When purchasing a business that includes artificial intelligence (AI) assets, it’s essential from the buyer’s perspective to carefully consider the representations and warranties included in the acquisition agreement. These serve as the seller’s assurances regarding the condition of the business and its assets, providing a layer of protection against potential undisclosed liabilities.
Representations and warranties in purchase agreements are heavily negotiated, especially because breaches can result in liability under an indemnification and breaches will also will make available other remedies as well.
Here’s a brief guide on crafting these clauses in the context of AI assets to ensure a secure and informed transaction.
- Ownership and Title to AI Assets
Representation: The seller should warrant that the business owns or has valid licenses to use all AI-related assets, including software, algorithms, and related data. Purpose: This guarantees that the buyer will not face legal challenges related to IP ownership or licensing issues post-acquisition.
- Compliance with Laws
Representation: The seller warrants that the AI assets, and their deployment comply with all applicable laws and regulations, including those specific to AI like data protection laws (GDPR, CCPA), and industry-specific regulations. Purpose: Ensures that the business has not engaged in activities that could lead to legal penalties or necessitate costly compliance measures in the future.
- Data Privacy and Security
Representation: The seller should confirm that all data used by the AI systems has been obtained legally, with proper consent, and is managed in compliance with privacy laws. Purpose: Protects the buyer from inheriting liabilities related to data breaches or misuse of data, which can lead to significant financial and reputational damage.
- Absence of Infringement
Representation: The seller should assert that the AI assets do not infringe on the intellectual property rights of third parties. Purpose: Minimizes the risk of future litigation related to IP infringement, which can be costly and disruptive to business operations.
- Performance and Functionality
Representation: The seller warrants that the AI systems function as intended and meet specified performance benchmarks. Purpose: Ensures that the AI assets are effective and will not require unexpected additional investment to achieve advertised capabilities.
- No Undisclosed Liabilities
Representation: The seller declares that there are no undisclosed liabilities associated with the AI assets, including pending or threatened litigation. Purpose: Helps the buyer avoid unexpected legal disputes or liabilities that could affect the financial health of the business.
- Third-Party Dependencies
Representation: The seller confirms the extent of any dependencies on third-party technologies or data for the operation of the AI systems. Purpose: Clarifies the scope of external risks and ongoing costs related to maintaining AI functionalities.
- Maintenance and Support
Representation: The seller should warrant that all maintenance and support necessary to keep the AI systems operational are currently in place. Purpose: Assures the buyer of continued operation and support, reducing the risk of operational disruptions post-acquisition.
- Ethical Use and Public Perception
Representation: The seller should disclose any issues related to the ethical use of AI and related public perceptions or controversies. Purpose: Protects the buyer from inheriting a business that could face reputational damage or regulatory scrutiny due to unethical AI practices.
Conclusion
Incorporating these detailed representations and warranties into the acquisition agreement when buying a business with AI assets helps mitigate risk by providing legal recourse should the seller’s assurances not hold true post-purchase. It’s essential for buyers to work closely with legal professionals who specialize in AI and technology acquisitions to tailor these clauses to the specific circumstances of the deal, ensuring a smooth transition and stable future operation of the acquired assets.