2023 M&A Annual Review 5 Diligence and reps and warranties. AI raises new business and legal questions, and with those come changes in diligence and related reps and warranties. For example, both parties might want to consider, if a target company: ▪ Develops AI tools (either for its own use or for third-party usage): (i) sources of data used in developing, training, and/or fine-tuning AI models, and the permission and restrictions on using, storing, managing, accessing, and processing such data from contractual, data protection, and other regulatory perspectives, and (ii) liabilities (including contractual warranties or indemnities) associated with outputs from AI tools, for accuracy and reliability of such outputs, as well as copyright or other intellectual property infringement claims.3 ▪ Develops or uses AI tools: (i) dependencies on thirdparty resources (e.g., data, technologies, cloud, or other infrastructure providers), and availability of such resources post-closing or the ease of switching providers post-closing, (ii) AI governance to mitigate the risks of safety and biases and ensure compliance with relevant privacy and other regulations, such as from the EU, U.S. federal and state governments and regulators (including regulations to come following President Biden’s AI Executive Order),4 and other applicable jurisdictions, and industry benchmarking standards, particularly in high-scrutiny use cases (e.g., hiring, education, benefit eligibility, credit worthiness, and health), and (iii) ownership and IP protectability of AI-generated technologies and content. AI tools have proliferated throughout businesses in all sectors, raising AI issues even in non-AI deals. 2 3 4 For regular discussions of AI developments, visit MoFo’s AI Resource Center. For an overview of generative AI-related issues, see our April 25, 2023 client alert, Key Issues in Generative AI Transactions. For discussion of key points of the executive order in more specific areas, see our Nov. 2023 client alerts on Healthcare Industry Implications, Presidential Authority for Compelled Disclosures for AI Models and Computing Clusters, Consumer Financial Services Touchpoints, and National Security and Government Contractor Implications. For discussion of key points of the executive order in more specific areas, see our Nov. 2023 client alerts on Healthcare Industry Implications, Presidential Authority for Compelled Disclosures for AI Models and Computing Clusters, Consumer Financial Services Touchpoints, and National Security and Government Contractor Implications.
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