DealLawyers.com Blog

A recent Risk Management Magazine article discusses AI-related risks in business acquisitions. The article addresses the need for buyers to understand the functionality of AI tools used in the target’s business, as well as approaches to identifying and assessing their risks. The article also discusses methods by which buyers may mitigate their risks. This excerpt on contractual risk-mitigation terms indicates that market practices concerning AI-risk allocation are still evolving:

Representations and warranties are important. “Standard reps” are still developing as lawyers begin to understand the risk better. Too often, representations are overly broad and do not force the review and discussion of specific risks in the context of the transaction. A buyer should be wary of a target that uses AI in any meaningful way and readily agrees to a super broad representation. Also, a buyer should understand that traditional representations, like those involving product liability, may take on additional meaning and complexity where AI is involved. For example, the risk of an AI-enabled medical device that is constantly learning and evolving may be very different at the time of acquisition than it was last year.

The appropriate allocation of risk and responsibility between parties in AI-related transactions is still developing. A buyer should consider obtaining representation and warranty insurance to cover potential AI-related claims. However, keep in mind that this insurance market is evolving as there has not been enough time for generative AI’s risks to manifest into actual damages subject to coverage.

In addition to risk allocation, the article says that Buyers also need to assess whether the target’s AI-related risks can be mitigated by changing how the AI is used after the acquisition is completed. This may be particularly effective in situations where the buyer has robust training, compliance and quality controls that it can deploy in the acquired business.

– John Jenkins