This article is written by Devagni Vatsaraj, pursuing a Diploma in Cyber Law, Fintech Regulations and Technology Contracts from Lawsikho.com.
With the dawn of technology, e-commerce businesses have flourished to a significant extent across borders. Customers as well as small retailers/dealers are depended on the various transactions that take place happen through technology, starting from having a partnership, buying of goods/availing services, to the closure of transaction. A lot of online websites are dealing into this area, making available to the customers the goods/services; to name a few, the different services and products such as Amazon, Flipkart, Ajio, Alibaba, Paytm, etc. Now it’s not possible for a small business or an individual availing the services, to enter into a pen-paper contract with such multinational companies and hence what the agreement entered into by these parties is primarily known as “Technology Contracts”. These consist of standard terms and conditions which the user has to agree to, for the transaction to be complete. These conditions are not always user-friendly, which means that the user have completely no rights in negotiation of the terms of the contract and they usually end up agreeing to almost all conditions, even the ones that might be unreasonable to them, for the transaction to be complete.
Understanding Transition Service Agreement
With the concept of Technology Contracts in mind, let us think of a scenario wherein two companies decide to pursue an acquisition or divestiture. Now it completely depends on the capabilities of parties and their interconnectedness, which makes the parties decide whether a Transition Service Agreement is warranted or not. The question is what a Transition Service Agreement (TSA) is. As its name suggests, a TSA facilitates the transition of rights from one company to another so that the buyer company has the time to establish its own departments, which for a specified time agreed therein in the contract, is provided by the seller company.
A TSA is a contract between the two parties in a divestiture that provides essential services in a variety of functional areas for the business in transition following its legal separation from the seller. A TSA outlines the conditions of the transition until the buying company is capable of implementing these departments within itself. Transitional service agreements are frequent when big companies sell one of its own divisions or certain non-core assets to a less established buyer or a newly incorporated company where the senior management is in place, but the back office infrastructure has not yet been assembled. A TSA can also be used during carve-outs where the big company spins out its division into a separate company, and then offers the infrastructure services to its new spinoff company for a defined period of time.
Forward and Reverse TSA
In a perfect scenario where neither of the companies requires any help or assistance from each other, a TSA is not required; and the transaction is complete on its day of Closing or as soon as the transfer of asset takes place. However where both parties seek support from the other, TSA is separately entered into or a clause to that effect is entered into the main agreement. When the seller company provides its services to the buyer company or the parent company provides resources to its spinoff, in such a case, it is generally known as a “Forward TSA”.
In cases where the flow of services is from the buyer company to that of the seller, wherein critical assets or resources are to be transferred along with the target business, like data centre used by the seller company, or technical personnel used, support applications or systems used by both the target business and the seller’s business, etc. The TSA entered herein is referred to as the “Reverse TSA”. The Forward TSA to a buy is equivalent or parallel to the Reverse TSA to a seller.
TSA in Technology Contracts
Information Technology Contracts means those contracts related to Information Technology assets, including subscription service, hosted agreements and Software licenses. These contracts are agreements concerning the Computer Software and Hardware. An IT contract can be any contract that has a connection with information technology. One can enter into an IT contract to license their software for a fee to someone else, order goods over the internet, or even to sell their time as a web developer. Some of the common IT contracts include Service and Maintenance Service Agreement, License Agreement, Software as a Service Agreement, IT Support Agreement, Distributor Agreement, While-label/Private-label Agreement, Outsourcing Agreement, Consulting Agreements, etc.
Let us consider that a Company has taken-over a small entity that has been doing great in web designing. Now since the entity will do more of the creation, designing, graphics and the like, it’ll need more resources such as IT, Accounts, HR personnel, etc. The Company that has bought the entity supports and provides a backbone to the entity while it provides its services to the Company. This goes on for a particular period of fixed time; say for the time being that the entity is capable enough to survive independently. If I were to put it simply, a TSA is applicable where a parent looks after their kids until they can look after themselves. Another though comes to mind that the entity can hire another entity for accounts and the like; but at the same time, how many different departments will it pay and till how long will such departments keep serving this entity. So it is always better that the seller company provides all the resources to the entity and there are no third parties concerned in the transaction.
Some of the standard clauses in an Information Technology Transition Service Agreement are:
- Definitions, Service Provided (that include Transition Services, details of Third Parties, Resources and Personnel; Term of Services, Limitations, Obligations, any other provision that may apply),
- Information System and Support (Access of Software and Database, Use of Rights, Relocation, Security, Network Restrictions),
- Assets (Intellectual Property and Equipments),
- Governing Law and Dispute Resolution,
- Force Majeure,
Transitional Services in Technology Contracts usually bring within fold the provisions such as Services Provided, Service Tranches, Standard of Care to be taken, Specifications, Upgrades/Modifications, Usage of Service etc. The entity and the Company are unlikely to be competent to predict every possible event beforehand; therefore, there should be broad agreements that utilize operate on some form of specificity of the transaction. The parties can agree on some reasonable, satisfactory and substantial clauses, like, the “Entity will provide repairs and consultation services up to Rs. 50,000 per year for the period of three years from the date of Closing of this transaction.” This makes the clause more specific and reduces the chance of future dispute.
Reverse TSA in Technology Contracts
Like mentioned hereinabove, a Reverse TSA is when the flow of service is from the Buyer to the Seller of services. To make the understanding simpler, let us look at an example where an entity “X” is into developing embedded software and a multinational company “Y Ltd.” is the prospective buyer of the software. Y Ltd. wants the software for its automated machines, robots in the industry, IoT and for high-tech security. Now to make such software, the software engineers, programmers and coders at X, will require the critical data of Y Ltd. Thus when data centres containing such critical sensitive data are transferred from Y Ltd. (the seller) to X (the buyer); a Reverse TSA clause is usually entered upon in the contract. A sample clause may be:
“In connection with expiration/termination of these presents, or the Statement of Work in accordance with its terms, the Parties will, immediately commence after giving the notice of termination or at least prior to expiration of this Agreement or the Statement of Work, jointly develop a plan (Reverse Transition), to effect the orderly transition to X or its designee from Y Ltd., the Services then being performed or managed by Service Provider. Such plan will be completed by the Parties within and will set forth the tasks and actions and the criteria for declaring the transition completed, as agreed to be performed by and between Y Ltd. and X. The Parties and their employees/agents will cooperate to execute the Reverse Transition and each Party will perform the tasks and actions assigned to it in such reverse Transition. In any event, Y Ltd. will assist and support X in the reverse transition of the service back to Y Ltd. (the “Reverse Transition”). At X’s request, Y Ltd. shall have to and maintain a personnel staff to ensure that services continue to be provided during the term of the reverse transition without interruption and that reverse knowledge transfer is effectively provided to X or its representative.”
TSA is a very precise concept; which works perfectly when framed correctly. What it apparently says is a party will help another (depending on forward or reverse TSA), for some time. However there are many questions like what exactly will this help be, for how long, how much finance shall be spent on it, what is the scope of the agreement, will there be any third party involved, how much access will each party have to the information and resources, etc; since the event for which the agreement is to be entered is unforeseeable and having precise answers to these questions is nearly impossible, at the best, one can make analogies with their experience. It further causes a lot of costs, litigation and unnecessary delay in delivery of the product. Therefore, it is for the best to look into these questions at the early stage of divesting or acquiring the service/product, that’ll help avoid problems upfront.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.