Mergers and acquisitions (M&A) have long been instruments of strategic growth, particularly in the technology sector where access to innovation, digital infrastructure, and proprietary software is often central to deal value. Yet as IP-rich transactions continue to rise, so too does the legal complexity surrounding the continuity and control of critical software assets.
For in-house legal counsel, particularly those supporting technology or digital-first businesses, software escrow has evolved from a niche consideration to a practical tool in managing transaction risk, protecting business continuity, and safeguarding IP value through post-close operations. Whether the transaction involves a full acquisition or a strategic investment in a software-dependent target, software escrow deserves a deliberate place in the due diligence and contracting phases.
According to EY-Parthenon, U.S. M&A activity declined in April 2025 despite resilience in technology, healthcare, and financial services sectors. This dip reflects macroeconomic caution, but behind the slowdown lies a consistent truth: where deals are being done, software remains central to strategic intent.
Modern acquirers are not just buying companies, they’re acquiring digital capabilities, proprietary code, and automated systems that underpin service delivery, customer experience, and core infrastructure. This makes continuity of software performance and maintenance post-acquisition a commercial necessity and a legal concern.
Yet the software behind a business is not always owned by it. Many targets rely on third-party vendors, niche development partners, or inherited licensing arrangements which introduces risk. What happens if a software vendor becomes insolvent, is acquired by a competitor, or terminates service following a change of control?
These are not theoretical questions. They're business continuity issues and legal ones.
A software escrow agreement places the source code and related development materials (documentation, deployment scripts, configuration files, etc.) with a neutral third-party agent under contractual terms. If specific trigger events occur, often linked to insolvency, vendor breach, or service withdrawal, the escrow agent releases the materials to the licensee or acquirer.
This legal mechanism offers several advantages for counsel managing technology transactions:
1. IP Risk Mitigation
In deals where mission-critical applications are not fully owned by the target, escrow provides a contractual assurance that the acquiring business will have access to the software it depends on, even if the vendor disappears post-close.
2. Stronger Due Diligence
Escrow arrangements support technical and legal due diligence. Provides the opportunity for the buyer to use the escrow agent to review the material and ensure it is complete and correct prior to the exchange of funds being made. This is achieved through independent verification and can also be extended to security scanning services to assess for any vulnerabilities within the code. Equally it provides protection to the seller’s IP prior to the transaction.
3. Operational Continuity
In highly regulated or 24/7-operating environments (financial services, healthcare, energy), software downtime is not an option. Escrow helps ensure that the acquiring company can maintain, support, or transition away from key applications if a vendor becomes unavailable.
4. Deal Facilitation
Where third-party software dependencies pose deal-breaker risks, negotiating a new or enhanced escrow arrangement can be the difference between a successful closing and a collapsed transaction.
While the concept of software escrow may seem straightforward, the legal execution demands precision. Poorly drafted or boilerplate agreements offer little protection in practice. Consider the following:
Release Conditions Must Be Clear and Enforceable
The triggers for release include insolvency, material breach, cessation of support and must be objectively defined. Counsel should avoid vague standards or subjective thresholds that create ambiguity in a post-close dispute.
Verification Enhances Value
An escrow that holds outdated, incomplete, or untested code is of limited use. Legal teams should push for independent verification of escrow deposits, ensuring that the materials are complete, functional, and deployable if needed.
Verification tiers range from basic deposit confirmation to full compile and build testing, each offering increasing levels of assurance depending on the risk profile of the software asset.
Consider Change of Control and Assignment Clauses
If the target licenses mission-critical software under non-transferable agreements, a change of control could trigger termination. Legal counsel should assess assignment rights, negotiate necessary consents, or ensure escrow release is linked to this risk.
Plan for Integration
Post-acquisition, the acquiring business may wish to consolidate IT systems or change vendors. Escrow can facilitate this transition by providing access to the code during the integration phase but only if this scenario is contemplated in the agreement.
Increasingly, acquirers are requesting not only the existence of an escrow agreement but also independent verification of the deposit contents. This trend reflects a shift in the role of escrow, this is from passive risk mitigation to active operational assurance.
A well-structured escrow agreement today often includes:
Deposit Audit: Ensuring the deposit matches what was agreed.
Build Verification: Testing whether the code can be compiled into a working application.
User Acceptance Testing: Confirming functionality matches production performance.
Update Schedules: Ensuring the escrow reflects current versions, not legacy code.
In-house legal teams should view verification as a value multiplier.
While software escrow plays an important role, it’s not a silver bullet. Counsel should also consider:
Robust SLAs and Service Continuity Clauses in software contracts
IP representations and warranties with meaningful indemnities
Assignment or novation agreements where vendor rights are non-transferable
Tech transition plans as part of integration
In deals involving custom software development, it may also be appropriate to secure assignment of IP rights outright or include milestone-based deposit requirements into escrow from the outset.
Software escrow is not just an IT clause or a procurement afterthought. It’s legal infrastructure that supports the continuity, control, and value of technology-dependent operations, precisely the kind of infrastructure that in-house legal teams are increasingly called upon to deliver.
In a deal environment marked by volatility, vendor concentration, and growing regulatory oversight, software escrow offers something rare: a legally enforceable path to business continuity.
For legal counsel navigating complex technology transactions, now is the time to move software escrow from the footnotes of the contract to the front lines of deal planning.
