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Artificial intelligence is still in its infancy. Instead of seeing it as a threat, dealmakers should embrace the technology and seize the opportunities it will generate, including improved client services and process efficiencies. There will undoubtedly be a surge in artificial intelligence M&A as the technology continues to rapidly develop, posing a range of new legal issues and requiring specific legal approaches. So, we as dealmakers must continuously adapt to stay on track.
AI Legal Due Diligence
Given the complexity of AI technology, acquirers should undertake necessary due diligence to accurately assess the value and potential risks associated with their targets. For many technology targets due diligence will likely remain largely the same as those applicable to technology companies more generally, but for other segments of the AI industry, especially those heavily reliant on AI systems and their applications, legal due diligence should be tailored accordingly.
Once a virtual data room has been opened by a target, AI can assist the buyer deal team by detecting gaps and providing summaries of the documents uploaded. One area with significant potential is the analysis of legal documents. Well-drafted agreements have a precise and logical structure similar to software code, using largely standardized language. Current AI-powered due diligence software can already look for critical clauses such as “change-of-control “and “non-compete” provisions in the target’s contracts.
In the last step of the legal due diligence process, generative AI can produce first drafts of legal due diligence reports based on the confirmed findings.
Because of the nascent nature of current AI tools, M&A attorneys will need to (at least spot) check the findings by the utilized AI software.
AI Representations and Warranties
In many cases, the representations and warranties in the acquisition agreements of AI companies do not need to deviate significantly from those typical in the acquisition of other high-tech companies. Many of the significant risks associated with AI companies, such as those related to IP, IT, data privacy and cybersecurity, are similar to those of other high-tech companies.
However, acquirers are increasingly pushing for separate AI-specific representations in situations where a particular feature or aspect of a target’s AI technology is crucial to the valuation of the business or involves unique risks.
AI representations and warranties may include provisions concerning:
- Disclosure of AI products and services. This representation requires the disclosure of target’s proprietary AI technology, including algorithms and models.
- AI training data. This is a representation that the target has obtained and complies with all third-party licenses, consents, and permissions necessary for its collection and use of data, content, or other materials to train AI models.
- Ethical and responsible AI use. This is a representation that the target has implemented policies and procedures for ethical and responsible use of AI and may specifically address identifying and mitigating bias in or falsification of training data.
- GenAI. This representation requires the disclosure of any GenAI tools used by the target and the applicable license terms for any third-party GenAI tools.
AI alone will not handle M&A legal due diligence and dealmaking. Human intelligence is a prerequisite to AI. Frank Aquila from Sullivan & Cromwell was spot on when in a recent post said: “As AI advances and becomes more integrated into our daily work and lives, great people skills will remain at the center of individual and company growth. EQ is a paramount skill to elevate in 2024 and beyond, as it provides a distinct advantage that AI cannot easily replicate.”
Happy holidays and best wishes for the New Year to you all!
Courtesy of EACC Texas Member Soren Lindstrom, Founding Partner at Pierson Ferdinand LLP and Honorary Consul of Denmark