AI Legal Risks in M&As

Navigating Artificial Intelligence (AI) Legal Risks in Merger and Acquisitions (M&A) Transactions:

What Investors Need to Know

Are you considering an acquisition of a company that develops or utilizes artificial intelligence (AI) tools? AI, especially generative AI technologies, are game-changers in today’s business landscape. However, they also bring unique legal challenges that can impact your M&A transaction. Understanding these risks, adapting your due diligence accordingly, and incorporating AI-specific representations and warranties into your deal documents are crucial steps.

Why AI Expertise Matters in Merger & Aquisition Deals

To navigate these complexities effectively, it’s essential to have an expert in AI technology and its legal implications on your deal team. Subtle issues, if overlooked, can result in liability and diminished business value. This article explores how due diligence should evolve beyond standard technology checks to address the AI tools used or developed by your target company.

Key Legal Considerations with Artificial Intelligence

The legal landscape surrounding AI is evolving rapidly, and each transaction will have its own set of unique issues based on the target company’s AI involvement. AI applications can range from:

1. Data Collection for AI Training: Licensing data for AI model training.

2. AI Model Development: Creating AI models or applications.

3. Third-Party AI Use: Utilizing or fine-tuning third-party AI tools.

4. AI-Generated Content: Using content produced by AI.

Each AI tool can have different versions, each with its own legal terms and handling of inputs and outputs. Understanding these variations is key to assessing potential legal risks.

Deepening Your Due Diligence

Once you grasp the target company’s Artificial Intelligence involvement, dive into the specifics of AI-related due diligence. Here are some crucial areas to focus on:

1. Inventory of AI Technologies: Identify all AI products and services used or developed by the company. Note the versions and terms of use. Free versions often come with riskier terms. Ensure that any AI development adheres to legal standards and "responsible AI" practices.

2. AI Governance and Policies: Check if the company has an AI governance committee and a clear AI policy. Companies lacking these are more likely to encounter legal issues and potential asset losses.

3. AI Vendor Due Diligence: Assess the company’s diligence in vetting AI vendors. Ensure that AI tools have been evaluated for legal compliance, including the legality of data used for training and the absence of bias. Missteps here can lead to liability under various laws, such as those imposed by the EEOC and the Colorado AI consumer protection law.

4. Content Rights for Artificial Intelligence Training: Verify that the company has legally obtained and has the right to use the content for training AI models. Unauthorized use of data can result in severe penalties, including "algorithmic disgorgement," where the company might be required to destroy its AI models and algorithms.

5. Ownership of AI-Generated Content: Determine if the company exclusively owns the content generated by AI tools. Some AI tools’ terms may grant the provider rights to use or reuse the output, which could affect the exclusivity of the content.

6. Copyright and Generative AI: If the company uses generative AI for creating content, be aware that AI-generated works typically aren’t protected by copyright. Ensure that any AI-generated content used in larger works is properly disclosed in copyright registrations.

7. Indemnity Agreements: Review any indemnities granted to AI tool providers. Free versions often come with terms that require users to indemnify the provider, which could pose risks if not managed properly.

8. Open Source and Artificial Intelligence Code Generators: For companies using AI code generators, ensure compliance with open-source licenses. Some licenses require that derived software be made freely available, which can impact the company’s business model.

9. Regulatory Compliance: Understand specific regulatory requirements related to the AI tools and their applications. This includes compliance with laws governing AI in employment, consumer finance, housing, and more. Ensure that the company meets all necessary legal standards.

Conclusion

AI-specific diligence is crucial for avoiding potential pitfalls and preserving deal value. Incorporating a knowledgeable AI legal expert into your deal team will help identify and address these issues effectively. Make sure to evaluate responses carefully, understand their implications, and negotiate appropriate representations and warranties. If your legal team lacks deep Artificial Intelligence expertise, consider bringing on specialized counsel to navigate these complex issues.

By following these guidelines, you can better manage the risks associated with AI in M&A transactions and safeguard your investment.

If you are in need of legal help with managing the possible risks involved with Artificial Intelligence in Merger and Acquisition transactions, contact Soreide Law Group regarding this complex issue at: 888-760-6552.