AI and due diligence
AI and due diligence
AI: it's everywhere, and your business is definitely using it
The general sentiment around AI, is whether you like it or not, people within your business are most likely using it. And in the realm of legal due diligence, the advent of AI-powered solutions has created an option for traditionally labour-intensive processes to become more streamlined, data-driven methodologies. However, while these tools are abound, with adverts for many in the inboxes of in-house counsel on the daily, there is still a way to go before our due diligence worries are wiped away by AI.
How useful is AI for due diligence?
"When I first started work, when people talked about a data room it was a room full of files that were just full of contracts," panellist Moushumi Sharmacharja, Head of Legal at Ohme explains. "Juniors and trainees would be sent off to this physical data room and go through all of these files - and you weren’t allowed to copy things or take anything away. From summarising contracts you were expected to come up with a due diligence report! Now, we have virtual data rooms, and in most cases you can print things off. That really changed the way due diligence was done."
Even though due diligence is rarely full of physical documents these days, digital data rooms are still a huge administrative burden on lawyers. The idea that AI can alleviate some of this for lawyers is highly anticipated.
The disappointing part? That it is not quite there yet, when it comes to giving a real value-added view without extensive additional risks for your business.
Right now, "AI can be helpful with things like summarising contracts, identifying where the variations in contracts are, and can help produce an extensive appendix to a DD report.” Other tools include redaction tools which can omit personal information which isn't required to be disclosed.
“There are definitely aspects for machine learning that can be of use and save time. Our approach is to talk to the clients about how much they want to use it, or how much they’d prefer a more old fashioned approach,” Adrian West, partner at Travers Smith says.
Impacts on valuation
Investors or potential buyers would expect to see an AI policy and be comfortable that the business has rolled it out successfully
Impacts on IP
Use of GenAI within a business can have potential impacts on IP ownership, for example giving unauthorised access to
Impacts on brand
Businesses that aren't considered to be using AI in a safe or ethical way could negatively affect a business's credibility and reputation
Impacts on private data
Business concerns also arise around the risks of confidential data leaking, or AI systems being trained on confidential data
Impacts on valuation
Investors or potential buyers would expect to see an AI policy and be comfortable that the business has rolled it out successfully
Impacts on IP
Use of GenAI within a business can have potential impacts on IP ownership, for example giving unauthorised access to
Impacts on brand
Businesses that aren't considered to be using AI in a safe or ethical way could negatively affect a business's credibility and reputation
Impacts on private data
Business concerns also arise around the risks of confidential data leaking, or AI systems being trained on confidential data
What can a law firm do for me when it comes to AI?
Many law firms advertise their AI-enabled discovery and due diligence options, such as its ability to provide detailed descriptions of standard contracts or focus more on exceptions-only value-added diligence.
Beyond generative AI, technological advancements over the past decade have also led to various tools for tasks like data reduction and data room organisation, enhancing efficiency.
This can be highly useful for disclosure purposes, particularly on the sell side, to address concerns about specific warranties and safeguarding sensitive information.
However - there are concerns that in-house lawyers should keep at the top of mind.
First, you want to be sure that the tool you use allows you to manage access to data rooms to prevent potential buyers from training AI on confidential information.
This also ties into choosing sophisticated AI products that have been designed with protecting client data in mind.
This can be important for when you get down the line in M&A, as banks and third-party providers may perceive due diligence reports aided by generative AI differently, raising questions about reliability and reliance on such reports in transactions.
"Legal encouraged a really open dialogue between the business and the legal team to help people navigate the period between signing a deal and closing, and what the nuances of signing a deal but not quite being one company yet are."
Natasha Scanes, Senior Corporate Counsel, OneWeb
Faced with the fact that people across businesses's are increasingly using AI within their jobs, Moushumi says that in-housers need to set policies and parameters around the use of GenAI to make sure it is being used in a way that doesn’t open the business up to risk.
"It is important to make sure that the business as a whole is aware of it as a potential risk item, and there are parameters to use it in a particular way. Because people are likely going to use it - it’s about how we can get it to be used in a way that is managed and not a Wild West type situation!"
Another reason for this is that when you have to give a compliance with laws warranty as part of a transaction, you will need to be able to identify the AI you are using and that your usage of it complies with law. Part of that is doing your research about products - making sure they can’t view or take away your data and that they are IP friendly.
“It’s a case of making sure that the business as a whole is aware that it’s a potential risk item, and there are parameters for a reason as to why they can use it in a different way.”
What should you be doing in the AI space?
It's up to you how and when you use AI within your teams. However, our panellists left the audience with two top tips to ensure they don't get left behind:
Continuous monitoring of the AI landscape is crucial due to substantial investment in AI tools and products, with upcoming legal cases and IP utilisation shaping its future. However, current low AI adoption rates in legal teams suggest a need for patience and awareness, especially as AI becomes increasingly integrated.
Products are going to keep being developed, regulation will keep coming, and this should make it clearer in terms of ownership and the responsibility of providers. As in-house counsel are the potential targets for new products, try to keep a general knowledge and certainty about the use of the AI: what is it being used for, how it is being used, if you have an AI element to your own company get to know it as it will be important as your business is taken on a journey whether you become the seller or buyer