Virtual Data Room (“VDR”) is established with the purpose to store, share documents and confidential information used in Merger & Acquisition (“M&A”). The due diligence process requires a large amount of information and data to be approachable and accessible. Currently, in response to the speed of globalization and modernization, virtual replace physical data rooms. The use of virtual data rooms helps buyers easily review and exchange documents and data (“information”) without physically moving to the location specified by the seller and save related costs such as for travel and accommodation. However, several risks might be preventing the buyers from joining the virtual data room services such as the structure complexity and schedule of operating, as well as cybersecurity in VDR management. Despite these risks, buyers still grasp the chance to approach potential M&A transactions by paying attention to the following issues in this article.
In M&A transactions, VDR is launched to accelerate and facilitate the innovation process of due diligence to become the most effective solution for parties. Indeed, VDR is a virtual place for the purpose of storing and sharing necessary documents and data for M&A transactions. Normally, the seller publishes on a VDR platform to share information to attract the potential buyer’s representative by providing instructions and regulations set by the seller. Also, a seller shall impose appropriate restrictions on the buyer’s access rights. In the process of creating virtual data room, sellers shall take notice of security, logical construction and organize data well.
Stages of information sharing
In capability of each stage in M&A Transactions, information is arranged step by step. Information is divided into several levels of accessibility for the buyers in order to guarantee high confidentiality of information for the seller. These are organized into the following stages:
- Stage 1 (optional): The buyers’ identification has not been justified.
The seller shall limit accessibility of the buyers by only providing potential information about the deal via sharing VDR room, except for confidential information or enterprise names.
- Stage 2: After the parties signing a Confidentiality Agreement, the seller shall disclose more information. The virtual data sharing room shall now extend the accessibility of documents and data to the merchant’s business, organizational model, and other basic information.
- Stage 3: After the buyers review these initial documents, in some cases the buyers issue a Letter of Consent or Memorandum to show their intention to proceed with the process of transaction.
- Stage 4: When entering the official appraisal stage, the seller shall open full accessibility of information for the buyer to consult and review all documents provided by the seller.
- Stage 5: When the parties have completed the appraisal phase and the transaction, sellers shall close the virtual data room and hand it over to the buyer.
Structure of the virtual data room in M&A
The storage of data, documents in virtual data room is secured safely in a due course which was applied by VDR’s provider. In M&A transactions, there are multiple steps in due diligence of finance, intellectual property, law, etc. Therefore, sellers are encouraged to arrange the documents effectively to improve management and facilitate access to save time. Ordinarily, virtual data room is structured as follows:
- General information of seller
- Economic information
- Tax information
- Marketing, Sales, and Customers information
- Technical information
- Intellectual Property information
- Labor information
- Agreements and commitments
- Legal, insurance and environment
- Other documents.
Regulation on using virtual data room
Seller along with the launch of sharing VDR is also encouraged to promulgate terms and conditions for the use of virtual data room. Specifically, the account and use conditions (also known as regulations) should include the following points:
- Relevant bases and definitions.
- Authorized access. It is highly noted that only identified users are listed in the confidential information commitment or agreement between the parties shall have access to the sharing virtual data room.
- Limitation of liability of the users with access.
- Security Agreement during process of virtual data room.
- Permissions which are preferentially requested when accessing to virtual data room under the condition of time and method interactions for those who have the rights to access to confidential information.
- Policies which are required with the aim to secure documents and information in data virtual rooms.
- Other relevant regulations.
The benefits of virtual data room in M&A transactions
A Virtual data room is a better option than a physical data room in terms of saving time and costs. This allows the seller to have more reasonable, effective, and protective information sharing strategy.
In addition, the creation of a virtual data room during the IPO or appraisal stage expands the opportunity for the seller to approach potential investors worldwide, thereby creating competitiveness among many investors to help the buyer get a better selling price. In addition, for parties in cross-border transactions, the establishment of a virtual data room helps both the seller and the buyer save time and facilitate sharing and exchanging information during the transaction process.
The seller organizes a unified, logical and fully detailed information operated according to specific regulations, contributing to strengthening the buyer’s trust in the seller. By building a virtual data room, documents and information are shared easily, securely, conveniently and quickly. This allows for greater, contributing to speeding up the appraisal process and helping the transaction to have a high probability of success than the other options.
The disadvantage of this option is that not all parties are familiar with this method. However, in our experience, this is not a major issue, and it can be fixed and overcome.
Method of creating virtual data room
Currently, sellers can choose from many methods to create virtual data room. However, each method has different advantages and disadvantages that need to be noted and considered before applying.
- Using cloud storage services has the advantages of being popular, easy to implement, fast and cost-effective. However, the parties must deal with risks in terms of security and limited control when there is a change. In fact, there have been a few cases of hacking and passwords leaked. In addition, accessibility can lead to share data without the seller’s permission. It should also be noted that the existing functionality of cloud storage services is limited when the parties process data.
- Using a dedicated virtual data room solution specifically built for M&A transactions, help sellers to structure data and information easily, meet security requirements and manage access from parties. Transaction managers (usually sellers) keep track of in detail what is happening during the validation process (frequency of viewing, identity of viewers, time of consultation of the document). However, using this solution is often costly and not as popular as a cloud storage service.
Thus, in M&A transactions, the preparation, provision and sharing of information is very important as this is the initial step for investors to access and conduct appraisal of information to make decisions whether to conduct transactions and transfer value. Therefore, businesses that are sellers conduct M&A transactions need to prepare necessary information and documents for the appraisal process deal. The construction of a virtual data room is very important to create a basis for appraisal as well as contribute to the success of the M&A deal. We recommend that the seller learn and use the virtual data room method in the validation phase. Meanwhile, the seller also needs to research, analyze, and apply the above related notes to optimize the M&A through the appropriate use of a virtual data room.