On January 7, 2009, the chairman of Satyam Computer Services (Satyam) tendered his resignation with a letter informing the company’s board of directors that the company had inflated its financial results. This new development compounds the problems facing Satyam as a result of the World Bank’s recent declaration that Satyam is ineligible to receive contracts from the bank for a period of eight years based on alleged improper benefits being provided to World Bank employees. This development has resulted in significant questions as to the continued viability of Satyam.
Satyam’s customers should review their existing agreements and projects and begin contingency planning to mitigate the risks of an interruption or degradation of the services provided in the event Satyam is unable to continue to provide services or is acquired by a third party.
From a business perspective, Satyam’s difficulties may result in degradation in the quality and level of services if its employees leave the company and move to competitors. Retention of its most skilled personnel may well become a significant issue for Satyam. One possible result could be Satyam’s inability to provide resources with the skill levels and experience required to complete existing work. If Satyam is to be sold, either as a whole or in part, there is a risk that the buyers may not want to assume all of Satyam’s existing contracts, especially those that might not be profitable in the hands of any potential purchaser.
In either event, Satyam’s customers should look closely at the work currently being performed and assess whether it makes sense to transition that work to alternate, more stable providers. Termination of an agreement or a project is not necessarily the best option in all situations.
The following is a list of contractual and business issues that all customers and their counsel should review and assess with regard to Satyam agreements:
- Does the contract contain a right to terminate the agreement in whole or in part and, if so, what is the notice period required? It is common for a customer to have the right to terminate a services agreement for convenience (i.e., without cause) and, in many cases, the agreement may permit the customer to terminate projects on a case-by-case basis for convenience as well. If your contract permits termination for convenience, you should investigate the notice requirement in order to execute this right and whether there are any additional charges for exercising this right such as an obligation to pay for stranded costs.
- Does the contract permit the customer to terminate the agreement in the case of a change of control of Satyam or include an outright prohibition on assignment? Many contracts for outsourced IT services permit the customer to terminate the agreement in the event that the vendor is acquired, often based on the theory that the customer may not want to be forced to do business with a company that acquires the contract.
- What are the customer’s contractual rights in the event that certain key personnel leave their employment with Satyam, and how will this impact the current work being performed? Does the contract permit (or prohibit) the solicitation of Satyam employees?
- Does the customer have a contractual right to demand that the vendor provide assurances of its ability to continue to perform?
Regardless of the specific contractual protections, Satyam’s customers need to prepare contingency plans for the worst-case scenario in which Satyam will no longer be able to perform services currently provided. Accordingly, each project and service should be examined and assessed and an appropriate contingency plan developed. Considerations include:
- Assess the operational impact of a possible degradation or cessation of each project or service. It is quite possible that current Satyam employees will seek employment with another company or that Satyam will reallocate employees among its accounts to protect its most profitable or largest relationships, possibly reducing the pool of resources possessing the skills required to provide the current contracted services.
- Customers should determine where their data is located and develop a contingency plan to get it back. Contractual clauses regarding the possession, use, and return of data, especially for contracts where this information is hosted off-site, should be reviewed. Where contractually permitted, conduct audits to ensure compliance with applicable contractual requirements. If Satyam is sold or ceases operations, a customer may find it difficult or impossible to identify the data that is in the possession of the vendor and where the data is located. This problem is made more complex where the vendor uses and holds the data in one or more countries. Accordingly, it may make sense to require more frequent data backups (even requiring continuous mirroring to a customer backup location) and/or requiring Satyam to perform certain mission-critical services on shore or in a near shore location to make it easier to recover data in the event of a problem. Consider exercising available audit rights, if any, to assess the current data situations and plan a risk mitigation strategy. It is critical that Satyam’s possession, use, and recovery of data that is subject various data privacy legislation both within the United States and elsewhere remains in compliance with applicable laws and applicable corporate policies. Consider requiring that all critical data and information be backed up now before there is a problem.
- Review any termination-assistance and knowledge-transfer provisions. Most agreements for technology-based services include a requirement that the vendor assist the customer with the transition of the services to the customer or another vendor at the end of the agreement. Often, these provisions are very vague and do not contain even the basic building blocks necessary to protect against an interruption in the affected business function, avoid problems related to the recovery of the customer’s data, confidential information, and other assets, and ensure the knowledge transfer activities to the new vendor. These issues should be investigated and, if not addressed, contingency plans should be considered.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.
If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or:
Karl A. Hochkammer
Michael R. Overly
Los Angeles, California
Frederic J. (Fritz) Vorlop