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Virtual data room in M&A transactions

Virtual data room in M&A transactions
Virtual data room in M&A transactions

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 data room replaces physical data room. The use of virtual data room helps buyers easily review and exchange documents and data (“information”) without physically moving to the location specified by the seller and therefore, save related costs such as travel and accommodation costs. However, several risks might be the reasons preventing the buyers from joining the virtual data room services such as the structure complexity and schedule of operating, cybersecurity in VDR management. Despite these risks, the buyers still grasp the chance to approach potential M&A transactions by paying attention to the following issues in this article.

In the M&A transactions, in an effort to accelerate and facilitate the innovation process of due diligence, VDR is launched 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 in M&A transactions. Normally, the seller publishes on a VDR platform to share information in order to attract the potential buyer’s representative by providing instructions and regulations set by the seller. Also, seller shall impose appropriate restrictions on the buyer’s access rights. In the process of creating virtual data room, the sellers shall take notice of security, logical construction and well-organized of data.

Stages of information sharing

In capability of each stage in M&A Transactions, information is arranged step by step. The information is divided into several levels of accessibility for the buyers in order to guarantee the highly confidential information of seller.

  • 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 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, the sellers are encouraged to arrange the documents in an effective way to improve management and facilitate access in order 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 time and costs savings. 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 in order 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, and it contributes to strengthen the buyer’s trust in the seller. By building a virtual data room, documents and information are shared easily, securely, conveniently and quickly, 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 have to 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 in order to optimize the M&A through the appropriate use of a virtual data room.

The article is based on applicable law at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable law has changed and the specific case that the reader wishes to apply. Therefore, the article is only for reference.