Investments in AI Businesses
04 November 2020
Major international businesses have, through their deal-making this year, demonstrated the value they place on holding effective AI products within their portfolios. Apple announced that it had acquired Xnor, for a reported $200 million. Xnor employs machine learning and image recognition tools for delivering AI capabilities on low-resource edge devices. Accenture has also this year acquired data analytics company, Byte Prophecy, in order to address the increasing demand of their customers for enterprise-scale AI and digital analytics. The Irish market has seen considerable investment in AI, sometimes at an earlier stage. Glofox is a business management platform that encompasses an integrated mobile and web application, a booking platform and payment processing, all specifically tailored for the health and fitness industry. The company has raised more than €13m in funding to date.
Many Irish incorporated companies own AI businesses which are very much international in outlook. Sale or investment transactions involving these companies will typically be governed by Irish law.
Whether an investor or acquirer, investee company or seller, the following should be kept in mind when embarking on Irish transactions in this sector:
An investor or acquirer should carry out a robust due diligence exercise prior to finalising the relevant transaction. A seller or investee company should be well-prepared for a process, as any delay in responding to due diligence questions will slow momentum in the transaction and can, in our experience, contribute heavily to prospective deals not proceeding.
While all relevant legal areas should be covered in a due diligence review of an AI business, the following topics would usually be particularly relevant:
Intellectual Property – is ownership of the IP for the product registered and protected? Appropriate searches should be undertaken and legal advice sought. It is important that evidence is available as to the ownership of IP in all products developed by or on behalf of the company. In the event that a contractor of the company has worked on developing some or all of a product and no legal agreement deals with, or inadequately deals with, the IP of the work product, there is a real risk that the contractor will own that IP. The IP of a product developed by an employee of the company will, however, subject to a contrary agreement, sit with the company.
Trade secrets – the nature of AI means that the technology behind the products such as algorithms and machine learning is often protected by trade secrets and confidential information rather than patents. Diligence is required on how this technology and these rights were created and subsequently protected. Failure to protect these rights in accordance with the relevant trade secret legislation could lead to a lack of protection; this can be very damaging, particularly where no patent protection exists.
Data – the scope and nature of any product training and test data sets should be checked to ensure they have been lawfully procured and lawfully used if they were not created by the company. If they were created by the company the investor shall need to confirm that the company has grounds to use the data for all purposes for which they were procured.
Software – does the company own its own software?
Contracts with third parties – What rights are being acquired under the deal? Does the counterparty have the right to terminate the relevant contract as a result of change of control? What are the terms of any supplier contracts?
The following deal terms can arise in an AI transaction in the Irish market:
Warranties – we would always expect a buyer or investor to be given the benefit of a suite of warranties, statements of fact, about the target company
Indemnities – in the event that the buyer or investor, as part of its due diligence exercise, identifies any areas of particular risk or concern, it may require € for € recovery under the transaction documents, in the event that that risk crystallises following completion
Warranty & Indemnity insurance – in order to close a negotiating gap between the parties, insurance is often incepted to provide the buyer with additional cover, over and above the limitations in the transaction documents
Restrictive covenants – the sellers will often, under the transaction documents, be restricted for a period of time from competing with the business or from soliciting clients or employees from the business. There are Irish law restrictions on the breadth such restrictions can have, which must be reasonable and proportionate
Escrow – a portion of the purchase price would often be placed in escrow when buying businesses where there are individual sellers, which can be released after a period of time, subject to satisfaction of the escrow criteria.
Given the prevalence of AI products and the success of businesses in the sector, relevant deal activity continues to prosper. It is important for those embarking on Irish AI transactions to be focused on the most important areas of legal due diligence for a business of this nature, which will often include IP, trade secrets, software, and third party contracts.
Transacting parties should also be familiar with the customary terms of an M&A or investment transaction in the Irish market, in order to be prepared to negotiate and conclude a transaction efficiently and with a positive outcome.