This article is written by Kanishk Gambhir, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here he discusses “How are Virtual Data Rooms used and what do these contain?”.
During investments transactions, companies are sometimes forced to disclose the non-public information and documents to the future investors to provide them with information so that they are able to verify the information provided by the companies to do their due diligence before investing their financial resources.
Due diligence is a form of research conducted by the investors or prospective joint venture partners to ensure that they are getting exactly what they agreed to acquire.
This process of due diligence includes a thorough check on the human resources, financial position, all past, present and future, legal compliances etc. This process of due diligence generally requires a physical transfer of all required copies of documents from the seller to the buyer so that the buyer can do a thorough analysis. This process of the transfer of the documents is very complex, time-consuming and expensive. But as we live in an era where technology is flourishing every day, where everything is done online. So for this problem of transfer of physical copies as well. a simpler and cheaper solution in the form of Virtual Data Room is available.
Virtual Data Room
Virtual Data Room also called a VDR, is an online depository of data which is generally used for storage as well as sharing of documents. It is very similar to Google Drive or any other cloud data storing services with a few but necessary changes like more focus towards the corporate user as well as more security along with a better interface to handle huge amounts of data which is very complex and sensitive. They are the virtual replacements of documents rooms.
These virtual rooms allow the user to share the link to particular documents as required to that particular user so that they can determine what data to share with whom as well as keep a thorough track of which documents were shared.
Some of the big players in the business of VDR are iDeals, Merrill corporations, Intralinks, Brainloop, box etc.
What does these Contain?
These are used to secure and store the highly sensitive and critical data of the companies. These documents generally have high valuation as the might contain not only information related to tax, finance, legal but also items like trade secrets or copyrighted work which might destroy the company if they were leaked. So, these VDRs provide a secure, convenient and confidential place to place all your data so that it is easily accessible to the people the owner of VDR wants to share it with, which is generally to the investors.
Further, these VDRs can easily be edited as per the requirements and specificity of each company for each transaction. These VDRs usually have very strong data encryption which is aimed at prevention of theft, misuse or unauthorised access by individuals. They are required to be highly secured due to the sensitivity and importance of the documents. Over the years, the user interface in these VDRs have been improved leaps and bounds as a user can easily arrange, bookmark, search or make reports in the VDRs itself which increases the work efficiency as well as effectiveness.
How are Virtual Data Rooms used?
These data rooms can be used for anything including but not limited to Merger and acquisition due diligence, fundraising, IPOs, Strategic Partnerships, Joint ventures, Audits, IP management, Board communications etc. Some examples of usage of the VDRs in various data rooms are given below:
M & A Transactions, Joint-ventures, Strategic Partnerships
These can possibly be the most common use of the VDRs as mergers and acquisitions involve huge amount of documents which are highly confidential. But as a part of the due diligence process, they are required. So storage of these in a secured place with easy and reliable access is a function that is provided by the VDRs. The documents are exchanged without leaving the sellers office with a click. So, this makes these transactions easier, cheaper and efficient. Further, this helps in crossing the geographical boundaries much more easily which will lead to more beneficial partnerships between separate organisations which were earlier barred due to geographical borders.
Court are generally synonymous with huge amounts of paper works. So with the VDRs large volumes of the documents can be easily dealt with a further advantage of making it impossible for such documents to be stolen or lost. Further, it would be more advantageous in a more globalised world involving international legal teams and placement of companies in different countries.
Initial Public Offerings
IPO involves huge amount of paperwork due to compliance with additional laws, rules and regulations as well as it involves huge number of people like lawyers, banks etc. So, with VDRs this process becomes much more simple and easy as it all could be done with a simple click.
Furthermore, these VDRs can easily be used in Board communications, IP managements, Audits due to easier and confidential sharing of data.
Advantages and Disadvantages of Virtual Data Rooms
Even though these VDRs are the present and future of data sharing but they are not without there disadvantages. The various advantages and a few disadvantages which they have been given below.
To Buyer (companies, investors etc.) / Authorities
- Cost Saving – These VDRs save huge amounts of cost by reducing the printing, transfer and storage of data.
- Time-Saving – Similarly, These VDRs save time as a time to both transfers as well as going through the data to do the required work is reduced due to easier ways to understand comprehend the data in computers than manually.
- Comfort – This data can be accessed by them anyplace, anytime once the link is provided to them and the need for carrying the files is gone.
- Transparency – There is no scope of tampering of documents as software can easily detect whether these documents were edited.
- Fair Playing Field – All the competitors have access to similar data and easier way to go through it, so unfair advantage to the top companies of the huge workforce is reduced to a certain extent.
- More organised Data – The data is clearly organised and data can be more easily searched well as used and understood as compared to the manual process of data due diligence.
To Seller company
- Simplicity – This process of putting the data online is much more similar then copying and sending all the required documents to the buyer.
- Ease of Setup – These VDRs can easily be set up with few clicks and it is very easier to understand.
- Cost Savings – Seller, too, saves huge cost like the buyer in relation to copying and transferring of data.
- Time Savings – Seller saves time, as well as the transfer, is done instantly, they can get an easier and quicker answer from the buyers.
- Security – As the VDRs have tracking records in details so the seller can easily see who accessed what data in case of breach of confidentiality.
- Legal Compliance – Legal compliance to the authorities becomes much easier as this data is available to keep a regular check on the data and there is no fear of loss of data.
- Competitive Price – As the sellers can share the VDRs with multiple investors without fear of geographical boundaries, financial burden or security.
Further, a huge benefit to the environment is caused due to the absence of the use of papers in such large numbers as well no transportation of these leads to the saving of energy.
- There are general concerns relating to the security as well as the confidentiality of such rooms as this is still a newer zone and if once the security is breached all the data can be lost at once as opposed to physical copies in which transferring of such data in one go is impossible.
- Sellers would generally want to restrict the buyer’s ability to transfer or copy the data but it becomes difficult.
- Some sellers or buyers are reluctant to change to this system due to security and privacy threat.
- Virtual Data Theft is a lot easier than physical theft as it can be done by sitting anywhere in the world at any time.
- Good Computer systems are required to handle such complex and large data, otherwise, it would cause problems in reading the data.
6.Competitive price- This is a buyer only disadvantage as they lose an edge which they had earlier due to geographical or financial restrictions on the seller to share the data which multiple companies or investors which is now removed.
VDRs are an affordable solution for the companies to reduce overhead costs, provide data in a secure and rapid mode but sometimes there is a risk of security and bloated data structures. But the advantages outweigh the disadvantages by huge margin and with finer development in the field of technology, it is the only way to go forward. The VDRs are the one and only future for these transactions.
- Seth Dua &Associates, Joint Ventures & Mergers and Acquisitions in India, 2011 Edition, page no.5.
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