Introduction
In 2024 [1], the landscape of mergers and acquisitions (M&A) involving companies that develop or utilize artificial intelligence (AI) technologies experienced significant changes. These changes have introduced new challenges for dealmakers [1], particularly in the areas of regulatory compliance and data management.
Description
In 2024 [1], there was a notable increase in mergers and acquisitions involving companies that develop or utilize AI technologies [1], which has introduced new challenges for dealmakers [1]. As regulatory scrutiny intensifies regarding data collection and usage in AI product development and commercialization [1], buyers are becoming more vigilant about the data used to train AI systems. Delays may arise during due diligence as parties work to identify and address “dirty data” or data from problematic sources, including the ability to remove or segregate such data [2]. Closing conditions may necessitate the replacement of faulty data or impacted algorithms [1] [2], particularly in light of compliance issues that can significantly affect deal valuations.
Purchase price adjustments may be required to align parties on the estimated costs of obtaining clean data and retraining AI models accordingly [2]. Indemnity provisions and special escrow arrangements should be established to mitigate risks associated with compliance [1] [2], including the potential costs of retraining models in response to regulatory actions or third-party claims [1]. The Federal Trade Commission (FTC) has already taken action against companies for deceptive practices related to AI, underscoring the importance of ensuring compliance with applicable laws regarding AI, intellectual property [1] [2], and privacy [2]. Acquiring a target primarily for its AI capabilities may lead to complications if those systems are found to be noncompliant, potentially hindering their utilization and impacting the overall transaction.
Conclusion
The evolving regulatory landscape and the complexities of data management in AI-related M&A transactions have significant implications for dealmakers. Ensuring compliance and addressing data-related challenges are crucial to maintaining deal valuations and achieving successful outcomes. As regulatory bodies like the FTC continue to enforce compliance, companies must remain vigilant to avoid potential pitfalls that could impact the success of their transactions.
References
[1] https://www.lexology.com/library/detail.aspx?g=9d4f5b9d-7810-4538-9dd4-7c5b175b762c
[2] https://www.jdsupra.com/legalnews/dirty-data-damaging-deals-data-issues-7470761/
