Surging interest in artificial intelligence (AI) has sparked a flurry of mergers and acquisitions as companies recognize the technology’s transformative capabilities. New companies are developing AI-based solutions that have the potential to revolutionize our daily lives, while traditional companies are increasingly integrating AI into their day-to-day business processes to reduce costs and improve efficiencies. These companies are attracting interest from potential acquirers, who want to bring AI into their portfolio and leverage its benefits. 

However, as with any new technology, AI brings many risks, including with respect to intellectual property, privacy, security, bias and discrimination, and regulatory compliance. Acquirers  need to address the risks of AI during the due diligence process. This may include:

• Requesting a list of all AI technology developed by the target or acquired from third parties and a description of how the target, its customers, or other third parties use that AI technology
• Reviewing the target’s policies governing its use of AI
• Reviewing all vendor and customer agreements relating to AI technology
• Verifying the target’s practices around AI output, particularly in industries where regulatory oversight is intensifying
• Understanding what data is used to train any AI technology developed or used by the target and assessing if the necessary rights for the training data have been obtained
• Assessing whether the target’s use of AI technology complies with any applicable regulatory requirements
• assessing the information security safeguards and policies regarding the implementation of the AI technology in the target’s business
• Inquiring if the target has received any complaints (whether legal or otherwise) relating to its use of AI technology

Failing to assess the target’s use of AI in the due diligence process may expose the acquirer to significant liabilities or drive down the value of the target company after closing. For example, if the proper rights for data used to train the target’s AI technology were not obtained, the acquirer may be subject to regulatory penalties under privacy laws or breach of contract claims by the relevant data licensors. Moreover, as AI regulations evolve, acquirers must anticipate future legal considerations—such as stricter data governance standards or emerging ethical AI guidelines—and assess whether their target’s practices can adapt.

Given these risks, in addition to performing the appropriate due diligence pre-closing, it is also critical to include specialized AI representations and warranties in the purchase agreement. These may address: 

• Ownership of the underlying AI algorithms, models, and data sets
• Ensuring all necessary licenses and permissions were obtained for any data used to train the AI technology
• Securing appropriate licenses for third-party AI technology, including for ongoing development and commercial exploitation and use of the output
• Maintaining appropriate information security safeguards for the AI technology and data used with the AI technology
• Assurances that the data used to train the AI technology was accurate and minimized bias and the outputs from the AI technology are reliable
• Maintaining appropriate processes to ensure that AI technology is used in accordance with applicable laws and in a manner that is responsible and ethical

These representations and warranties must be drafted carefully to encompass both existing and anticipated regulatory frameworks, covering all aspects of AI design, deployment and data handling. By demanding robust warranties and properly scoping their protections, acquirers can protect themselves against legal, operational, or reputational surprises.

Ultimately, the due diligence process and representations and warranties for any M&A transaction involving AI will vary depending on the specific AI technology involved, the scope of its use, and the importance of AI to the value of the overall transaction. However, a proactive approach to AI-specific risk assessment is a key element of any M&A transaction in today’s marketplace. By conducting thorough due diligence on the target’s AI technologies, ensuring compliance with emerging regulatory landscapes and negotiating comprehensive representations and warranties, acquirers can harness the benefits of AI while minimizing their exposure to potential pitfalls.