Is AI a concern in M&A and venture capital (VC) financings?
AI can raise a variety of concerns in M&A and VC financings, including:
Governance and Risk Management:
Has the target company established processes, personnel and technologies for assessing the ethical, legal and contractual compliance of AI systems and overseeing their development and use?
Does the target have all proper authorizations, licenses, consents and other rights in the data it uses to train its AI models?
What are the target’s key third-party AI dependencies and how are the tools being used internally or in the company’s products and services?
What obligations are imposed by the target’s internal- and external-facing policies concerning AI, and is it abiding by them?
What internal mechanisms are in place to understand, communicate and manage the company’s position on acceptable AI use and development?
Intellectual Property:
Has the target company implemented controls to restrict and protect data that is considered a trade secret or subject to confidentiality obligations with AI technologies?
Does the target’s overarching IP strategy align with the lack of protections that may be afforded through the use of generative AI technologies?
Do the target company’s vendor agreements protect the confidentiality of the target’s data or does it grant any rights to the vendor to own or use the data?
Liability:
Has the target company appropriately allocated rights and risks between customers and suppliers of AI tools?
Does the target understand and control for potential liabilities arising from AI development and deployment, especially regarding consumer harms, privacy violations, security compromises, hallucinations and ethical and bias issues?
Has the target received or given indemnifications to third parties (including customers and providers of AI tools)?
Does the target company develop, deploy or otherwise use AI tools that result in automated decision-making or are a substantial factor in impacting a consumer’s legal rights (e.g., employment, insurance, financial products), and has it implemented all legally required controls for such technologies?
AI Claims:
Are the target company’s marketing claims regarding its AI capabilities exaggerated or accurate?
Has the target company ensured the accuracy of its SEC disclosures or any other public filings about AI benefits?
Please review this article for more information on AI considerations in M&A transactions.