An “online data room” or “virtual data room” is an online warehouse of key documents about a company. Online data rooms are frequently used in connection with M&A transactions, to facilitate the extensive due diligence process typically undertaken by buyers.
The online data room is populated with the selling company’s important documents: contracts, intellectual property information, employee information, financial statements, capitalization table, and much more. The online data room allows the selling company to provide valuable information in a controlled manner and in a way to help preserve confidentiality. The online data room avoids the need to have a physical data room where the documents are kept, and helps expedite an M&A process.
The online data room can be established to allow access to all documents or only to a subset of documents, and only to pre-approved individuals. A number of online data rooms allow the seller or its investment bankers to review who has been in the data room, how often that party has been in the data room, and the dates of entry into the data room.
Access to the online data room is made via the Internet, with a secure user identification and a protected password.
The online data room provides the benefit of cost savings over traditional physical data rooms, easy access to documents when needed, a search function, easy updating and adding of new documents, and security of sensitive information.
Vendors of Online Data Rooms
There are many vendors of online data rooms, including Intralinks, Merrill Corp., Ansarada, Firmex, Box, RR Donnelly, and ShareFile. Most data room vendors charge based on the amount of storage used and the length of time that the data room will be functioning. Some law firms with sophisticated M&A practices also provide a private online data room for their clients.
Tips for Preparing the Online Data Room
Preparation of the online data room is extremely important for an M&A transaction. Here are some tips for preparing it:
- The management team of the selling company must understand that a complete online data room is essential to a successful M&A transaction. Knowledgeable key employees have to be given the responsibility to collect the needed documents.
- The preparation of the data room is very time consuming and must be started as soon as possible in the M&A process. Failure to have a complete data room ready will slow up or potentially kill the transaction.
- The online data room should be prepared in conjunction with preparation of the selling company’s disclosure schedules attached to the acquisition agreement, as complete and accurate disclosure schedules are key to getting an acquisition completed.
Problems in Preparing the Online Data Room
Due diligence investigations by buyers frequently find problems in the seller’s historical documentation process, including some or all of the following problems that can show up when preparing the online data room:
- Contracts not signed by both parties
- Contracts that have been amended but without the amendment terms signed
- 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
- Missing stock purchase agreements and related investor rights documents
Deficiencies of this kind may be so important to a buyer that the buyer will require certain matters to be remedied as a condition to closing. That can sometimes be problematic, such as instances where a buyer insists that ex-employees be located and required to sign invention assignment agreements.
What Should Be in the Online Data Room?
Typically, everything material about the business of the selling company will need to be included in the online data room, including key contracts, intellectual property information, employee information, financial statements, and much more. Below is a comprehensive list that sets forth the types of information that may need to be included in an online data room. (See also 20 Key Due Diligence Activities in an M&A Transaction.)
Note that this is a sample list and additional documents may be appropriate in the context of a particular company or transaction. Do not include any attorney-client privileged documents into the data room. The information here should generally apply to the company and each of its subsidiaries and predecessors. Also, consider whether any information that is highly confidential (e.g., customer pricing) should be redacted. Consider the sensitivity of any term sheets or letters of intent from potential acquirers.