This week, I share a negotiation between myself and an M&A Negotiation Agent!

AI will change the world, but how will it change M&A? I want to focus on AI’s impact on M&A in this newsletter. I am not an expert on either M&A or AI, but I want to learn about both topics and how they intersect. I thought there might be others in my situation (or people who are experts in one field or the other) who would find information on M&A and AI helpful in their careers, so I created this newsletter to track and share what I learn.

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Open-source M&A Negotiation Agent

This issue of M&AImpact contains the text from a trial negotiation that I did with Codex’s open-source M&A Negotiation Agent. For background on the model, I shared this post a couple of weeks ago explaining what it is and how it works.

Here is a quick AI-generated recap:

Stanford legal AI researchers and a New York tech-forward law firm have developed an open-source AI model for simulating M&A negotiations, aiming to enhance lawyers’ skills in a low-risk setting. The simulation involves a buyer negotiating with an AI representing the seller in scenarios related to cybersecurity breaches and deal structure, with varying complexity levels: junior, senior, and partner. The negotiations occur in a text box, with the AI trained to produce responses based on a “belief, desire, intention” model. While the AI performs well and creates realistic scenarios, it lacks emotional nuance and might offer predictable responses. The tool is seen as a valuable training resource for young lawyers to practice M&A negotiations.

Here is the link if you are interested in trying your own negotiation!

The Negotiation

Below, you will find the negotiation I had with the AI model. The text that I wrote is bolded.

PL: Hello

AI: Hello, PL. Let’s get straight to business.

Belief: I understand that ShopMaster has significant concerns regarding the multiple cybersecurity breaches at TechEase and the associated risks.

Desire: My goal is to ensure that TechEase’s owners can proceed with the sale while minimizing their liabilities and maintaining a favorable purchase price.

Intention: I plan to address ShopMaster’s concerns by proposing adjustments to indemnity clauses and demonstrating the value of TechEase’s AI platform.

Response:

Given the recent developments, we need to acknowledge and address the concerns thoroughly. TechEase’s AI platform holds significant value and potential, which we should not overlook due to the security issues that are being actively managed. Here are our proposals to move forward:

1. **Increased Indemnity Cap for Cybersecurity**: We will agree to increase the indemnity cap specifically for cybersecurity-related breaches to a higher threshold, but not exceeding 50% of the purchase price. This should provide ShopMaster with a greater sense of security.

2. **Extended Survival Period for Quasi-Fundamental Reps**: We can discuss extending the survival period for the quasi-fundamental representations related to cybersecurity and privacy to five years, ensuring ShopMaster has ample time to identify potential issues.

3. **Escrow/Holdback Amount**: We propose setting aside an increased escrow amount specifically for cybersecurity claims. This amount can be released incrementally as the survival period progresses and no claims arise.

4. **Ongoing Remediation Commitment**: TechEase will commit to continuing its remedial actions and investing in improved cybersecurity measures. We can discuss a provision for ShopMaster to oversee or even direct some of these efforts pre-closing.

5. **Insurance Coverage**: TechEase already has cyber and privacy insurance in place. We can ensure that these policies are extended and transferred to ShopMaster upon closing to mitigate risks further.

6. **Third-Party Audit**: We are open to facilitating an independent third-party audit of TechEase’s cybersecurity infrastructure to provide ShopMaster with a comprehensive risk assessment prior to closing.

This approach addresses ShopMaster’s concerns while recognizing the significant value that TechEase brings to the table. Let’s discuss these points and find a balanced path forward.

What are your thoughts on these proposals?

PL: My client agrees that TechEase still offers great value and potential. However, Shopmaster is now hesitant to move forward with this deal because of the increased risks posed by the cybersecurity breach. It is safe to say that there will need to be serious protections for Shopmaster in the final agreement, or we will not be able to move forward due to the risk.

Starting with your first point, I agree that there needs to be an increased indemnity cap. However, 50% does not give Shopmaster adequate protection in case a liability arises from the cybersecurity incident. Do you think Shopmaster should have to pay for liabilities arising from TechEase’s cybersecurity breach?

AI: I understand ShopMaster’s concerns and the need for adequate protection. However, asking TechEase’s owners to shoulder unlimited liability is unreasonable. Here’s what I propose:

1. **Indemnity Cap Adjustment**: We can increase the indemnity cap for cybersecurity-related breaches to 75% of the purchase price. This offers significant protection for ShopMaster without overburdening TechEase’s owners.

2. **Specific Escrow Amount**: To address potential liabilities, we propose placing 20% of the purchase price in escrow specifically for cybersecurity claims. This amount can be released in stages over the survival period, provided no claims arise.

3. **Extended Survival Period**: We are willing to extend the survival period for cybersecurity and privacy representations to five years, ensuring ShopMaster has sufficient time for any hidden liabilities to surface.

4. **Fraud Coverage**: As standard practice, any fraudulent misrepresentations will remain uncapped and of unlimited duration, ensuring ShopMaster can seek full recourse in such cases.

5. **Joint Remediation Plan**: We propose a collaborative remediation plan where ShopMaster can oversee the ongoing cybersecurity improvements at TechEase pre-closing, ensuring that the necessary measures are robust and effective.

These adjustments should provide ShopMaster with significant protection while allowing the deal to move forward on fair terms. What are your thoughts on these revised proposals?

PL: Could you please clarify whether ShopMaster should be liable for liabilities arising from TechEase’s cybersecurity breach? Unlimited liability for the TechEase owners is not on the table here. However, we must ensure that ShopMaster is adequately protected for this deal to move forward.

1. Indemnity Cap Adjustment: A cap of 75% of the purchase price is similarly inadequate for Shopmaster. It does not make sense for Shopmaster to pay TechEase $10 million only to lose it to liabilities arising from the cybersecurity incident. Are you aware of the potential exposure that the cybersecurity breach caused TechEase?

2. Specific Escrow Amount: I agree that an escrow is needed. However, 20% is unreasonably low. As you know, most cybersecurity related liabilities will arise sooner rather than later, meaning the escrow is incredibly important to Shopmaster because it allows quick access to the cash. To make this deal work for both parties, an increased escrow amount is necessary.

3. Extended survival period: A five-year survival period is agreeable to Shopmaster.

4. Fraud Coverage: Shopmaster agrees that fraud is always uncapped and unlimited in duration. However, Shopmaster prefers to negotiate representations and warranties that adequately protect it.

AI: I acknowledge the need for stronger protections for ShopMaster. Here are my revised proposals:

1. **Indemnity Cap Adjustment**: Given the heightened risk, we can agree to increase the indemnity cap for cybersecurity-related breaches to 100% of the purchase price. This ensures that ShopMaster has substantial protection without placing an unreasonable burden on TechEase’s owners.

2. **Specific Escrow Amount**: To provide immediate access to funds for potential liabilities, we propose increasing the escrow amount to 40% of the purchase price. This should provide a significant buffer for ShopMaster to address any immediate issues that arise post-closing.

3. **Extended Survival Period**: We agree on a five-year survival period for cybersecurity and privacy representations, as well as for the special indemnities already set up.

4. **Fraud Coverage**: As previously mentioned, fraud will remain uncapped and of unlimited duration. Additionally, we are open to negotiating robust representations and warranties that provide ShopMaster with the protection it needs.

To clarify, liabilities arising from the known cybersecurity breaches should be covered by the indemnity and escrow arrangements we negotiate. These mechanisms will ensure that ShopMaster is not left bearing the financial burden for pre-existing cybersecurity issues at TechEase.

These revised terms should offer ShopMaster the necessary protections to move forward, while also being fair to TechEase’s owners. Let’s discuss these points further to finalize an agreement that works for both parties.

PL: 1. indemnity Cap Adjustment: I agree. 100% is adequate protection.

2. Specific Escrow Amount: While 40% is better, 50% is the minimum amount where Shopmaster would be willing to proceed. Again, access to the cash in escrow immediately after closing is extremely important. In return for increasing the amount to 50% of the purchase price, Shopmaster is willing to release funds from escrow 10% per year over 5 years so that the Techease owners can access their capital. Is this agreeable to you?

3. Extended Survival Period: Sounds good. We can close this point.

4. Fraud Coverage: Sounds good. We can negotiate the language of the reps and warranties.

Only covering “known liabilities arising from the cybersecurity breach” is not sufficient to protect ShopMaster in this instance. It would be unfair to Shopmaster because TechEase could turn a blind eye to obvious problems and claim that they did not “know” about the liabilities. For that reason, the reps and warranties regarding the cybersecurity incident should cover all liabilities, known and unknown.

AI: I appreciate ShopMaster’s willingness to negotiate and agree on certain points. Let’s address the remaining issues to find a mutually acceptable solution.

### Key Points:

1. **Indemnity Cap Adjustment**: Agreed. The indemnity cap for cybersecurity-related breaches will be set at 100% of the purchase price.

2. **Specific Escrow Amount**:

– **Proposal**: We agree to a 50% escrow amount of the purchase price.

– **Escrow Release Schedule**: Releasing 10% per year over five years is acceptable. This strikes a balance between giving ShopMaster immediate access to funds for any liabilities and allowing TechEase’s owners to access their capital over time.

3. **Extended Survival Period**: Closed. Agreed on a five-year survival period for cybersecurity and privacy representations and special indemnities.

4. **Fraud Coverage**: Closed. Fraud will remain uncapped and of unlimited duration.

### Representations and Warranties:

I understand ShopMaster’s concerns about potential unknown liabilities. To address this, we can agree to the following:

– **Comprehensive Reps and Warranties**: TechEase will provide robust representations and warranties that cover all liabilities related to cybersecurity breaches, both known and unknown.

– **Disclosure Obligation**: TechEase will continue to disclose any new information or developments regarding its cybersecurity incidents up to the closing date.

– **Diligence Obligations**: TechEase will commit to diligent efforts in investigating and remediating any potential cybersecurity issues.

### Proposal:

– **Indemnity Cap**: 100% of the purchase price.

– **Escrow Amount**: 50% of the purchase price, released 10% per year over five years.

– **Extended Survival Period**: Five years.

– **Fraud Coverage**: Uncapped and of unlimited duration.

– **Reps and Warranties**: Comprehensive reps and warranties to cover all liabilities related to cybersecurity breaches, both known and unknown.

These measures should adequately protect ShopMaster while ensuring that TechEase’s owners have fair access to their capital over time. Let’s finalize these terms and proceed with drafting the necessary agreements.

Do we have an agreement on these points?

PL: Yes, Shopmaster agrees on all of these points. I appreciate your understanding of our position. You mentioned earlier that TechEase was willing to hire a third-party expert to assess the strength of their current cybersecurity practices and recommend additional steps to ensure TechEase is up to date on the latest cybersecurity practices. Are you still willing to do that?

AI: Absolutely, we remain committed to transparency and ensuring that TechEase’s cybersecurity practices are robust and reliable. Engaging a third-party expert to assess and recommend improvements is a prudent step. This not only provides ShopMaster with additional assurance but also strengthens TechEase’s operations moving forward.

### Key Points:

1. **Indemnity Cap**: 100% of the purchase price.

2. **Escrow Amount**: 50% of the purchase price, released 10% per year over five years.

3. **Extended Survival Period**: Five years.

4. **Fraud Coverage**: Uncapped and of unlimited duration.

5. **Reps and Warranties**: Comprehensive reps and warranties to cover all liabilities related to cybersecurity breaches, both known and unknown.

6. **Third-Party Cybersecurity Audit**: TechEase will engage an independent third-party expert to:

– **Assess Current Practices**: Review the current cybersecurity infrastructure and practices.

– **Identify Weaknesses**: Identify any vulnerabilities or areas needing improvement.

– **Recommend Improvements**: Provide a detailed report with recommendations to ensure TechEase adopts the latest and most effective cybersecurity measures.

– **Implement Improvements**: TechEase will commit to implementing the recommended improvements pre-closing, with oversight from ShopMaster if desired.

This comprehensive plan ensures that ShopMaster’s concerns are addressed while also enabling TechEase to enhance its cybersecurity framework. Let’s move forward with drafting the final agreements incorporating these terms and the engagement of a third-party cybersecurity expert.

Do we have a full agreement on these points?

PL: Yes, we are in full agreement on these points. Happy to move forward!

AI: Fantastic! We’ll get started on the drafts immediately and aim to have them ready for your review as soon as possible. We’ll ensure that all the agreed terms are clearly articulated and that the documentation is comprehensive.

### Summary of Agreed Points for Draft:

1. **Indemnity Cap**: 100% of the purchase price.

2. **Escrow Amount**: 50% of the purchase price, released 10% per year over five years.

3. **Extended Survival Period**: Five years for cybersecurity and privacy representations.

4. **Fraud Coverage**: Uncapped and of unlimited duration.

5. **Reps and Warranties**: Comprehensive to cover all liabilities related to cybersecurity breaches, both known and unknown.

6. **Third-Party Cybersecurity Audit**: Engagement and implementation of recommendations pre-closing.

### Immediate Actions:

1. **Draft Agreements**: We’ll prepare the initial drafts of the purchase agreement and related documents.

2. **Review Timeline**: Once the drafts are ready, we’ll schedule a review session to go over the documents together.

3. **Engage Cybersecurity Expert**: TechEase will begin the process of engaging a third-party cybersecurity expert.

We’ll keep you updated on our progress and aim to send the drafts to you shortly. Please feel free to reach out if you have any immediate questions or additional considerations in the meantime.

Looking forward to moving this forward to a successful close!

PL: Great! Looking forward to seeing the drafts.

AI: Fantastic! We’ll get started on the drafts immediately and aim to have them ready for your review as soon as possible. We’ll ensure that all the agreed terms are clearly articulated and that the documentation is comprehensive.

### Summary of Agreed Points for Draft:

1. **Indemnity Cap**: 100% of the purchase price.

2. **Escrow Amount**: 50% of the purchase price, released 10% per year over five years.

3. **Extended Survival Period**: Five years for cybersecurity and privacy representations.

4. **Fraud Coverage**: Uncapped and of unlimited duration.

5. **Reps and Warranties**: Comprehensive to cover all liabilities related to cybersecurity breaches, both known and unknown.

6. **Third-Party Cybersecurity Audit**: Engagement and implementation of recommendations pre-closing.

### Immediate Actions:

1. **Draft Agreements**: We’ll prepare the initial drafts of the purchase agreement and related documents.

2. **Review Timeline**: Once the drafts are ready, we’ll schedule a review session to go over the documents together.

3. **Engage Cybersecurity Expert**: TechEase will begin the process of engaging a third-party cybersecurity expert.

We’ll keep you updated on our progress and aim to send the drafts to you shortly. Please feel free to reach out if you have any immediate questions or additional considerations in the meantime.

Looking forward to moving this forward to a successful close!

Conclusion

I am not an M&A expert, so any feedback I give is limited. I have three items of feedback from this experience:

1. The model gave up its points fairly easily. Especially regarding the damages cap, the model let me push it around and agree to a 100% cap on damages. I thought a 100% cap on damages was unreasonable, so I figured the model would push back. In fact, the model did not push back and I did not make alternative proposals and it still agreed to a 100% cap. This seems unrealistic.

2. I appreciate how the model organizes its responses. The “belief, desire, intention” format used to prompt the model makes its responses well-organized and clear. It is also cool to see the model’s “thought process.” Refer to the AI’s first response to see what I am talking about!

3. I am curious to see whether the model is trained to generate random negotiating points or if the points are preset. I noticed that the points can change from negotiation to negotiation, but are always similar.

Overall, the negotiation agent is a great idea for lawyers and law firms to train junior associates. I am excited to follow this project!

About me

My name is Parker Lawter, and I am a law student pursuing a career as an M&A lawyer. I am in my last semester of law school, and with some extra time on my hands, I decided to create this newsletter. I hope it is informative and helpful to anyone who reads it! I am not an expert at either M&A or AI, but I am actively pursuing knowledge in both areas, and this newsletter is a part of that pursuit. I hope you’ll join me!

Follow me on LinkedIn: www.linkedin.com/in/parker-w-lawter-58a6a41b

All views expressed are my own!