $66,000 that was paid to Microsoft, as well as associated attorney fees. The total sum claimed was $134,370.55 and did not include any losses from future litigation by past unlicensed On-Site customers. That could easily total hundreds of thousands of Dollars in additional costs.

The Seller responded by asking for supporting documentation and suggested that Spectro settling with Microsoft, and not involving the Seller, is a breach of the Stock Purchase Agreement. A litany of claims and counterclaims followed, ranging from breach of contract to fraud, with the case culminating in a hearing at the Delaware Law Court of Chancery in 2019.

The court decided in July 2019 that many of the claims by both parties were to be rejected due to Statute of Limitations implications. However, the Spectro settlement with Microsoft was within the 3-year limit and Spectro could now demand costs from the Seller and the Escrow fund. Moreover, since legacy On-Site customers had not yet come forward with costs for unlicensed software, the court decided that any claim for those potential losses is currently “unripe”.

Naturally, expect that “unripe” claim to change as those legacy On-Site customers discover the incompliant software of their own volition, or when Microsoft contacts them to resolve the issue.

This situation highlights the importance of ensuring software that is deployed in any organization is adequately licensed. The fallout from using unlicensed software in this case shows how time-consuming, costly and problematic unlicensed software can be in a Mergers and Acquisitions scenario. Whether you are buying, selling or merging with an organization, the overlooking of unlicensed software can leave a lasting bitter taste.

Reference: Kevin M. Kilcullen v. Spectro Scientific, Inc. :: 2019 :: Delaware Law Courts

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