Publications

The use of artificial intelligence (AI) in various sectors is transforming the landscape of mergers and acquisitions (M&A), requiring companies and their M&A advisors to keep up with the rapidly changing technological and regulatory environment. On 21 April 2021, the European Commission proposed the 'Regulation of the European Parliament and of the Council laying down harmonised rules on artificial intelligence' (AI Act), which aims to establish a regulatory framework, inter alia for the providers (including product manufacturers), users, distributors and importers of AI systems. The AI Act is expected to be formally adopted in the first half of 2024. In our last contribution, we discussed the concept of 'Tech M&A'. In this article, we will take a look at how the AI Act will affect Tech M&A. AI Act The AI Act introduces a new legal framework that classifies AI systems according to the level of risk they pose in respect of the rights and freedom of individuals. Four levels of risks are dis­tin­guished:Un­ac­cept­able risk: AI systems which are classified in the first category are prohibited by the AI Act. High risk: With respect to high-risk AI systems, the AI Act imposes requirements and obligations regarding, inter alia, (i) technical documentation; (ii) risk management systems; (iii) conformity assessment procedures; (iv) log keeping; and (v) quality management systems. Limited risk: Title IV of the AI Act concerns certain AI systems to take account of the specific risks of manipulation they pose. The transparency obligations set out therein apply for systems that (i) interact with humans, (ii) are used to detect emotions or determine association with (social) categories based on biometric data, or (iii) generate or manipulate content ('deep fakes'). Low or minimal risk: Lasty, the AI Act creates a framework for the creation of codes of conduct, which aim to encourage providers of non-high-risk AI systems to voluntarily apply and implement the mandatory requirements for high-risk AI systems. The task of monitoring and enforcing the provisions of the AI Act is assigned to a national supervisory authority in each Member State. In the Netherlands, the competent authority is the Personal Data Authority (Autoriteit Per­soonsgegevens). Failure to comply with the obligations and requirements laid down in the AI Act may result in a penalty. Further rules on penalties shall be determined by each European member state individually, taking into account the maximum penalties provided for specific infringements of the AI Act. For example, infringements of Article 5 (regarding prohibited AI practices) shall be subject to administrative fines of up to EUR 30,000,000 or up to 6 % of its total worldwide annual turnover for the preceding financial year. Due diligence As the AI Act will come into force in the near future, assessing the risk level(s) of the relevant AI system(s) and their compliance with the AI Act is already – and will increasingly become – an important part of the due diligence in Tech M&A transactions. In addition, depending on the role of the target company (e.g. as a provider or user of AI), it will be crucial in such due diligence investigations to assess information on the ownership of AI-generated intellectual property rights, compliance with data protection regulations and liability for AI decision-making. Transaction documentation The AI-related risks identified in the due diligence phase should be addressed in the share purchase agreement through appropriate warranties and indemnities, signing or closing conditions. These due diligence findings may also affect the valuation, negotiation and structuring of the M&A transaction. Representations and warranties: the seller should provide more specific and comprehensive representations and warranties regarding compliance with the AI Act. Signing or closing conditions: the parties may need to include more tailored conditions relating to the target company's AI systems, such as obtaining or maintaining any necessary authorizations, registrations, certifications or notifications under the AI Act in order to comply with any ongoing or reporting requirements. Furthermore – in the event of W&I-insured transactions – the parties and their insurers should adapt the scope of their due diligence, disclosure, negotiations and underwriting processes to account for AI risks and to ensure that the W&I insurance provides adequate coverage for these risks. The introduction of the AI Act and the expected development of associated national legislation may result in uncertainty regarding the (legal) risks involved. Therefore, we expect W&I insurances will be in demand by parties in Tech M&A transactions Conclusion In the dynamic landscape of Tech M&A, the development and application of AI and the introduction of the proposed AI Act are transforming M&A processes. AI-related transactions require a tailored approach at each stage of the transaction, focusing on identifying specific AI risks and incorporating such risks into the transaction documentation. The AI Act, once enacted, will impose various requirements, obligations and other aspects to be considered by all stakeholders to an M&A process. Time will tell how the Tech M&A market will respond to the development of further legislation to regulate AI systems. We consider the adoption of the AI Act a confirmation of the significant potential of AI companies and foresee a bright future for Tech M&A.

The Infrastructure Index is designed to help investors understand the environment they may encounter in 50 different jurisdictions. Data from the 50 jurisdictions was analysed against nine key criteria to create a guide to the most attractive destinations for infrastructure investment. We also look at developments in some of the nations included in the Infrastructure Index, this year highlighting in particular the situation in our top-ranked country Germany and the need for reconstruction in Ukraine.

Data-driven insights into class action risk across Europe, a key concern for major corporates

Mergers and acquisitions (M&A) are crucial to the growth and evolution of businesses across industries. M&A in its most traditional form involves companies in various sectors coming together to consolidate resources, expand market reach, and enhance overall competitiveness. However, with the rapid advancement of technology, a new paradigm has emerged: Tech M&A. Tech M&A focusses on new sorts of technology that can create great value to businesses, but creates new challenges as well. Our specialised Tech M&A team will explore the key challenges of Tech M&A in a series of articles. In this first article, we explore the key differences between traditional M&A and Tech M&A. Traditional M&A Traditional M&A refers to the consolidation of companies in various industries, such as manufacturing, and retail. In traditional M&A, the primary objectives often include achieving economies of scale, synergizing operations, gaining access to new markets, and diversifying products or services. The legal and other processes involved in these transactions are well-established and generally of a static nature, with extensive precedents and routines governing the entire process. Companies meticulously assess each other's financials, assets, liabilities, and risks. Tangible assets, such as real estate, machinery, and inventory are an important element of such assessment. Tech M&A Tech M&A, on the other hand, refers to acquisitions that involve technology driven companies. Unlike traditional M&A, where tangible assets are at the forefront, Tech M&A centres around intangible assets like intellectual property, data, software, and innovative technology such as artificial intelligence. The legal and other processes for Tech M&A transactions are therefore tailored to focus on such assets during every stage of the transaction.  Strategic value is placed on a company's proprietary technology, talent, and potential for future growth. Consequently, Tech M&A transactions are dynamic and complex, while time is of the essence. Key differences and challenges Need for alternative valuation methods Traditional M&A primarily relies on financial metrics and historical performance to determine valuation. In contrast, Tech M&A requires a keen assessment of a company's intellectual property, technology, market potential, and future growth prospects. Valuation methods like discounted cash flow and comparable analysis are still relevant, but new metrics and tools are required to evaluate the potential of a prospect accurately. Continuous technological advancements The fast-paced nature of technology requires the acquiring party to carefully consider the sustainability and scalability of the technology they are acquiring. This is far from a static assessment and may even change during the course of a transaction. When designing the process for a Tech M&A transaction, parties should consider which developments are especially relevant for the target. Furthermore, the process should provide for sufficient flexibility to address any such developments without jeopardising the overall timeline. ESG concerns around use of AI and data privacy ESG considerations have unmistakably become an important topic in any M&A transaction. Technology driven companies, often operating in dynamic and innovative environments, tend to be more re­source-ef­fi­cient and carbon-light compared to traditional companies, aligning well with ESG goals. However, the technological advancements on which such companies are based may raise concerns on their impact on society, including in respect of artificial intelligence, automation and data privacy. Rapidly changing regulatory landscape Regulatory requirements and developments are key to both traditional M&A transactions and Tech M&A transactions. Technology driven companies used to manoeuvre more often in a unregulated legal landscape than traditional companies. This landscape is changing as a result of European legislation focused on shaping Europe's digital future, including the Digital Services Act, Digital Markets Act and the EU AI Act, the world's first comprehensive AI law. The impact of such legislation on tech companies will soon become a decisive factor for Tech M&A transactions and will force these companies to regulate their businesses. Conclusion As technology continues to shape the business landscape, the differences between traditional M&A and Tech M&A become more pronounced. Actors in the Tech M&A space must adapt to the unique challenges posed by Tech M&A, including complex valuations, regulatory matters, and the fast-paced nature of the industry. Staying informed on the latest trends will be crucial to navigating the Tech M&A landscape. Stay up-to-date Stay up-to-date by subscribing to our Corporate M&A and TMC newsletters to receive future articles and event invitations about Tech M&A directly in your mailbox.

ESG: Environmental, Social & Governance

Over a relatively short period of time, the implementation of ESG (environmental, social and governance) aspects in commerce has grown to become a strategic priority at management level. While the substance of ESG is likely to evolve in the coming years, the underlying impulse for businesses to make a social contribution, and not just an economic one, is here to stay. In essence, it is about maintaining and reinforcing the social licence of a business to operate in a rapidly changing world. As a result, ESG goes to the heart of every business. Future-looking companies Not all aspects of E, S and G are priorities for all companies. Companies will carefully have to weigh which ESG aspects they want to focus on. For that reason, it is instructive to observe organisations that approach ESG in a rigorous, strategy-driven, socially attuned way. McKinsey calls these organisations ‘for­ward-look­ing companies’. They make ESG intrinsic to their strategy by deliberately applying those ESG aspects that connect to the core of their business. Forward-looking companies also promote competition by standing out and using good corporate citizenship to contribute to finding solutions to existential challenges, such as climate change. Distinguishing role Whatever your company's ambition, you will always need to comply with the ESG regulations, including those on environmental legislation, labour-law issues and governance. But forward-looking companies take it one step further, and usually raise the bar by focusing on certain aspects of ESG in which they can play a leading or distinguishing role. Ideally, this will also motivate similar companies to take a comparable route when it comes to ESG. Roadmap to social profit This ESG special publication provides company lawyers a concise overview of the most important ESG regulations, as well as concrete tools to give managers better advice in the field of ESG. Various aspects and elements of a company will be discussed: from the distribution chain to commercial property, from sustainable financing issues to the desired level of diversity and inclusivity within the population, and from governance to ESG litigation.

Some leaks can’t be fixed “Confidential information is like an ice cube... give it to the party who has no refrigerator or will not agree to keep it in one, and by the time of the trial you have just a pool of water.” This, from the so-called Spycatcher case (1987), applies well to corporate assets: fail to store them correctly and all you might have left is an expensive mess. The consequences of even a minor exposure of a trade secret can be huge. As this report reveals, the protection of trade secrets is rightly recognised by most senior executives as a priority issue. But the research also reveals gaps that leave companies unnecessarily exposed to risks. The top named threats – cybersecurity attacks and employee leaks – resonate with what we see impacting our clients. Increased home and remote working is straining security measures and employee loyalty. Added to this, an ‘innovate or die’ attitude in highly-com­pet­it­ive sectors can motivate new joiners to arrive with questionable material from their previous employer, or worse: outright theft between competitors. But while it is easy to focus on the lurking threats from weakened cyber security and disgruntled employees – and they are important – there are more routine actions a company can take to safeguard its secrets than just updating its IT systems or the employee handbook. Commonly, those who most need our help already have a trade secrets policy but have not properly implemented it in relation to the secret in question. Or the policy has not been updated to reflect the intangible assets the business now owns. Or protection was taken for granted. With trade secrets – which for many businesses are strategically more important than a public patent portfolio – it is always costlier and messier to find solutions after a theft or a leak. Identifying the trade secrets and the threats posed to them, combined with rigorous internal processes and well-drafted contracts, can help prevent such problems from happening. Harder, but just as necessary, is engaging hearts and minds in corporate culture, to know why trade secrets are important, why we are all are responsible for protecting them, and what may happen if we do not (to both the company and the individual). In our experience, the businesses with the strongest defences have not only thought strategically about their intangible assets and how best to protect them but are also prepared for the worst. The trick to avoiding an asset becoming a crisis is to be wise before the event.

Data driven insights into  class action risk across Europe, a key concern for major corporates

Changing tech, changing risks

What’s next? In a world of ever-ac­cel­er­at­ing change, staying ahead of the curve and knowing what’s next for your business or sector is essential. At CMS, we see ourselves not only as your legal advisers but also as your business partners. We work together with you to not only resolve current issues but to anticipate future challenges and innovate to meet them. With our latest publication, CMS Next, our experts will regularly offer you insights into and fresh perspectives on a range of issues that businesses have to deal with – from ESG agendas to restructuring after the pandemic or facing the digital transformation. We will also share with you more about the work that we are doing for our clients, helping them innovate, grow and mitigate risk. To be able to provide you with the best support, we immerse ourselves in your world to understand your legal needs and challenges. However, it is equally important that you know who we are and how we can work with you. So, we invite you to meet our experts and catch a glimpse of what is happening inside CMS. Enjoy reading this publication, which we will update regularly with new content. CMS Executive Team