Private equity and portfolios
Non-exclusive licenses in the ordinary course: the credit agreement carve-out
By SourceX Editorial · Reviewed by Noah Loul ·
Short answer
Many credit agreements count a license as a disposition of assets but carve out non-exclusive licenses granted in the ordinary course of business. A data license fits that carve-out when it passes three tests: it is non-exclusive and limited, it is ordinary for this company and its industry, and it leaves the business and collateral intact. Confirm with counsel.
Key takeaways
- Read the definition of Disposition first; many agreements include licenses in it, which is why the carve-out matters.
- The carve-out usually carries qualifiers such as ordinary course, consistent with past practice or no material interference.
- A first-ever data license may not look like past practice, even when it is non-exclusive and modest.
- Exclusivity, perpetual terms, affiliate counterparties and any transfer of ownership push a license away from the usual carve-out.
- When the fit is unclear, ask the administrative agent for written confirmation before signing, not after.
Why do credit agreements care about licenses?#
Credit agreements care about licenses because a license can move value away from the lenders' collateral. Most secured facilities restrict the borrower from disposing of assets outside agreed exceptions, and many define Disposition broadly enough to include sales, leases, transfers and licenses of property, including intellectual property.
Without an exception, almost any license the business grants, including routine software or content licenses to customers, would need lender consent. The ordinary-course carve-out exists so normal commercial activity can continue. A license of operational records to an AI developer is a newer kind of transaction, and the question for the CFO is whether it fits that exception.
The question usually reaches the CFO late, after a buyer conversation has started. Reading the carve-out early, while scope is still open, lets the company shape the license to fit instead of seeking consent for a license that has already been negotiated.
The common carve-out wording and what it signals#
The common carve-out permits non-exclusive licenses of intellectual property in the ordinary course of business, usually with qualifiers that narrow it. Wording varies from agreement to agreement, but a few patterns recur. Read the exact text with counsel, because small qualifiers change the answer.
Also read the definitions of Intellectual Property and Collateral. If records such as support tickets or job histories are not intellectual property under the agreement's definition, the license may be tested under the general asset provisions instead of the IP carve-out.
| Wording pattern | What it usually signals | Question to ask counsel |
|---|---|---|
| Non-exclusive licenses of intellectual property in the ordinary course of business | The basic carve-out for routine licensing | Do our records count as intellectual property under the definition? |
| Consistent with past practice | The company's own history matters, not only the industry's | Have we granted comparable licenses before? |
| That do not materially interfere with the business | The licensed asset must stay fully usable by the company | Does the license restrict our own use of the records? |
| Other than Material Intellectual Property | Key IP may be ring-fenced from transfers or exclusive licenses, often to unrestricted subsidiaries or affiliates | Are these records listed, or likely to be treated, as material? |
| Licenses to customers or end users | A narrower class of permitted licensees | Is an AI developer a customer in the agreement's sense? |
| Exclusive licenses limited by field or territory | Some exclusivity allowed within limits | Does our proposed exclusivity fit inside those limits? |
Three tests for whether a data license fits ordinary course#
Ordinary course has no single definition across agreements, but the questions lawyers ask tend to cluster into three tests. A data license that passes all three is easier to defend; one that fails any of them is a candidate for a consent or confirmation request.
The second test is the hardest for most operating companies, because few have licensed operational records before. Counsel may still conclude that a narrow, non-exclusive license is ordinary for a company that already licenses software or content to customers, but that conclusion should be written down and kept with the license.
| Test | Questions to ask | Points toward ordinary course | Points away |
|---|---|---|---|
| Nature of the license | Is it non-exclusive, time-limited and scoped to defined records and uses? | Non-exclusive, fixed term, defined permitted use, company keeps ownership | Exclusive, perpetual, broad field, any transfer of title |
| Company and industry practice | Do we, or businesses like ours, grant licenses of this kind? | Existing licensing activity; comparable licenses granted before | A first-ever transaction of an unfamiliar type |
| Scale and effect | Is it proportionate, and does it leave the business and collateral intact? | Modest relative to the business; no interference with operations | Large relative to the business; restricts the company's own use |
Terms that push a data license outside the carve-out#
Some license terms push a deal outside the carve-out however the business describes it. Check each one before the term sheet is agreed, because removing a term later is harder than leaving it out.
Several of these terms can be reshaped into a form that fits. A field-limited exclusivity can sometimes become a short right of first negotiation, and a large upfront payment can be split into payments tied to delivered milestones. Counsel and the deal team should agree which variants the credit agreement tolerates before any term is offered to a buyer.
- Exclusivity of any kind, including exclusivity limited to a field of use or a period.
- Perpetual or irrevocable grants, or rights that survive a sale of the company without limit.
- Any assignment of ownership in the records, or broad rights for the buyer to sublicense.
- A large one-time payment out of proportion to the company's usual revenue, which can make the license look more like a sale of the asset.
- A counterparty affiliated with the sponsor, which can engage affiliate transaction covenants.
- Proceeds routed outside the borrower group, which can engage restricted payment or cash management provisions.
Other provisions to read alongside the carve-out#
The disposition covenant is not the only provision a data license can touch. Lien covenants may treat certain licenses as encumbrances on collateral. Investment covenants matter if the license is paid in equity or credits. Reporting covenants may require notice of material contracts. Mandatory prepayment provisions can require net cash proceeds of certain asset sales to be applied to the loan unless reinvested, so how the license is characterized can affect where its proceeds go.
Security agreements sometimes add their own limits on licensing collateral, and intercreditor arrangements can add a second set of parties. Read them together with the credit agreement, since the narrowest provision tends to set the practical limit.
Illustrative: a portfolio CFO tests the carve-out#
Illustrative: the CFO of a fictional PE-backed field service software company is approached about licensing anonymized support-to-fix histories. The credit agreement includes licenses in the definition of Disposition and permits non-exclusive licenses of intellectual property in the ordinary course of business consistent with past practice.
The CFO and counsel apply the three tests. The proposed license is non-exclusive, fixed-term and scoped to defined records, and the company keeps ownership. The company licenses its software to customers but has never licensed records. Counsel advises that the past-practice qualifier is uncertain.
The company sends the administrative agent a short description of scope, term, exclusivity, counterparty and payment flow, and asks for written confirmation that the license is a permitted disposition. The agent circulates the request to the lenders as the agreement requires and returns a written confirmation, which goes into the board file next to the license.
How SourceX handles financing questions#
SourceX structures each data transaction as a license, not a sale, and the supplier keeps ownership of its records; scope, term and exclusivity are set deal by deal. That structure does not replace the borrower's own review of its credit documents.
In the Approval step of the SourceX five-step transaction, the supplier confirms that the lender, board and investor consents it needs are in place. The SourceX Evidence Packet then records the release authorization alongside provenance, licensing rights, permitted use and the privacy record.
Frequently asked questions
Is a data license a disposition at all?
It can be, depending on the definition. Many credit agreements define Disposition to include licenses of property, so a license is captured unless an exception applies. Others are narrower. The agreement's definition, not the label the parties put on the deal, decides the answer.
Does the carve-out cover licenses to any third party?
Not always. Some carve-outs cover licenses to customers or in connection with selling the company's products, which may not describe an AI developer licensing records. Read who the permitted licensees are, and ask counsel whether the proposed counterparty fits.
What should a consent or confirmation request include?
A short description of the records, the scope, term and exclusivity, the counterparty, how payment flows, and confirmation that the company keeps ownership. Agents tend to respond more readily to a clear, specific request than to a general question about data monetization.
Does sponsor approval satisfy the lenders?
No. Sponsor consent under the governance documents and lender consent under the credit agreement are separate. Both may be needed, along with board approval under the company's own thresholds, and each should be documented separately.
Can a license signed now cause problems at refinancing?
It can if it is exclusive, long or unusual, because new lenders will diligence existing licenses. Keeping licenses non-exclusive, time-limited and well documented makes them easier for a new lender or acquirer to review. File the carve-out analysis or the agent's confirmation with the license, so the record answers the question on its own.
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