Targets applying AI
As the AI Act entered into force on 1 August 2024, assessing the risk level of AI systems and their compliance with the AI Act is – and will increasingly become – an essential part of due diligence in TMT M&A transactions. In addition, depending on the role of the target company (e.g. as a provider or deployer of AI), it will be crucial to assess information on the ownership of AI-generated content, compliance with data protection regulations and liability for AI decision-making.
The AI-related risks identified in the due diligence phase should then be addressed in the transaction documents through appropriate warranties and indemnities (W&I) or completion conditions. Evidently, the seller should provide more specific and comprehensive representations and warranties regarding compliance with the AI Act, especially if high-risk AI systems are being used. In addition, the parties may need to include more tailored completion conditions relating to the target company’s AI systems, such as obtaining or maintaining any necessary authorisations, registrations, certifications or notifications under the AI Act to comply with any ongoing or reporting requirements. These findings may also affect the valuation, negotiation and structuring of the M&A transaction.
Furthermore, in the event of W&I-insured transactions, the parties and their insurers should adapt the scope of their due diligence, disclosure and underwriting processes to account for AI risks and to ensure that the W&I insurance provides adequate coverage. As there are many uncertainties about the application in practice of the AI Act, we expect W&I insurances to be in demand by buyers in AI-heavy TMT transactions.
Liability
Liability with respect to AI is a complex and evolving issue that raises various legal questions. One of the main challenges is determining who is responsible and liable when an AI system produces errors or causes damages. Depending on the nature and function of the system, different parties may be involved, such as the developer, the provider or the deployer.
The AI Act does not introduce a specific liability regime for AI, but rather refers to the existing EU and national liability rules, which may not be well-suited to address the complexity and unpredictability of AI. Hence, directors should be aware of the potential liability risks associated with the use of AI in their business operations and act appropriately to mitigate such risks. This includes conducting due diligence, implementing risk management and control systems, effectively ensuring compliance with the EU AI Act and other relevant laws and obtaining adequate insurance coverage.
In so doing, directors can not only protect the company and themselves from liability claims, but also enhance the reputation of their companies, a prerequisite for successful M&A.
Support of GenAI in M&A transactions
The possibilities of GenAI are changing the way players within the M&A world conduct transactions. GenAI applications – such as Harvey for legal and Microsoft Copilot for general corporate use – are able to support and improve certain processes within a transaction by their ability to quickly analyse vast data sets, identify risks and provide actionable insights. The embrace of AI reflects a commitment to innovation and will improve the quality and the efficiency of M&A transactions.
It is clear that AI and AI-powered companies have an increasing role to play in M&A. With new AI developments emerging, new applications will follow, and with new applications new regulations will emerge. CMS is monitoring the developments closely and we look forward to the next chapters of AI in M&A.
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