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Preparing AI statements for mergers and acquisitions

Is your target M&A a manufacturing company with automated production, a consumer products company with online sales and marketing, or an education company that creates content for students? The growing use and development of artificial intelligence (“AI”) systems and products, particularly generative AI, has created risks for businesses using such tools. Artificial intelligence plays a role in many industries and companies whose products and services are not artificial intelligence themselves. In the context of M&A transactions, it is important to identify and assign responsibility for these risks. Risks related to AI may include: breaches (including through the use of training data and results), confidentiality, ownership and protection of intellectual property (including limitations on the protection of intellectual property generated by AI), regulation (e.g. privacy, recent regulations on AI intelligence), and other risks arising from use, such as indemnification liabilities or the use of artificial intelligence by the managing contractor.

Even for enterprises that do not focus on AI, e.g. where AI may be used in the business but is not the end product, it is important to identify the risks associated with AI and properly address and allocate those risks. exercising due diligence and applying appropriate conditions in the final decision regarding the purchase agreement. Companies across industries, from healthcare to manufacturing to entertainment, are using or interacting with artificial intelligence. Fortunately, many of the risks associated with AI can be partially covered by commonly used intellectual property representations and warranties. This article reviews the representations and warranties included in the purchase agreement that may cover AI-related risks and issues, and provides some comments on how these terms can be used to address AI-specific risks.

In some cases, existing intellectual property representations and warranties may be expanded to include the definition of AI technology as a separate term or to be included in other intellectual property definitions, such as “software” or “technology”, as necessary. AI technology may include generative AI tools such as ChatGPT, or AI-enabled tools such as MSWord with Co-Pilot integrated, and definitions should take into account the specific uses of the target. These types of tools use machine learning algorithms and large amounts of training data to develop models that can generate output in the form of high-quality text, images, and other content based on user input. If the target uses these tools, it may also be necessary to consider the concept of “training data” to eliminate AI risks in the target company. Training data is typically described as data, tuning, and RAGS used to train, pre-train, validate, or otherwise evaluate, improve, modify, or supplement an algorithm or software model. Generally speaking, the actual scope of the definition will vary depending on the results of the target company’s diligence. For example, diligence may also reveal whether the target has an established policy for its employees regarding the use of AI in its business. A review of these policies may also impact these definitions, as well as if the target uses contractors who create work products using artificial intelligence.

As part of the research, buyers should confirm, among others: rights regarding the use and ownership of manufactured tools. In such cases, non-standard representations and warranties may be useful, such as (i) infringement of training data and rights therein, (ii) ownership of AI technology, (iii) ownership and ability to protect results developed using AI technology tools or software, (iv ) licenses for contributions derived from the AI ​​technology, and (v) separate copyright and patent statements and warranties related to the AI ​​technology, as necessary. The actual scope of representations and warranties will vary depending on the technology or AI tool used by the company and for what purposes, e.g. customer contact in products or for internal purposes. In any M&A transaction in which the target company uses artificial intelligence, it is important to understand the risks associated with artificial intelligence and develop appropriate regulations that appropriately allocate and minimize these risks. To develop appropriate provisions, parties may consider a combination of: (a) due diligence, (b) disclosure statements, (c) standard pre-existing disclosures, or (d) non-standard disclosures.

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