The Future Lawyer Weekly Briefing – W/C 18th December 2023

EU Pioneers Global AI Regulation

The European Union (EU) has taken a step towards regulating artificial intelligence (AI) with the provisional agreement reached by the Council and European Parliament on 9 December 2023. This legislation, poised to become the world’s first comprehensive law dedicated to AI, emphasises the EU’s commitment to establishing ethical, safe, and trustworthy standards for AI systems.  

Echoing the impact of the UK’s General Data Protection Regulation (GDPR) on data privacy, the EU AI Act could notably shape the global landscape of AI regulation in the forthcoming years. 

Objectives of the AI Act

The EU AI Act is designed to safeguard the rights and interests of EU citizens and consumers in their interactions with AI systems. EU Commissioner Thierry Breton hails the agreement as a “historic milestone”, emphasising its “potential to propel EU startups and researchers to the forefront of the global AI race”.  

The legislation stratifies AI systems into four risk levels, each subjected to specific rules commensurate with the potential harm they pose. 

1. Minimal Risk: AI systems with negligible risks, such as recommendation systems, will have no obligations. 
2. Limited Risk: Systems with manageable risks, like AI chatbots, will be subject to transparency obligations, ensuring that users are aware they are interacting with AI. 
3. High Risk: AI used in critical sectors like education, recruitment, medicine, and utilities will face strict rules to ensure safety and compliance. 
4. Unacceptable Risk: AI systems that pose a clear threat to people’s rights, including social scoring by governments, will be outright banned. 

The EU’s AI Act goes beyond protecting people within the EU and aims to set global standards for AI regulation. European Commission President Ursula von der Leyen categorises the legislation as a “significant contribution to the development of global rules and principles for human-centric AI”.  

The legislation addresses specific issues such as cognitive manipulation, predictive policing, emotion recognition in workplaces and schools, and certain remote biometric identification systems. By focusing on identifiable risks, the agreement encourages responsible innovation while assuring the safety of individuals and businesses. 

Law firms and the AI Act

Law firms play a pivotal role in navigating the complexities of the EU AI Act. The legislation presents new challenges for companies using AI, necessitating legal expertise to ensure compliance. Law firms can offer support in various scenarios: 

1. Established Businesses: Firms will seek lawyers to review and adapt existing processes, ensuring they conform with the new regulations, especially under the pressures of increasing globalisation. 
2. Startups: With the increase in AI based technology startups, new and innovative ideas must align with the EU AI Act, requiring legal advice to execute these ideas in a compliant manner. 
3. Mergers and Acquisitions: Companies acquiring or merging with others will require regulatory experts to assess the compliance of the target company within the EU AI Act. 

The arrival of the EU AI Act is not just about guiding businesses; it is also transforming how law firms operate internally as businesses themselves. Law firms must thoroughly understand the nuances of this legislation. This means investing in ongoing training for their legal teams, ensuring they are not just up to date but have a practical understanding of AI’s functionality. 

Additionally, firms will see an increase in the use of legal AI systems which will in turn affect them as an employer and business. AI is being developed that can replace non-fee earning roles in firms, such as secretaries and paralegals while potentially affecting the fees charged by firms if they use AI for tasks traditionally performed by humans.  

The increasing access to AI also poses the challenge: the extent to which clients will rely on firms if they have access to legal AI for their needs. Law firms will be navigating this evolving landscape while remaining compliant themselves and advising their clients to do the same.  

The EU AI Act’s global reach means that even non-EU lawyers need to be well-versed in its provisions, considering its applicability to companies based outside the EU operating AI systems within its borders. 

Article by Charlie Cromwell-Pinder 

⸺⸺⸺⸺⸺⸺⸺⸺⸺⸺⸺⸺

Know Your Role: M&A for Future Lawyers

Mergers and Acquisitions are a huge part in the typical operations of International and City Law Firms. As aspiring lawyers, it’s important to know what they mean, how they work, and what Lawyers’ role is in their success.

What is an M&A?

Mergers and Acquisitions typically involve two companies. In a Merger, the companies come together to form one company. In an Acquisition, one company takes over the other, usually buying the company out and gaining more capital control. Although every M&A will look different, depending on the type of M&A and the agreement between companies, its overarching is to make money and grow capital.

Types of M&A

There are three main forms of M&A, and what makes them different is the industry of the companies and the stage of production of the companies. To understand this, here is an example of the stages of production:

• Suppliers of Raw Materials
• Manufacturer
• Wholesaler
• Retailer
• Consumer

Based on this, the main forms of M&A are:

• Vertical M&A: Companies are in the same industry but in different areas of production.
• Horizonal M&A: Companies are in the same industry and the same areas of production.
• Conglomerate M&A: Companies are unrelated. Even their strategies don’t overlap.

In every form of M&A, the result is to form one corporate entity.

Examples of M&A

Some examples of the types of M&A can be helpful to understanding how they work.

Allen & Overy’s merger with Shearman & Sterling is a horizonal M&A. Both are law firms that provide leading services to clients across the globe. The merger is one of the biggest transatlantic legal deals in history. Keeping in mind the purpose of M&As, it’s important to consider what each company will gain from the merger. Each firm operates with distinctive strategies in its respective market, and by combining, they can accelerate their growth strategy and provide unique services to clients across the globe.

An example of a vertical M&A is Microsoft’s acquisition of Activision Blizzard, the publisher of award-winning games Call of Duty and World of Warcraft. Activision is at a different stage in production than Microsoft, but both companies operate in tech. Microsoft’s’ acquisition of the company makes sense, as it enables it to combine Activision’s knowledge in game production to create specialised games for Xbox. The acquisition was a difficult one due to it coming under fire from the Federal Trade Commission; however, Microsoft was able to defeat the FTC in the US Federal Court. After twenty months of deal-making, the acquisition puts Microsoft as the third-largest gaming company by revenue, behind Tencent and Sony.

Regarding mergers of conglomerates, an older example is Amazon’s controversial acquisition of Wholefoods in 2017. As digital grocery shopping grew in popularity, Amazon sought to learn about the food operations. With growing competitors, Wholefoods needed a new edge. Thus, the acquisition was able to encourage people to sign up for Amazon Prime memberships, joining Amazon’s powerful loyalty program in exchange for discounts on Wholefoods groceries. Despite having different markets, operations, produce and strategies, both companies created a successful acquisition, boosting both Amazon and Wholefoods capital.

What is the Lawyers’ Role?

An M&A involves extensive negotiation, contracts, agreements, and due diligence – especially for high value companies as mentioned above. Lawyers need to draft confidentiality agreements, preliminary agreements, letters of intent, ancillary agreements and much more, usually multiple times. Beyond that, a Lawyer needs to ensure clients have performed legal due diligence on prospective companies they wish to merge with or acquire. They also need to complete negotiations between parties, which could take months. Lawyers’ need to be able to give efficient advice regarding duties, rights, third parties, and more.

Lawyers need to be organised, strategic, quick, and critical. They play a vital role in a success of M&As, which explains why International and city firms seek candidates with the highest potential to bring that success. Bigger success means bigger revenue and reputation for the firm, and the start of long-term, trusted relationship with clients.

Article by Paige Tume