Felicia Ellsworth: Welcome to In the Public Interest, a podcast from WilmerHale. My name is Felicia Ellsworth.
Jekkie Kim: And I’m Jekkie Kim. Felicia and I are partners at WilmerHale, an international law firm that works at the intersection of government, innovation, and business. Today, we’re tackling a topic that’s becoming increasingly critical in corporate transactions: the hidden risks in carve-out divestitures, especially when it comes to shared technology. Joining me is Stephen Gillespie, also a corporate partner at WilmerHale, a leading expert in this space, and the author of a recent article that’s been making waves. Stephen, welcome to the show.
Stephen Gillespie: Thanks, Jekkie. It’s great to be here.
Jekkie Kim: Your article opens with a lawsuit that really illustrates the stakes here. CA, Inc. v. Allstate. Can you give our listeners a quick overview of what happened?
Stephen Gillespie: Yeah, it’s a fascinating example of what can go wrong when you’re doing a divestiture and you don’t identify the problems in advance. In short, Allstate sold its employer volunteer benefits business to StanCorp for about $2 billion. And that business relied on software that was licensed by Allstate from CA, Inc. Allstate allegedly allowed the buyer of the business that it was divesting to keep using that CA software without securing proper rights or permission or some sort of consent from CA. And so CA claims now that was a breach of the license agreement and copyright infringement and is now seeking $80 million in damages from Allstate and StanCorp for their misuse of the CA software without a license.
Jekkie Kim: So $80 million and that’s at least $80 million in damages, correct?
Stephen Gillespie: Correct.
Jekkie Kim: And this case is currently ongoing. I was in your office earlier today and you’re trying to see what was going on with this case.
Stephen Gillespie: Yeah, it appears the case has not been settled and that the litigation is still pending. Now Allstate has filed an answer and StanCorp has filed an answer. So litigation is continuing.
Jekkie Kim: Got it, thank you. In your article, you call this the “shared technology” problem. What does that mean and why is it so common in carve-out transactions?
Stephen Gillespie: Shared technology is really one of the biggest and more complex issues that we encounter in carve-out divestitures, and we’re encountering it more and more. I think carve-outs are on the increase. There’s more companies looking to divest or spin out non-core businesses. We’re seeing more and more activity in this space, both in terms of spin-outs, where you create a separate company and move business into that, or you just sell a business. And so that’s what we call a divestiture. If you think about when you divest a business, you have RemainCo, which is the business that you’re retaining, and then you have SpinCo, which is the business that you’re spinning out. So our term “shared technology” refers to any software, intellectual property, services that are shared by both the RemainCo and the SpinCo, by parent and the divested entity. Think about software programs like ERP systems with Oracle or SAP, HR systems like Workday, any kind of IT infrastructure; often those are centralized and shared across business units, so when you’re divesting one business or spinning it off, you have to figure out what is shared and you have to figure out what rights you have to transfer or bifurcate those shared technologies. So it can be software, but it can also be patents and patent rights. It can be data. I’ve done a few divestitures where both RemainCo and SpinCo rely on a shared data lake. Whatever it is that you’re splitting up, you have to figure out what are the rights in that data lake and how can they be shared? I’m working on a deal right now where RemainCo and SpinCo are in two different business areas, quite distinct fields, but both rely on a large set of data for both businesses. And so we have to figure out what rights we have to share and which companies should own those. And so shared technology should be thought of as a large category of anything shared across both businesses, but clearly software licenses, as in the CA case, are a critical part of them.
Jekkie Kim: What I’m hearing is that it’s not just identifying the software, the data lake, or the chemical formulations. As for us lawyers, it seems to be also about understanding the underlying contracts, the patent portfolios, and other IP behind or covering or directed to the shared technologies related to the transaction.
Stephen Gillespie: Yeah, absolutely. The contracts are critical for any kind of shared technology. So you might have, as in the CA case against Allstate, an enterprise software license. And you have to figure out what rights you have to permit both the RemainCo and the SpinCo to use that software or that SaaS cloud service or whatever it is. It could be an inbound patent license. And oftentimes, these license agreements restrict use to the seller’s internal operations, or to the parent’s internal operations. And they often prohibit sharing access with third parties, which could include the buyer of the SpinCo. So after a divestiture is completed, the SpinCo becomes a separate entity and it’s no longer internal operations of the parent, or RemainCo. And so you have to figure out what rights do you have under that contract to share or bifurcate or divest that shared technology and shared software. If you don’t review those agreements carefully, you can end up in breach the moment the deal closes. If RemainCo continues using software that was licensed from CA after closing, it’s now a third party and that’s not permitted—you can end up in a situation like we have in the CA v. Allstate case.
Jekkie Kim: So what I’m hearing from you is that identifying shared technology and then dividing the world between RemainCo and SpinCo is not like dividing water and oil. So perhaps we can talk about the challenges of identifying shared technology that you’ve seen from your clients, and then some practical tips that we can provide our listeners with.
Stephen Gillespie: Absolutely. I think there’s really two key challenges in identifying and mitigating the risk of shared technology in any divestiture. And those are scale and knowledge gaps. So big companies might have hundreds or even thousands of vendor agreements and inbound licenses related to shared technology. And the people who know the details of those license agreements in IT and human resources and finance, those people with knowledge are often siloed in their particular function. And sometimes the business being sold doesn’t even know that a sale is coming. So you can’t consult with them early in the process. We had a fascinating example in a divestiture for a large equipment provider. We completed the diligence and everything on the divestiture. We did our best to identify shared contracts and shared technologies, and we were all the way to the point of signing, but with a limited knowledge group. And so certain people with knowledge of the business weren’t disclosed and didn’t know about the transaction until after it was actually announced publicly. And it turns out that one part of the business we divested and signed an agreement to sell was a service provider developing technology mostly for the divested business. And so we included that in the perimeter and we sold it as part of the transaction. And we learned, only after announcing the deal, that group had been developing a critical next-generation router for RemainCo. And RemainCo needed that technology that had been in development for a couple of years and was going to be critical in order to launch this next-generation equipment. And we had just sold the business that produced it and not retained any license back and not identified it before the divestiture.
Jekkie Kim: Uh-oh.
Stephen Gillispie: Yeah, so that obviously became a big problem. We had to go hat in hand to the buyer and say, oh by the way, this part of the business that we just sold you is critical for our future operations as RemainCo and we need a license. And then we had to negotiate that and it resulted in difficult negotiation posture.
Jekkie Kim: Well, that does sound very challenging. I’m pausing because we did not discuss this before and it’s just an actual heartache.
Stephen Gillespie: Yeah, it happens. I mean, despite your best diligence, again, because of the knowledge group, if you don’t really know who has relevant knowledge about the technologies and you haven’t identified them in advance, you can end up in a situation where that inadequate knowledge base causes these shared technology problems.
Jekkie Kim: Wow. So I don’t think these kind of situations are 100% preventable, but I think we can try to help clients mitigate them. What kind of practical tips or advice would you have for our clients and other listeners regarding shared technologies?
Stephen Gillespie: In my experience, one of the keys is to start early. So you need to build a cross-functional team to identify all of the technology and intellectual property and software that is shared between RemainCo and SpinCo. You need to collect all of the contracts and review them for divestiture clauses and for restrictions on assignment, for change-of-control clauses, and you have to figure out what rights you need for SpinCo to operate as it has been operating using the technology that it has been using, and you have to figure out if a license doesn’t allow post-closing use, how do you approach the vendor in order to get rights to share that technology, either as part of a transition service or by bifurcating the contract so that both RemainCo and SpinCo can keep using that technology? And you have to understand that there’s often a cost involved. Some vendors will charge a premium, and they know that you’re under time pressure. If you approach them and say, I’m doing this divestiture or this spin, the vendors might say great, we’re happy to help. Please open your checkbook.
Jekkie Kim: Yeah, that’s a great point. A lot of the time vendors have leverage when the clock’s ticking. Do you anticipate disputes similar to CA v. Allstate in the coming years?
Stephen Gillespie: Absolutely. I mean, the market for carve-outs is heating up. We’re seeing more and more divestitures and spins, and these issues are not going away. If anything, they’ll become more frequent as companies rely more and more on complex tech stacks and cloud services and agreements. We’re just seeing multiplication of these risks as companies centralize and then start doing divestitures.
Jekkie Kim: I agree, even within the life sciences space, as more and more life sciences companies leverage technology, including AI, more and more of these shared technology issues will arise. So the takeaway for our listeners: don’t underestimate the “shared technology” problem. It’s not just an IT issue. It’s not just a non-IT services formulation life sciences issue. It’s a legal and financial risk as well that we’ve seen through actual litigation, as mentioned by Stephen in his article. If you want to read Stephen’s full article, we’ll link it in the show notes. Stephen, this has been a fascinating discussion. Thanks so much again for joining us and sharing your insights.
Stephen Gillespie: Thanks for having me, Jekkie. It’s always a pleasure.
Felicia Ellsworth: And thank you to our listeners. If you enjoy this podcast, please take a minute to share with a friend and subscribe, rate, and review us wherever you listen to your podcast. If you have any questions regarding this episode, please email them to us at [email protected].
Jekkie Kim: For our WilmerHale alumni in the audience, if you haven’t already, please join our alumni center at alumni.wilmerhale.com so we can stay better connected. Special thank you to the producer of this episode, Maria Kanevsky. Sound engineering and editing by Bryan Benenati, marketing by Allison Khan and Alexandra Thimble, all under the leadership of executive producers Jake Brownell, Kaylene Khosla and Arpi Youssoufian.. Thank you for listening.
Felicia Ellsworth: See you next time on In the Public Interest.
