Infrastructure and energy agreements
Reliable and cost-efficient energy is necessary for data center operations. The legal review of utility power purchase agreements with a view to ensuring uninterrupted power, energy efficiency incentives, renewable energy commitments and connectivity agreements is critical to prevent service disruptions. For regulated energy markets, a data center may be subject to additional consumption/time-of-use charges, tariffs, grid access rules, load-shifting incentives and demand response programs. It is also critical to understand local water usage and conservation laws.
Environmental compliance
Data centers consume significant energy, requiring adherence to environmental regulations, including energy efficiency and emissions standards. Data centers are also subject to health, safety and other laws, including those relating to (a) the generation, storage, handling and disposal of hazardous substances, (b) the generation and use of energy, (c) noise pollution and (d) liability for historically contaminated land. Environment, health and safety reviews, including for ground pollution and environmental permitting for the operation and construction of data centers, are necessary to evaluate compliance risks. Finally, renewable energy commitments and sustainable practices are important to meet corporate social responsibility goals and regulatory expectations.
Service level agreements
Review of (and compliance with) existing customer and vendor contracts ensures continuity and mitigates liability. Data centers may have a limited number of long-term and commercially relevant lease agreements. The loss of one major customer or lease agreement may jeopardize an acquirer’s assumptions in its financial model. These transaction risks may be mitigated by considering the specific characteristics of the target company and its customers during due diligence.
Existing customer or tenant contracts may contain termination rights or hidden exposure to capital expense (capex) or operational expenses. For example, hidden capex costs in service level agreements can impact margins, profit models, security and compliance. Also, it is necessary to understand the risks and financial liabilities to customers arising from power outages, system failures and security breaches.
Zoning and land use rules
An acquirer must ensure that each data center is compliant with local zoning laws, building standards and land use restrictions. The land use diligence also includes the review of containment and management of asbestos, water consumption, disability access, the measurement and reporting of energy consumption, and the efficiency of buildings.
Data privacy and security
A thorough data privacy review must be conducted to ensure compliance, as the target company will have access to data relating to its employees, contractors, suppliers and customers. Furthermore, the physical and electronic security measures in each data center will be evaluated by customers to determine whether the data is protected by the technical and organizational measures required under federal and foreign data privacy laws (such as the General Data Protection Regulation (GDPR) in the EU, the California Consumer Privacy Act (CCPA) in the United States and other regional or state frameworks). Data center operators also must stay informed about current cyber threats and security trends. Otherwise, the operator may be subject to regulatory fines and liability.
Intellectual property and licensing
Intellectual property and software licensing are important diligence areas in data center acquisitions and construction. They can affect operational continuity, transferability of key systems, and overall legal and financial risk – particularly in high-tech, custom or hyperscale environments. Acquirers should confirm that licenses are transferable, software is properly licensed and no usage restrictions would be triggered by a change of control. Some data centers, especially hyperscale or modular builds, may involve proprietary engineering designs (such as energy efficiency, cooling/HVAC or power distribution systems) or custom hardware. Acquirers must verify that all such intellectual property is owned by the target company and determine whether additional licenses are required.
Labor considerations
Some data center owners, such as hyperscalers, may construct and operate the centers. In such cases, the owners will rely on a broad spectrum of skilled and semi-skilled labor across multiple industries for operations as well as construction. Compliance with labor laws, workplace safety regulations, wage-and-hour requirements and other federal and local state laws is vital. In some jurisdictions, especially for large-scale builds, union labor is fairly standard, bringing with it union agreements and collective bargaining obligations.
Insurance and liability coverage
Buyers must review cybersecurity insurance, business interruption policies and general liability coverage to mitigate financial risks. Also, representation and warranty insurance (RWI) may be beneficial for the acquisition, as it provides coverage for financial losses arising from breaches of the seller’s representations and warranties in the purchase or merger agreement. RWI benefits acquirers by offering recourse outside of the seller, reducing post-closing disputes, and it can extend the survival period of certain representations. For sellers, it limits post-closing liability, allows for a cleaner exit and may reduce or eliminate the need for escrow or holdbacks.
Other regulatory/tax matters
If the acquisition involves large-scale consolidation, antitrust laws may come into play, triggering legal scrutiny and maybe requiring government approval. For multinational targets, import/export controls, foreign investment restrictions and data center localization requirements must be examined. Tax and structural issues, such as asset versus stock purchase considerations, entity issues and financing, can significantly affect deal economics and must be carefully evaluated early in the transaction.
Conclusion
Navigating mergers and acquisitions in the data infrastructure sector requires more than technical know-how; it demands a clear legal strategy that accounts for operational complexity, regulatory scrutiny and asset-specific risks. Acquirers who approach these deals with informed legal foresight are best positioned to mitigate risk and capture long-term value.
