Navigating the Impact of Generative AI on Cross-Border M&A

As generative artificial intelligence (AI) continues to reshape the business landscape, its influence on mergers and acquisitions (M&A) is increasingly significant, particularly in the context of Canada-U.S. cross-border transactions. This dual impact manifests both as a catalyst for deal flow and as an innovative tool for executing complex transactions. According to Dentons’ 2024 Laws of AI Traction report, 70% of business leaders anticipate that M&A will play a crucial role in building AI capabilities over the next three years.

The integration of generative AI into M&A strategies presents unique challenges and advantages, especially given the differing legal frameworks and accelerating regulatory environments in Canada and the United States. Both nations currently exclude copyright for AI-generated works; however, significant disparities are emerging in areas such as fair use and privacy regulations.

**Contextual Significance** The growing demand for AI-driven companies is evident. AI-powered software-as-a-service (SaaS) tools are revolutionizing operations across sectors, from compliance to customer service. Additionally, sector-specific AI platforms targeting legal tech, health data, and supply chain optimization are becoming increasingly appealing to potential acquirers. Proprietary data assets, regarded as core intellectual property for training AI models, are also highly sought after. The complexity associated with these targets necessitates thorough due diligence, especially concerning ownership rights and data provenance.

**Legal Considerations and Diligence Requirements** In cross-border M&A transactions involving AI technologies, traditional contractual language often falls short. The intricate nature of AI assets requires tailored, forward-looking deal terms. Buyers must ensure that representations and warranties clearly address the ownership and lawful usage of training data and AI outputs. For instance, Riley Dearden, a partner at Dentons, emphasizes the importance of confirming ownership or licensing of AI models and outputs, alongside compliance with applicable laws, including privacy and data protection regulations.

Furthermore, buyers should be aware of potential national security concerns that may arise from foreign investments in critical technologies. Regulatory scrutiny may be applied under frameworks such as the Investment Canada Act (ICA) and the Committee on Foreign Investment in the United States (CFIUS), prompting buyers to seek clear disclosures from sellers regarding any engagement in sensitive areas.

**Indemnification and Post-Closing Obligations** As regulatory landscapes evolve, indemnification clauses should address risks associated with copyright infringement, privacy violations, and potential biases in AI outputs. Negotiating robust indemnity caps, baskets, and survival periods becomes vital, particularly in transactions involving high-impact AI applications. Additionally, buyers may require sellers to adhere to post-closing obligations, such as maintaining operational standards and supporting compliance with new regulatory mandates.

**AI as a Deal Tool** The application of generative AI is not limited to acquisition strategies; it is also being utilized to streamline the M&A process itself. AI technologies are enabling efficiencies in due diligence, regulatory mapping, drafting and review of documents, and historical knowledge retrieval. For example, AI can quickly organize multilingual contracts and flag anomalies, significantly reducing the time required to navigate complex legal frameworks in cross-border transactions.

**Regulatory Divergence and Challenges** Despite the efficiencies that AI brings, the regulatory landscape for generative AI remains fragmented. Canada’s proposed Artificial Intelligence and Data Act (AIDA) seeks to impose mandatory risk assessments and system registrations, contrasting with the more varied approach in the U.S., which is guided by agency-level oversight and state laws. This divergence necessitates comprehensive evaluations by companies regarding data processing locations and compliance with jurisdiction-specific regulations.

**Conclusion: The Future of AI in M&A** As generative AI transitions from a novel concept to a foundational aspect of modern M&A, companies pursuing growth, particularly in the Canada-U.S. corridor, must navigate this evolving landscape with strategic foresight. Engaging specialized legal advisors early in the process can enhance the alignment of internal governance with external regulatory demands, translating AI complexity into a competitive advantage. Those who embrace this transformation will not only acquire AI capabilities but will also redefine the future of agile and compliant M&A transactions.