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This article is written by Madhav Gawri who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

An M&A transaction is a detailed-oriented task. Moreover, it can prove to be an overwhelming task for all the parties involved in mergers and acquisitions. Tasks like examining crucial paperwork, requesting the correct documents, waiting for approval from all sides, and any governmental authority, if required, leave room for error, steal valuable company time, and sometimes kill the deal. An M&A requires sharing of confidential and vital information back and forth. To facilitate and support this transaction, virtual date rooms or online date rooms were created.

A virtual data room or an online data room is a cloud computing service specially designed to secure and store all the confidential business documents and information which is to be shared with the other party. Date rooms have specific features such as advanced permissions, Q&A tools, notes, and multiple authentications and watermarking. These data rooms are used in transactions like mergers and acquisitions, IPOs, real estate asset management, and other financial transactions. 

Usage of virtual data rooms in M&A transactions

A mergers and acquisition virtual date room facilitates everyone involved in the mergers and acquisition transaction to a secure place. This is done to share, organize and store all the sensitive information in one accessible and safe place. Moreover, virtual data rooms enable collaboration and come fully equipped with features that help speed up the due diligence process and streamlines the other parts of the M&A transaction. Virtual data rooms are helpful in an M&A in the following ways:

  1. They allow stakeholders in a different location to collaborate: The data rooms allow collaboration between all the interested and involved parties to share information. The data room provides a centralized hub of information rather than information and requests being in multiple emails, excel spreadsheets, and google docs. It also helps in better accessibility and visibility between the key players, which helps in better integration of the M&A plan. 
  2. They allow users to securely store documents: These data rooms allow the users to keep important documents, such as financial statements and employee information, in a safe, two-step required authentication space. The documents stored in these virtual rooms are encrypted as well as carefully controlled by the service provider.
  3. Elimination of work: Elimination of work is done by way of automatic elimination of duplicate requests, bulk dragging and dropping off documents, full-text searches, and auto-indexing, as well as the ability to assign tasks, live link documents, and procedure reports with the click of a button.
  4. They allow users to analyze and organize files easily: The software’s analysis and organizing of files allow the user to improve the workflow and adopt new information. Artificial intelligence would allow companies to collect and store data that can help themselves only.
  5. They provide an overview of the entire process: Some virtual data rooms software provides a bird’ eye view of the entire process. Therefore, it can be said that virtual data rooms somewhat allow managing the transaction. Moreover, the user’s usage can be monitored by analyzing the amount of time spent by the buyer, buyer’s engagement, identifying and responding to potential problems or roadblocks. 

M&A data room vendors 

  1. DealRoom
  2. Intralinks
  3. Midaxo
  4. Firmex Merrill
  5. Devensoft
  6. FirmRoom

M&A data rooms in India

  1. iDeal – Virtual Data Rooms
  2. Ethos Data – Virtual Date Room Services
  3. Intralink India – All About Virtual Data Room Providers
  4. Box – Virtual Data Rooms
  5. Datasite – Merrill in India

Benefits of virtual data rooms

  1. Security: One of the key factors on which a virtual data room is acquired is security. All the information stored in virtual data rooms is sensitive. To protect the same the access to this virtual data room is given to limited personnel only. Moreover, the access data room’s access and usage can be monitored by the software itself, and an access time limit can also be set on the virtual data room. 
  2. Comfort and Convenience: Handling and sharing all the key documents in a physical format can prove a tiresome process. Traveling and retrieving a physical document from another person can prove to be a very time-wasting process. Therefore, these virtual room allows the person to access the data room from anywhere as per your convenience.
  3. Cost Reduction: To control, maintain and safeguard a physical data room is a very costly process, as it requires different personnel for different tasks. In contrast, a virtual data room requires only one to two personnel to maintain it. This reduces the cost drastically if it crosses border mergers and acquisition transactions.
  4. Process Transparency: Virtual Data Rooms also have a feature to track any user’s activity using that room. Therefore, information like who accessed the room, who logged in, what was deleted by whom, etc., can be tracked easily. 
  5. Efficiency: Due diligence and taking approvals from various personnel and organization is a very tedious and time-consuming task. These virtual data rooms allow the user to access the information in no time, as it is accessible from anywhere. It takes a few clicks to store or to distribute information amongst various personnel. 

Problems in preparing virtual data rooms

Usually, the buyers in an M&A transaction faces problem created by the sellers. This might include the seller’s historical documentation process. Problems that can arise while preparing a virtual data room:

  • Both parties do not sign contracts.
  • Missing or unsigned Board minutes or resolutions.
  • Missing or unsigned stockholder minutes or resolutions.
  • Board or stockholder minutes/resolutions missing referenced exhibits.
  • Incomplete/unsigned employee-related documents, such as stock option agreements or invention assignment agreements.
  • Incomplete patent documents.
  • Incomplete capitalization table.

Steps to create virtual data rooms

  1. Initial schematic of the Virtual Data Rooms: It is always beneficial to plan before executing a plan. Drawing up a plan and roughly structuring a virtual data room can help execute the deal more easily. It can be done by drawing on a sheet of paper and making small squares representing major files, and underneath it, those files should be added, which be expected to be seen. 
  2. Assigning access to the relevant personnel: This step is crucial and should be decided very carefully. The parties must decide which file should be accessible by whom. Allowing too many people to access important files increases the risks of data leaks. 
  3. Creating a systemized filing system: This step includes creating different files with designated names, for example, finance, legal, buyers, etc. One master tip is that create a master folder that will include copies of all documents present in the virtual data room, but it should not include confidential data. The files can arrange in the following manner for example,

i. Marketing Package (Non-disclosure agreement, teasers, etc.)

ii. Financials 

iii. Legal 

iv. Human Resource (Employee resumes, Salary, pension details, etc.)

v. Private and Confidential Files (Pending deals, legal cases, industrial dispute, etc.)

  1. Adding and maintaining of relevant documents: It is essential to maintain and continuously updates the documents, and the information provided in the virtual data room is used. Documents that are outdated are of no value to the parties in the transaction. Moreover, useless information usually clog-up the data room and system created in it. 
  2. Engaging continuously with the Virtual Data Room: Inactive data virtual rooms prove to be useless. Virtual Data Rooms need to be used continuously, as it requires maintenance of the documents stored in the data rooms. If the documents are not updated, they become obsolete, thus making the virtual room obsolete. There are many benefits of continuously working with virtual data rooms, such as the transaction team will not have to scan thousands of old emails to get information, there would be no transfer of heavy data files or less risk of a breach. 

Conclusion

The concept of virtual data rooms on paper proves to be a very crucial and useful tool in transactions like mergers and acquisitions. If used correctly, they provide a magnitude of services to the users and prove to be a very beneficial tool for them. Virtual data rooms seem to be very useful when first acquired and used. But they need to be kept updated and maintained regularly. Moreover, the user needs to vary against the third-party reviews, as it increases the risk of data leaks. Mostly virtual data rooms have proved to be efficient, time-saving, and improved the flow of work and communication amongst the involved parties.

A certain degree of care needs to be used while taking services of a virtual data room. These data rooms prove to be a great tool in Mergers and Acquisition transactions, as they are very helpful in the due diligence of the target company by cutting down the time and errors. In conclusion, virtual data rooms are a very great tool if used proficiently and professionally.


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