In the rapidly evolving landscape of generative artificial intelligence (AI), businesses engaged in mergers and acquisitions (M&A) must now update their playbooks to effectively address the associated legal risks. The integration of AI, both in products and internal operations, necessitates updated representations and due diligence processes from both buyers and sellers, reflecting the growing importance of AI in enterprise environments.
Traditionally, purchase agreements have focused heavily on intellectual property (IP) representations. Now, however, according to the Orrick team of Sarah Schaedler, Daniel Healow, and Zac Padgett, buyers are incorporating AI-specific clauses. These new representations address critical areas such as training data, compliance with legal and contractual obligations, confidentiality terms, and internal governance structures for AI use.
For sellers, this means a heightened level of diligence is required. This includes maintaining an up-to-date inventory of AI usage, development, and distribution, alongside any applicable contractual terms. Additionally, sellers must establish and showcase responsible AI use policies and oversight mechanisms. This helps demonstrate active risk management of new technologies to potential buyers, ultimately supporting accurate AI-related representations and warranties.
Adjustments are not limited to pre-transaction preparations and purchase agreements. Post-closing integration practices are equally important. Buyers need to integrate the acquired business into their broader AI management frameworks, considering the specific AI regulatory landscapes, like the EU AI Act, which may apply to businesses outside the EU under certain circumstances (European Parliament). This also necessitates routine updates to the AI risk profile as the business evolves.
Moreover, revisiting customer and supplier agreements is critical. Buyers must ensure that they hold the necessary rights to pursue the combined companies’ AI objectives and that vendor agreements align with their confidentiality and data protection standards.
In conclusion, the incorporation of AI-related representations and diligence in M&A processes is becoming increasingly prevalent. Addressing these issues early in deal negotiations can significantly mitigate risks and avoid last-minute delays, underscoring the importance of thorough preparation and ongoing updates to AI governance structures.