by Mark Coakley and Rupert Cocke
March 2 2022
DealTech (formerly known as M&ATech) covers technology trends aimed at M&A professionals. If you would like to give us any feedback, please contact [email protected]
AI-based contract review used by the top 200-300 M&A law firms
Job candidates will require technological proficiency
In-house legal departments likely to shrink in favour of M&A specialty firms
Artificial intelligence (AI) will play an increasingly important role in the due diligence process associated with M&A, in particular contract review, and this will lead to profound changes in the legal profession, experts said.
An M&A transaction can require lawyers to review hundreds or thousands of contracts, searching for contractual terms (e.g. conditional liabilities) that may affect a company’s value.
AI will increasingly make the work of lawyers more efficient by identifying anomalies in a massive number of contracts, said Thomas Fredell, the Chief Product Officer at Datasite, a Minneapolis, Minnesota-based SaaS provider for the M&A industry with a focus on AI in due diligence.
AI-based M&A contract review systems are currently only used by big firms with sophisticated back offices and IT departments, but the market is expanding, said Chad Bayne, a technology lawyer at Osler in Toronto, Ontario, and the founder of Osler’s Emerging and High Growth Companies Practice Group.
Law is a tradition-based sector that resists adopting new technologies, Bayne said, adding US law firms have been quicker to adopt AI technology than Canadian ones.
Osler uses off-the-shelf AI-based contract review software from Toronto’s Kira Systems, “the main AI document review tool that a lot of the firms use,” he said. “It definitely speeds up the process.” The company built an in-house team to deal directly with the Kira software and other emerging technologies, so that most of its M&A lawyers have not needed to be trained to use Kira, he explained.
AI has been used by M&A lawyers for contract review for the last three to five years, said Kirk Sanderson, Managing Partner at M&A Insurance Solutions of Hoboken, New Jersey. He estimated that full-scale AI platforms are currently used only by the top 200 or 300 law firms, because they are still expensive and cumbersome. There must be enough users to make AI-based contract review worthwhile and gain efficiencies, he said, so AI does not make sense for a one- or two-person shop, in terms of time and expense.
The benefits of AI contract review are standardization, efficiency, and transparency, Sanderson said, adding that as the technology improves, it will become practical for smaller firms.
AI will eventually mean a decreased need for M&A lawyers to review contracts, Bayne and Sanderson agreed.
However, this does not necessarily mean reduced employment for M&A lawyers, Bayne argued, as some will still be needed to coordinate reviews and analyze results. Associates that once would have reviewed contracts will be freed up to do “more advisory work than just the grunt diligence work”, he added.
He foresees lawyers working in parallel with AI software, offering clients services beyond anything available today. “Technology creates new jobs”, he said.
For Sanderson, however, AI will, in the next five to 10 years, lead to reduced employment opportunities for M&A lawyers in general, but in the short-term AI will increase employment for M&A lawyers with a strong grasp of advanced tech. Law firms will put more weight than ever on the technological proficiency of job candidates, he said.
By driving down legal costs at M&A specialty firms, AI will tilt the balance of affordability towards such firms and away from in-house counsel, which are less likely to have access to such specialized software, Sanderson argued. This will lead to in-house legal departments shrinking as corporations increase their reliance on M&A specialty firms.
Contract review is the main AI function used by M&A lawyers, Bayne and Sanderson said, but they expect to see AI moving into new areas of legal practice in the coming years.
Bayne spoke of future contract management systems, in which AI could study the history of experience with a particular law firm to uncover its tendencies and indicate how certain contractual clauses have been resolved in the past.
AI will soon be used for customer relations management; for contract drafting tools, which will suggest terms and make collaboration easier; and for self-organizing data rooms, which will automatically screen and organize documents, Sanderson said.
Datasite's categorization tool lets companies put documents into a deal room before a deal goes live and let the AI put them in order, Fredell said. AI also powers other Datasite services, such as natural-language redaction to comply with the General Data Protection Regulation.
Sanderson also spoke with enthusiasm of the potential for AI in acquisition target screening. Fredell agreed, predicting that the cutting edge of applied AI will be to use data to help M&A advisors augment their networks by identifying players that want to move into a certain area.