Merge with caution: the future of food delivery services

The convenience and efficiency of meal ordering applications (“apps”) has led to a rapid development in food delivery services. However, despite the ever-growing popularity of online takeout, the increase in food-delivery companies and the decrease in restaurants offering food delivery service is slowing the growth of what could be a lucrative market.

Consumers of this market are notoriously fickle in their loyalty. Rather than order through a specific app, consumers are more likely to order through apps which offer a wide variety of restaurant options and cheaper fees. Recent media attention has highlighted the conflict between delivery companies struggling to establish loyalty in an over-saturated market, and restaurants who are finding that sending food to customers is not worth the hassle. Restaurants are reporting that the fees imposed on them make deliveries an unprofitable venture. In order to compete, delivery services are offering increasingly subsidized pricing. The amount of competition has emboldened some restaurants to negotiate for lowered fees, accelerating the “race to the bottom” for these delivery services. In addition, restaurant operations are unable to address the growing demand for delivered food in addition to traditional service. Some have built separate entrances and systems specifically for delivery orders, but lack the digital capability to handle the requests.

Where to go from here?

With restaurants making the push for lower fees, delivery companies must adapt. Technology platforms and start-ups have emerged to help bridge the gap between delivery services and restaurants by integrating the ordering process into the restaurant’s existing systems. Several delivery companies have already carried out acquisitions of digital start-up companies to help place orders more seamlessly into a restaurant’s kitchen. Delivery services who have successfully involved digital systems to integrate into kitchens have seen an increase in orders. News articles report that of the restaurants who partner with various apps, half have now integrated delivery-based technology services. In 2015, no restaurants had integrated this service.

On the flip side, some of the largest start-ups in the delivery service industry are reportedly considering mergers with competitors rather than going public. The disappointing performances of similar companies following initial public offerings has raised concerns about the prospects of going public, and has pushed major players in the industry to look towards mergers with others. These acquisitions could either help lower the fees that delivery companies charge clients, or increase them due to decreased market competition.

After considering marketing and administrative costs, it is clear that companies that have already gone public have not yet been profitable. The integration of digital platforms into delivery services and the potential for mergers paints an exciting future for the industry. We look forward to seeing how the trend develops.

The author would like to thank Roohie Sharma, summer student, for her assistance in preparing this legal update.

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Investor uncertainty will continue to impact Canadian M&A momentum

Deal count reached a seven-year high in Canada last year, but there has been a loss of momentum in the first half of 2019. On-going trade conflicts and concern over a possible market correction have generated greater economic uncertainty, and the investment outlook for the second half of the year continues to be clouded by these factors.

Rising valuations have been partly attributed to favourable debt conditions. With stimulus measures like the central bank holding interest rates low, the financial environment has been conducive to growth in Canada – so why are some investors dubious? For one, the availability of lower discount rates on long-term earnings has encouraged greater financial risk-taking, and a there is mounting concern that global trade issues could cause a reckoning.

Trade tension with China and the residual impact on global trade is soon expected to redress lofty earning expectations in some sectors of the Canadian economy. Global economic growth has softened, and the persistently high valuations set against this backdrop has manifested doubt in the market consistent with predictions made earlier this year.

A survey of M&A and capital markets professionals across 53 countries completed by Refinitiv in January anticipated that uncertainty caused by escalating global trade tensions and political instability in key economies would slow M&A activity. Sure enough, worldwide M&A deal count was down 16% compared to the first half of 2018 and it has become apparent that trade wars among the world’s largest economies has shaken investor confidence across the globe.

While the US tariffs on Canadian steel and associated countermeasures have been lifted, the precarious process of negotiating a North American trade pact has been disruptive to Canadian investment decisions. Despite a rebound in Canadian exports, threats of further hostile trade actions contribute to a general sense of economic uncertainty. It seems likely that the loss of momentum seen in the first two quarters of 2019 is a preview of what is to come, and markets will continue to respond to escalating trade tension.

The author would like to thank Alisha Alibhai, summer student, for her assistance in preparing this legal update.

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“DARQ” technology and disruptive M&A: gearing up for the “post-digital era”

As technology has become embedded into most parts of our lives, the majority of companies have completed a digitization process. Maintaining a digital platform has become the new norm, and increasingly sophisticated technologies continue to be developed. Accenture’s Technology Vision 2019 (Vision Report), describes this as the transition to the “post-digital era,” where “digital” is a new normal and is no longer a sign, on its own, of innovation. The Vision Report highlights main technology trends that companies will need to get ahead of in order to become leaders.

The main questions related to this “post-digital shift” are; what is next, and how can companies get ahead? One possible answer appears to be “DARQ” technology, acquired through transactions with disruptive technology companies.

Emerging DARQ Technology

According to the Vision Report, 45% of businesses attribute a significant acceleration of innovation to emerging technology. One trend discussed is the growth of “DARQ” technology. The acronym DARQ stands for four different emerging technologies including; distributed ledger technology, artificial intelligence, extended reality, and quantum computing. As they develop, these technologies will have a profound impact on the way companies interact with consumers, employees and each other.   For example, distributed ledger technology, such as block chain and cryptocurrency removes the third party from transactions and can enable self-executing smart contracts. Additionally, virtual reality is poised to completely change the consumer experience with on-demand and immersive interfaces.

The Vision Report also warns that it is in the best interest of companies to get ahead of the DARQ technology. It emphasizes learning from the experience of companies who did not get ahead of the previous social, mobile, analytics, and cloud (SMAC) innovation. Those that lagged behind with embracing SMAC were met with a struggle to keep up with the digitizing age. This should be kept in mind as the new wave of DARQ technologies emerges.

As DARQ technologies grow, they are set to become the “next source of differentiation and disruption” for years to come. Consequently the investments in DARQ technology seem to be ramping up steadily, as 89% of businesses report experimenting with at least one of the four DARQ technologies. Against this backdrop, the question becomes how can companies stay relevant and get ahead.

Disruptive M&A

In the context of DARQ technology, the Vision Report suggests that companies can either invest in innovation themselves, or acquire smaller start up companies specializing in such technology. As we have previously discussed, disruptive technology is an emerging driver of M&A, and as predicted, companies have an increasing interest in acquiring disruptive technology.

Deloitte recently discussed the acquisitions of companies involved in disruptive technology as “Disruptive M&A” in a recent article (Disruptive M&A Article). The focus of Disruptive M&A is different from standard M&A transactions, as it is usually geared toward accessing technologies, talent and operating models. According to Deloitte, companies that are targeting disruptive technology start ups, are often not in the technology sector themselves. This suggests a push to interface with new disruptive technologies across a variety of industries.

However, the challenge with Disruptive M&A is the inherent complexity of such transactions. The transactions are usually more rapid, and may be done in groups, executed in series or simultaneously. Adding to the complexity, is the nature of the target companies in Disruptive M&A transactions whose value may be analyzed differently. Finally, after the transaction is complete, integration may prove more difficult.

Companies who want to get ahead of the DARQ technology trend may be interested in participating in Disruptive M&A to acquire companies currently building specialization in this area. Utilizing this nuanced form of M&A will allow companies to begin acquiring and developing technologies that will soon become part of the fabric of business before the next wave of new technology. It will be interesting to follow how companies acquire and adopt such technologies, and how it might change the landscape of M&A.

The author would like to thank Lauren Rennie, summer student, for her assistance in preparing this legal update.

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Avoiding independent contractor liability in M&A

The distinction between employees and independent contractors is significant as it pertains to workers’ legal entitlements. Employees have an exclusive working relationship with an employer, which engages rights and obligations under applicable employment legislation and the common law. By contrast, independent contractor agreements are entered into by legal and contractual equals. As a result, independent contractors are not afforded employment law protections.

The misclassification of employees as independent contractors continues to attract considerable legal action and media attention. Recently, Ontario has seen a rise in class action lawsuits involving claimants alleging to have been misclassified by their purported employers. If found to have misclassified employees, these companies could face claims for unpaid Employment Insurance and Canada Pension Plan contributions, wages and benefits, as well as various categories of damages. Canadian companies would be well served to consider the risk of inheriting independent contractor liability through M&A deals. Specifically, an assessment of the target company’s workforce should be undertaken as part of the due diligence process to ensure that workers are classified correctly and penalties are avoided. An overview of the law relating to the classification of workers should help guide this analysis.

In a recent decision emerging from Quebec, an individual was held to be an employee despite being labelled an independent contractor in a franchise agreement with the deemed employer. In reaching this decision, the Supreme Court of Canada affirmed that the language used in an agreement is not determinative of whether an employment relationship exists between parties. According to the majority of the Court, “the inquiry must assess the actual nature of the relationship between the parties, regardless of the terms of and labels used in the franchise agreement.” An employment relationship was identified based on several factors including the assumption of risk and opportunity of profit, degree of control and ownership of tools. Similar factors have been considered by courts in common law jurisdictions.

Notably, the Ontario Court of Appeal has recognized dependant contractors as an intermediate classification between an employee and independent contractor. Dependant contractors appear to work for themselves, but may be entitled to protections usually reserved for employees because of their dependence on a single employer. While this status is still developing, dependant contractors have been extended common law damages for wrongful dismissal.

Based on the foregoing, M&A due diligence must involve more than simply reviewing the independent contractor agreements of a target company. Whenever possible, buyers should also request access to employment data, contractor lists, job profiles, descriptions of services, service histories, pay records and other available information as part of the discovery process. Buyers should be attuned to the labour and employment practices of the companies they are dealing with in order to avoid independent contractor liability, particularly as this area of the law continues to unfold.

The author would like to thank Lila Yaacoub, summer student, for her assistance in preparing this legal update.

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Leave a mark: the growth trajectory of “impact investing” in Canada

Impact investing represents a continuation of Canada’s ongoing commitment to social finance, an “approach to mobilizing private capital that delivers a social dividend and an economic return to achieve social and environmental goals”, as defined by the Government of Canada. The rapid growth of impact investing is driven largely by investor demand for addressing the social and environmental impact across various asset classes, according to a report released by the Responsible Investment Association (RIA) earlier this year (RIA Report).

The Start

The term “impact investing” was first coined in 2007 by The Rockefeller Foundation and is often described as “investments intended to create positive impact beyond financial returns”, as defined in a research note published by J.P. Morgan Global Research.

The recent popularity and traction of impact investing is driven by factors including an increase in customers and other stakeholders of public and private companies demanding sustainable business practices from businesses; the diversification of non-profits and charities’ revenue sources away from traditional sources such as donations and grants; and an increasing number of investors seeking to align their personal values with their approaches to investing.

The Scope

According to RBC’s social finance white paper (RBC White Paper), impact investing is often explained as being situated across a continuum of investment approaches, with traditional investing on one end and venture philanthropy on the other end. Impact investing is distinguishable from socially responsible investing (SRI) and responsible investing (RI), investment approaches that generally seek to minimize the negative social and environmental impacts of investments by incorporating an analysis of a business or an asset’s environmental, social and governance (ESG) performance into the investment decision-making process rather than proactively investing in businesses and assets that create positive social and environmental benefit.

The most important distinction between impact investing and other investment approaches such as traditional investing, RI, SRI and/or venture philanthropy is the intention and expectation of investors to seek both a measurable social and environmental impact and a financial return. Due to the myriad of investors who engage in impact investing, the expectations of financial return from investors also range from return of capital to market-competitive to market-beating returns. Beyond providing financial statements to investors, it is common for asset managers and advisers to measure and report the social and/or environmental performance to ensure accountability to investors.

The Scale

The RIA Report revealed that the impact investing industry grew from $8.15 billion to $14.75 billion in Canada between 2015 and 2017. This significant growth has been attributed to increasing awareness and interest in social and environmental impact from asset managers and retail investors. In particular, public equity has captured considerable engagement, and at the end of 2017, represented 41% of reported impact assets under management (AUM). This is a departure from the concentration of impact investing in private equity and private debt historically. Respondents to the RIA Report, being predominantly asset managers and asset owners, believe that the increase in public equity carries with it the opportunity to “democratize” impact investing, making it more accessible to a wide array of Canadian investors.

More than ever, investors are prioritizing intentionality and magnitude of impact above asset class allocation. Similarly, investors and asset managers are moving past integrating ESG factors in their decision-making toward specifically targeting assets that have positive social and environmental outcomes at their core. The RIA Report notes that although a part of the increase in impact AUM may be attributable to the appreciation in the valuation of the underlying assets, it is safe to assume that significant inflows of net new capital contributed to impact investing strategies.

As impact investing continues to be a relatively young and immature industry, the top barrier to growth is the lack of high quality investment opportunities with operating history. Investors identified business model execution and management as a primary source of risk to their impact investment portfolios. Another challenge is the measurements and reporting frameworks of impact investment being too fragmented, complex and non-standardized.

Notwithstanding its stage of development and current challenges facing the industry, 98% of investors reported that their impact investments met or outperformed their expectations and expect impact investments to continue to grow. As the impact investing market continues to grow and reach maturity, investors are likely to adopt existing impact measurement metrics such as Impact Reporting and Investment Standards (IRIS) or UN Sustainable Development Goals (SDGs) as an agreed upon common language to measure impact, service providers and intermediaries are likely to continue to hone their expertise and qualifications, and asset managers will likely continue to increase the depth of their service offerings and related products.

Kelly Gauthier, board member of RIA and the Managing Director of Impact Advisory at Rally Assets, noted that retail and institutional investors increasingly want to drive positive social and environmental change with their investments regardless of whether it is coined “impact”, “responsible”, “sustainable” or otherwise. The investors’ objective remains that they demand investment opportunities that deliver financial returns and social and/or environmental impact.

Impact investing is experiencing rapid growth in Canada and is an up-and-coming investment approach which Canadian investors and asset managers would do well to understand.

The author would like to thank Lila Yaacoub, summer student, for her assistance in preparing this legal update.

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AI as a solution for cybersecurity problems in M&A deals

Artificial Intelligence (AI) has immense potential as a solution for cybersecurity vulnerabilities in M&A deals. Generally, M&A deals generate value and as such, understanding vulnerabilities on the acquirer and target sides is important for completion of the transaction. With the common usage of networks and servers to store high volumes of data by corporations, vetting for cybersecurity attacks has become a priority in the M&A due diligence process. In a recent study, IBM reported that the global average cost of a data breach has risen 6.4 percent over a 12 month period to $3.86 million. The average cost for each lost or stolen record that contains confidential information is also up 4.8 percent to $148, a number that can grow at an exponential rate any time a significant breach has taken place.

Preventing such attacks may require leveraging new AI solutions. IBM also reported that the average cost of a breach for organizations that fully deploy security automation is $2.88 million, which is a $1.55 million net-cost difference for organizations without automation. As with any other innovation, AI can help facilitate and be a useful tool  in the M&A due diligence process. With respect to cybersecurity vulnerabilities, AI solutions can help with the following factors found to affect the cost of a data breach:

  • Early detection: AI solutions can help identify and potentially contain the data breach faster than without automation technologies.
  • Effective management of detection and escalation costs: AI solutions can help maintain internal frameworks to manage detection and escalation costs.

Unsurprisingly, there has been an uptake in deals involving cybersecurity start-ups, including within the health and technology sectors. The effectiveness of AI solutions for protecting against cybersecurity vulnerabilities remains to be seen, as AI also gives rise to additional considerations, including in relation to supervising and monitoring the results and safeguarding against additional cybersecurity compromises that can arise with engaging AI solution into existing networks and servers.

The author would like to thank Fatima Anjum, summer student, for her assistance in preparing this legal update.

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New share register requirements! Working towards greater corporate transparency

In November 2018, the Standing Committee on Finance released a report to address the issue of money laundering and terrorist financing in Canada. The Committee’s first recommendation emanated from the corporate registry regime in the United Kingdom (“UK”). In an attempt to emulate the UK’s system, the Committee recommended that the Canadian government work with the provinces and territories to maintain a register for all legal persons and entities with significant control over a corporation.

Requirements for share registers

On June 13, 2019, previous amendments to the Canada Business Corporations Act (“CBCA) came into force. These amendments, introduced in Bill C-86, require private CBCA companies to maintain a register of individuals who have significant control over the corporation. An individual with “significant control” over the corporation holds:

  1. Shares that carry 25% or more of the company’s voting rights, or
  1. Any number of shares equal to 25% or more of all the corporation’s outstanding shares measured by fair market value.
  2. Furthermore, these registers must now include information such as the name, date of birth, address, residence and other prescribed information for each shareholder who has significant control.

Access to share registers

After the implementation of share register requirements, clarification on access to these registers was necessary. As a result, the federal government introduced Bill C-97 in 2019. Although these provisions are not in force as of yet, these amendments to the CBCA are intended to delineate the parties with access to the shareholder register.

In particular, Bill C-97 requires private corporations to provide a copy of the shareholder register and any information contained in the register to investigative bodies, including any police force or the Canada Revenue Agency. These investigative bodies are authorized to request this information when they have reasonable grounds to suspect that the information would be relevant in investigating an offence committed by, and/or facilitated by, the corporation or an individual with significant control over the corporation.

Consequences of non-compliance

As of June 13, 2019, directors or officers who knowingly authorize the corporation to maintain a false register, or provide false information, are guilty of an offence. Similarly, shareholders who knowingly provide false or misleading information to the corporation are also guilty of an offence. The maximum penalty that can be imposed on directors, officers and shareholders is a fine of $200,000 and/or imprisonment for a term not exceeding six months.   Once Bill C-97 comes into force, if corporations fail to comply with the investigative bodies’ request, they may be found liable on summary conviction to a fine of up to $5,000.

A push for corporate transparency

These amendments to the CBCA reflect federal and international trends to help combat tax evasion, money laundering and corporate corruption. These safeguards provide effective mechanisms to ensure that law enforcement, tax and other investigative agencies have access to up-to-date information on significant corporate shareholders so they can accurately respond to criminal activities. With the clarifications provided in Bill C-97, it is expected that provinces and territories will mimic this federal legislative reform to be a part of the nationwide commitment to ensure greater transparency in corporate ownership.

The author would like to thank Nareesa Nathoo, summer student, for her assistance in preparing this legal update.

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Good eats: rising interest in dairy & meat alternatives driving M&A activity

As consumer demand for dairy and meat alternatives increases, established food manufacturers are looking to supplement their offerings by entering into M&A transactions with emerging meat and dairy alternative manufacturers. According to a recent report by the Good Food Institute (GFI), there have been 46 completed investments and acquisitions of vegan food manufacturers in 2018 alone, with the largest acquisition having a value of $12.5 billion. Many leaders in the meat industry are starting to acquire and invest in the dairy and meat alternatives market to tap into consumer demand. Investing in vegan alternatives is essential for food manufacturers to show growth to their investors and shareholders. GFI has shown that in 2017-2018, U.S. retail food sales grew 2% overall, whereas plant-based meat sales grew by 23%, exceeding $760 million in sales.

Although dairy and meat alternatives have been available since the 19th century, technology advancements and a cultural shift can help explain the recent surge in interest in vegan and vegetarian alternatives over the past 3 years:

  • Technology. With today’s technology, plant-based alternatives are not compromising on taste. While past vegan food manufacturers were not able to create plant based burgers that accurately mimicked the taste and texture of a meat burger, current options such as the Beyond Meat burgers not only feel and taste like a normal burger but are also found in the refrigerated meat case in grocery stores which makes the meat alternative more appealing to meat eaters as well as vegetarians or vegans.
  • Cultural shift. Individuals in Canada are cutting down on their intake of meat for health and environmental reasons. The new Canadian Food Guide launched in January encourages Canadians to incorporate more plant-based proteins into their diet. Canadian consumers are also beginning to take notice of the health benefits that come with eating more vegetarian and vegan meals. An estimated 6.4 million Canadians follow a diet that partially restricts meat.

As meat and dairy alternatives continue to become more readily available to consumers and cultural shift towards reducing meat-based protein continues, food manufacturers will be looking to expand their vegetarian and vegan alternatives to take advantage of the increased demand from consumers. As Bruce Friedrich, the Executive Director at GFI, recently stated: “we’re just at the beginning of [a] tremendous growth period for both the plant-based and cell-based industries.”

The author would like to thank Fatima Anjum, summer student, for her assistance in preparing this legal update.

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2019 M&A activity off to a strong start in financial services

M&A activity in the financial services sector has opened with a solid start. According to a KPMG quarterly update, the Q1 2019 report is the second highest than any other quarter since 2016 by deal volume. This positive start to the year suggests that the 11 percent increase in transaction volume last year may continue to surge. For both domestic and foreign buyers, the Canadian financial services sector continues to be an attractive investment. A robust Canadian M&A market is expected for the remainder of 2019 due to low-cost debt financing and supportive debt markets. KPMG has identified these trends in the Canadian financial services M&A market by examining several sectors.

1. Insurance

Compared to all other sub-sectors across Canadian financial services, insurance has experienced more activity in Q1 – with deal volume more than doubling the previous quarter. Access to speciality lines, technological capability, geographic expansion and adding scale are amongst the drivers of M&A insurance activity. KPMG expects that M&A activity in this sector will continue due to the market’s fragmented nature and the amount of high quality targets.

2. Asset and Wealth Management

Transactions relating to asset & wealth management in Canada has been steady. Deal value increased in Q1 by CAD 6.5 billion, while deal volume grew by 50 percent from the previous quarter. Drivers of M&A activity include competitive market pressure on fees, which include mutual fund fee reductions and ETF pricing, along with investment requirements for technology and regulatory compliance.

3. Banking, FinTech and payments

Although there has not been notable M&A activity by Canadian banks in the first quarter, the substantial level of M&A activity experienced south of the border by US banking could present Canadian banks with opportunities to continue to expand into the US market. However, high US banking valuations may be an obstacle. Moreover, additional banking transactions may be driven by divestiture of non-core operations for the remainder of the year, as “banks seek to free up capital and focus on strategic business lines and markets.”

On FinTech and payments, the year has begun with an encouraging start. KPMG believes that additional M&A opportunities may arise in Canada due to the anticipated changes to the Bank Act, since these amendments would allow banks to collaborate with FinTechs more efficiently. FinTechs are potentially disruptive and could function as a catalyst for future M&A activity, with banks hoping to acquire or collaborate with FinTechs in order to gain competitive advantage.

The outlook on the remainder of 2019 is positive, as growth or stability is anticipated. There are reasons to be optimistic about the deal-making environment in the Canadian financial services M&A market over the remainder of the year.

The author would like to thank Ceviel Alizadeh-Najmi, summer student, for her assistance in preparing this legal update.

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Uses of blockchain in the M&A process

We have previously explored some potential uses of blockchain in the M&A process. Generally, blockchain refers to a growing list of blocks linked by cryptography. Each block contains a timestamp and a link to the previous block. When a new block is added to the growing list, it is verified by independent parties on the peer-to-peer network and is by design, decentralized and resistant to modification of the data. The possibilities are immense – but ultimately, what are some of the ways that blockchain can help the M&A process?

One key area may be with the use of “smart contracts” – an umbrella term used to describe computer protocols that facilitate, verify or enforce the negotiation or performance of a contract. Blockchain allows further development of the smart contract, as parties can deploy their smart contracts on a blockchain, where all terms are transparent, unalterable and automatically enforced.

Another area is due diligence. According to some experts, a common problem in the due diligence process is the lack of diligence undertaken by seller companies on themselves. Occasionally, contracts are unsigned or signed by persons without requisite authority. For buyers to verify the validity and performance of these contracts, additional steps are often required, which increases the cost of due diligence. This problem could be avoided by recent developments in the blockchain legal innovation space.

Furthermore, in the context where a company employs many sub-contractors to complete a project, a distributive ledger process for smart contracts that allows for the transfer of legal documents and money safely and securely between all the parties involved. When such company is up for sale and going through the due diligence process, instead of tracking down every contract with different sub-contractors, their signatures and/or performance stages, the ledger can be used to easily verify the exact state of each contract.

Blockchain technology can also assist in recording intellectual property (IP) assets. Digital trails of records of IP assets are being created so that in a due diligence process, all inventions, designs and proofs of use can be quickly verified to prove ownership, integrity and transfers of the IP assets.

The potential benefits of blockchain may be endless, but ultimately, these benefits will be contingent on how widely the technology is adopted and the overall security of the application tools. We look forward to seeing how the trend develops.

The author would like to thank Victoria Liu, summer student, for her assistance in preparing this legal update.

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