This article is written by Saswata Tewari, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.
Table of Contents
Introduction
Do you know that a normal due diligence contract review conducted by a law firm in M&A deals includes reviewing somewhat close to 75 to 500 contracts?
For a law student, it can be a huge number but in reality, it is somewhat close to 5000 contracts and in some cases more than that!! This makes it clear that conducting due diligence is not child’s play and at the same time, it is time-consuming and expensive obviously. But what if a major mistake happens which results in damages and makes a whole bad advertisement scenario for your firm? The whole bad due diligence situation was seen in Hewlett-Packard’s deal with Autonomy where an impairment charge of 8.8 billion was recorded by the acquiring company.
The solution to this has been created. Presenting artificial intelligence, a technology just made for such scenarios which will not only assist you with this contract review problem but can solve way more problems than that. I believe that in the next decade artificial intelligence is going to make all the difference in the legal fraternity. We will discuss the whole scenario of artificial intelligence in the legal procedures of M&A transactions but first-
What is Artificial Intelligence?
Let us give some information first so that even first-timers can enjoy this article too.
To put it into simple terms, artificial intelligence is the simulation of the mental capacity of human beings in machines that are programmed to think like humans and copy their actions. It can be applied to even those programs and machines that show human behaviour such as learning and problem-solving.
Artificial Intelligence and law
Using Artificial intelligence in law is very much like a first-generation lawyer, it acquires the requisite knowledge by doing an action over and over again. It evaluates its eros and develops its knowledge of the task to give out the best results.
Daily, a lawyer has to engage in a lot of activities which include planning the case such as preparing the arguments and looking after its financial aspects. Meanwhile, the AI makes a record of all these activities of the lawyer, keeps an account of expenditure, assembles the requisite information, regularly updates the teams about relevant, and keeps a tab on the interests of the client. So it can be quite understood how AI can be used to take all the mental pressure from the lawyers by doing their menial chores so that they can deeply focus on the important legal cases at hand. AI can observe the preferences of the lawyers and conduct the necessary work anticipatorily which reduces the physical or mental strains of the lawyers.
Artificial intelligence has been adopted by many countries. It is still in its developing stage but its presence can be seen in different law firms and judiciaries around the globe. The world’s first-ever artificial intelligence AI Ross which is developed by IBM has been recognized by many law firms in the world, especially in the USA, and has been utilized to assess legal agreements, perform legal research, and briefly summarize case laws, etc.
The use of AI in the Indian legal fraternity was noticed for the first time in 2017 when Cyril Amarchand Mangaldas deployed Kira, an AI software that is used to identify and analyse different legal provisions and other related information from legal documents with precision. Still, the use of AI in the Indian legal systems is in its growing stages and there are a lot of changes to be made before we adapt to AI.
How can Artificial Intelligence be used in Due Diligence?
The most important part of any M&A deal is due diligence, a process where lawyers are required to go through thousands of documents to identify every possible risk in the company to be acquired.
Due Diligence involves collecting different records that are scattered across frameworks and hard drives, analyzing the discovered information to identify any possible and based on that the report for the due diligence is prepared. This whole process requires the lawyers to put their energy, time, and sometimes even their own money. The whole tedious scenario for lawyers can sometimes even lead to inaccuracy and mistakes that can result in bad fame for the law firm.
M&A lawyers are in a need of a tool that can help them avoid all these errors and help them to produce high-quality and foolproof due diligence reports. Here artificial intelligence (AI)comes into play.
How can artificial intelligence help lawyers in the due diligence process?
- The first and foremost effect of using AI in the due diligence process is that it will spare several working hours for the M&A lawyers. Manual due diligence requires lawyers to engage in the process for several hours making it a tedious job and which often results in errors on part of these lawyers. Artificial Intelligence will make sure that the due diligence job is completed in a short time with high accuracy.
- Lawyers using AI can use it to identify all relevant documents that are generally used for M&A transactions. The AI can be programmed accordingly by familiarizing it with different legal provisions that are seen in the M&A documents, for example, confidentiality, non-competition, infringement, indemnification, controlling governance, dispute resolution, jurisdiction, etc. This can also be used to make the AI review similar documents and pinpoint the differences in both documents.
- If the AI is properly programmed and trained, it can be utilized to identify and define uncommon and ambiguous terms by giving it access to a variety of sources such as different contracts and other relevant documents. This will also test the AI’s ability to pick these uncommon and ambiguous terms.
- The AI can also be used to identify, classify, organize, prioritize and highlight documents and determine which documents need to be provided by the target company.
- The lawyers of the acquiring company are provided access to a variety of documents of the target company and it is more than the number of documents that are needed by the lawyers to prepare the report. In such a scenario, the burden is on the lawyers to wade through all the documents and organize and review accordingly, However, AI can be used to highlight and catalog all the relevant provisions of each document and while the AI is doing the highlighting and cataloging work, it is providing time for the lawyers to look problematic sections of these documents which need the manual review.
- Not only this, with the use of AI in the due diligence process, the law firm will be able to finish the job in less time. If the firms can complete these tasks in less time then they would have extra hours in their hand which they can use to focus on developing their company and focus on other important tasks. In the long run, the company will be able to beat the competition with other law firms and emerge as a superior power in the legal fraternity.
Case study: How does Kira help in M&A transactions
There are a lot of Artificial Intelligence programs being implemented in the legal sectors and out of these, the author did a case study on Kira Systems.
If you go onto Kira systems homepage, there is a video uploaded that shows an overview regarding the working of Kira. Kira can be employed in due diligence by law firms in the following ways:
- Kira can be used to select all the provisions that one would like to search for and will highlight those selected provisions to make a review on. It makes the review much easier.
- Kira can also be used to keep a record of all the documents that have been reviewed and to see which provisions have been creating difficulty.
- Kira has a special dashboard so that one can look at it and get an overall idea about the progress of your projects, which can help you to talk about the risks involved with both your team and your clients.
- Kira has also made it easier for reviewers to check the accuracy of a review done by simply clicking and comparing the review with the original document.
- You can also take out provisions and make summary charts that too from scanned documents.
All these functions are listed in the due diligence section of the website of Kira systems.
According to this study, some other benefits of using Kira in M&A transactions are:
- Kira has been trained to find the provisions that are frequently negotiated during the entire course of an M&A deal. These findings can be utilized to assist in the tracking of market intelligence information. Kira’s smart fields can be effectively on share purchase agreements, asset purchase agreements, and merger agreements.
- Kira Systems has combined 172 fields in these merger agreements which includes provisions like:
- Title
- Parties
- Date
- Size/Purchase Price
- Definition of Material Adverse Effect
- Termination
And the list goes on.
- Not only this, Kira’s state-of-the-art machine learning technology spontaneously recognizes and takes out information from agreements and has over 900 built-in-provision models. A team of lawyers trains Kira to automatically find provisions by providing it with a sample language of that particular provision picked up from publicly filed agreements. Once Kira has adequate samples of a provision, it can find that same provision in any new imported agreement.
- Kira can be utilized to make a similar analysis of your firm’s deals and can even inspect a particular industry or geography with remarkable speed, stability, and accuracy than any manual review. It helps a law firm to discover all those things which were previously not unearthed by the normal standard practice done in private transactions and easily detect real precedent clause language that can be used in future transactions.
Conclusion
It is no doubt that in the next few decades technology is going to play a major role in our lives and this shall be applicable too in the legal systems. It is believed by people that a situation can arise where humans might lose their jobs but there shall be a creation of new opportunities also.
Artificial Intelligence will not only ease the due diligence process in an M&A deal but also will stabilize the high-cost prices involved in these deals which are charged by lawyers for spending exhaustive hours reviewing the documents involved in these deals. All these can be changed for a less costly and faster transactional legal work in M&A using the technology of Artificial Intelligence.
References
- https://kirasystems.com/how-kira-works/due-diligence/
- https://www.legalsupportnetwork.co.uk/sites/default/files/Kira%27s%20M&A%20Deal%20Point%20Study%202020_compressed%20(1).pdf
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