Law firms are increasingly deploying their own Internet-based virtual data rooms (VDRs), as part of their basic document management solution. This is a good idea in theory because it keeps confidential documentation in-house, leading to a sense of greater control. It also expands the use of the VDRs beyond the relatively small number of service providers that operate facilities. Often, the firms use white-label VDR technology supplied by a vendor.
Virtual data rooms can be very helpful for lawyers participating in M&A transactions. The role of corporate law firms’ M&A departments in corporate transactions (M&A, IPOs, refinancing) has changed dramatically in the last years with lawyers now getting involved in every aspect of the transaction. From overseeing the due diligence process through to guiding their clients in the achievement of their business objectives, the work requires secure, 24/7 access to confidential documentation for all parties in the transaction.
Virtual data rooms streamline this process considerably, making it possible to allow access and file sharing across verticals within both the client’s organization and the law firm. The facilities also enable private communication between parties that isn’t subject to unsecured networks and email.
Increased M&A LitigationThe effect of the big economic downturn that we have experienced in the last few years is now being reflected in an increased number of lawsuits and litigation processes related to many M&A transactions. For example, according to a Reuters article, the number of M&A related court cases in the UK has multiplied X 6 in the last year. This only includes the number of cases that are actually taken to court, many are settled before that.
Sellers are suing buyers, buyers are suing sellers, investors are suing shareholders and management..
We believe that the main driver by this increase is that when things are tough, mistakes and disagreements grow stronger. As Warren Buffet puts it, when the tide goes down, you discover who has been swimming naked. However, from our experience, we also believe that a good dataroom can help sellers, buyers and investors to significant reduce the risk and cost of M&A litigation.
Dataroom Impact on Litigation
Different aspects of a dataroom can reduce the risk and impact of M&A litigation:
- Document organization. Anyone that has been involved in a M&A dispute will testify of the importance of a clear document structure with a solid numbering system. We strongly believe that the best way to organize a data room is by keeping the folder and subfolder structure that we are all so used to.
- Accountability. A good virtual data room can certify that the documents shared with investors have not be changed and that they have been available during a period of time. Moreover, some of the best datarooms offer auditing and reporting capabilities that provide detailed information and audit trail about all the documents and users in a virtual data room.
- Data Room as eBible. Historically, when a transaction closes, the participants receive a data room CD/DVD with all the documentation related to the deal including audits and reports. Although DVDs are useful, an online Deal Bible solution is much more effective as it provides assurances that the data has not been changed and cannot be lost.