DealLawyers.com Blog

We’ve all seen the staggering statistic that one-third of all VC dollars invested in 2024 went to AI startups. AI is also a huge driving force behind M&A activity these days as companies look to use M&A to increase their AI capabilities. That means M&A practitioners have been forced to deal with the unique risks of acquiring an AI-focused company and how to address these risks in agreements.

This Torys memo says that AI-specific representations and warranties are increasingly being used for this purpose — especially when AI is a critical element of the target’s business. The memo includes a non-exhaustive list of AI-related considerations for reps and warranties, which relate to the scope of AI, AI training and data use, ownership and license, use and functionality, governance and oversight, use of third-party AI or open-source code, compliance with law/industry standards and incidents/litigation. Here are a few examples:

– [W]hether AI should be a defined term and, if so, the potential scope of the definition. Definitions of AI should generally be drafted considering the ordinary meaning of “artificial intelligence”, which includes AI beyond genAI and the factual matrix surrounding the transaction.

– Depending on the circumstances, whether the target’s personnel have sufficient internal expertise to perform the various applicable oversight, use, maintenance, and similar functions within the organization may also be a consideration.

– In certain circumstances, buyers may seek to confirm AI models have sufficient logs and that results are sufficiently explainable and auditable.

– Where there is a lack of consensus as to the relevant industry standard, or where such standards are underdeveloped, parties may be better served by drafting properly scoped sector-specific representations to address compliance.

– The parties should consider whether there are any (i) instances of the target’s use of AI causing harm to individuals or demonstrating an undesired bias; (ii) complaints regarding the target’s use of AI; or (iii) threatened or pending litigation relating to the target’s use of AI.

Over on our new “AI Counsel” blog, Zachary also highlighted this Sheppard Mullin blog that identifies four areas of interest for M&A buyers evaluating AI-driven companies.

– Meredith Ervine