“Companies developing AI are currently the most exciting subjects for legal due diligence”

Leaders League: What makes a legal due diligence on a target company not only using, but developing AI so special?

Dr. Marc Seeger: When the target company develops AI, this implies a whole world of issues and questions that need to be tackled in the legal due diligence. And a lot of these lead into unchartered territory. Companies developing AI are currently the most exciting subjects for legal due diligence. The AI boom has occurred so recently that a lot of legal questions surrounding the development of AI and related activities like the training of the underlying language model are not yet answered with certainty. And in addition, the legal framework applicable to AI and its development is rapidly evolving with the EU AI Act being the most prominent and important piece of legislation.

Before we turn to the target company that develops AI, what is the standard program for a target company that uses AI tools but does not develop AI itself?

A due diligence on a target company that only uses AI but does not develop AI itself is considerably less complex. At the lowest level (occasional use of off the shelf AI tools like Microsoft’s copilot), you would have to confirm that data protection and business secrecy laws are observed. When the target company in addition to that uses AI also within its value creation, for instance a marketing agency when working on new campaigns, the provisions in the customer agreements on data protection, IP and confidentiality should be reviewed as well. But again, the legal due diligence is by far less complex in both cases as opposed to an AI developing company.

Which areas of law become involved beyond that if the target company develops AI itself?

The core areas for a comprehensive legal due diligence on a company developing AI comprise regulatory, copyright and data protection laws.

"It is very crucial to identify the applicable regulatory framework for the target company"

This is the workstream where it needs to be verified if and to what extent the new EU AI Act will apply and how far advanced the target company’s preparations are in this regard. Copyright law generally concerns the questions whether the use of the data that the underlying language model is trained with is permitted. And on the other hand, who holds the rights on the output generated by the generative AI. Data protection finally deals with the very sensitive questions to which extent it may be justified under the GDPR when also personal information that is included in data scraped from the internet is among the training data used for the AI – and which measures a company would have to take to avoid or limit its use.

What would you consider crucial for a conclusive legal due diligence on a target company developing AI?

Given that AI is such a cross-sectional matter that involves so many areas of the law, it is even more important that the different team members that get involved in the due diligence are true experts in their fields. But that alone is not even enough. They need to work very closely together to identify the interfaces between the different areas and handle issues that concern more than one of them in a diligent and appropriate way. In my view it’s fair to say that a legal due diligence on an AI developing company is one of the most challenging tasks a M&A team could face these days.

Interview with MARC SEEGER, Partner, BIRD & BIRD Germany