IBM’s spinoff: key contractual considerations for existing IBM clients

IBM’s coming spinoff of its Global Technology Services division into a newly created, publicly traded company (being called Kyndryl) is raising an array of concerns for the company’s existing clients.

Kyndryl, IBM says, will focus on client-owned infrastructures and offer “hosting and network services, services management, infrastructure modernization and migrating and managing multi-cloud environments,” while the “legacy IBM company will focus on its open cloud hybrid platform and AI businesses.  This is not the first time a technology company has decided to streamline its operations through a spinoff, but this particular spinoff raises interesting contractual issues for IBM’s current clients.

Here are some key considerations for current IBM clients.

Timeline: The separation is expected to occur in two steps with the formation and dropdown of assets and contractual arrangements with infrastructure clients to occur sometime this summer, and the spinoff to IBM shareholders planned to be complete by the end of 2021.

Consequences of the spinoff on existing contracts and legal qualification of the operation: At a minimum, the separation entails, from a contractual perspective, the assignment of all or part of existing IBM contracts with its clients to Kyndryl (ie, in relation to those parts of the services currently being provided to such clients as would relate to the future scope of operations of Kyndryl, as set out above).  

Whether the separation and spinoff results in a change of control may depend on how that may be defined in a client’s particular contract – if it is defined at all.  According to press articles, the spinoff is intended to be effected by way of a pro rata distribution of shares to the current IBM shareholders, with the resulting company, Kyndryl, intended to be a public company.

Whether or not there is a change of control, any suggestion that an existing contract be assigned to a different legal entity will usually require customer consent.  (There may be exceptions to this in some countries where the assignment can be shown to be as a result of a bona fide corporate reorganization; this would likely be argued to be the case here). This is especially so where the contract is to be assigned in part only (ie, with part going to Kyndryl, but with IBM also retaining a contract of its own with the customer for those parts of the services which remain within its envisaged scope of future operations).

Action steps to consider for existing clients of IBM

• Clients with existing technology and outsourcing services contracts with IBM need first and foremost to review their contracts and identify the stipulations applicable to the assignment or transfer of such contracts and to the change of control of IBM (if any). Whether IBM is obliged to obtain the client’s prior consent before proceeding to the transfer of the agreement will be a determining factor in the future discussions. In any event, gaining a good understanding of your rights and obligations under the contract is important to ensure the protection of your interests.   
• In complex technology and outsourcing projects mixing different type of services, including business processes or cloud services, it may be difficult to separate the infrastructure services which would be assigned to Kyndryl from the services which would remain in IBM’s hands. In particular, pricing schemes, service levels, governance, disaster recovery plans and other operational considerations are usually built to support the engagement as a whole and not just for a specific line of service. In such case, any transfer of services to Kyndryl would imply the negotiation and signature of an amendment to the contract to clarify how the commercial arrangements will work in future; this could become an opportunity to renegotiate other parts of the contract (using the leverage that will be provided by IBM’s need to obtain consent for their own intended changes).
• Irrespective of the right to accept or not accept the transfer of the contract, business continuity and proper performance of the contract remains the main concern for clients. In that regard, the information that IBM is going to cut 40,000 jobs worldwide, including 10,000 in Europe, is to be noted. IBM and Kyndryl should provide reassurance that both of them have the ability to perform end-to-end services efficiently and in accordance with the contract without compromising service levels and without increasing the burden and information security risk of clients.
• An alternative to the transfer of all or part of the contracts to Kyndryl is for the parties to the contract to remain as is, but for Kyndryl to become IBM’s subcontractor. In such case, IBM would remain the main provider and responsible for Kyndryl’s performance of the services. This option might be particularly interesting for clients with existing contracts with IBM that cut across various towers such as managed infrastructure (which will be spun off to Kyndryl) and cloud services and application maintenance (which will remain with IBM). Again, the contract may require for the customer’s consent to be provided for the use of any subcontractors (or at least for material subcontractors), and it is likely that this is what Kyndryl would become, once the separation has completed.

Next steps

IBM has only very recently started going into the details of the consequences of the operation on existing contracts with clients. It is thus time for IBM’s clients to prepare for discussions with IBM and determine the implications and risks for their company in this context.

For help and support in relation to this operation, please reach out to your regular DLA Piper contact in your respective jurisdiction or email us at TechandSourcing@dlapiper.com.