The process of selling (or acquiring) a company typically involves the seller providing a variety of detailed information about the target company to the buyer and its advisers in response to due diligence enquiries and for the purposes of making disclosures against warranties (usually given to the buyer at completion of a sale).
Sellers and their advisers will often use a 'data room' to facilitate the exchange of financial and legal information relating to the target company with prospective buyers and their advisers.
What is a data room?
A data room is a physical or online space set up by the seller to collate and store information about the target company and its business for the purposes of completing or rather satisfying the buyer's due diligence exercise. Physical data rooms – which are becoming increasingly uncommon – house hard copy documents in a room (normally in the offices of the sellers or their advisers) which is supervised by a representative of the seller (this would often be their solicitor). This contrasts with online data rooms – commonly referred to as virtual data rooms – which are made available through a secure internet site and act as a digital document repository.
Setting up and administering a data room
In the context of a share sale or asset sale, the responsibility for setting up and maintaining the data room will fall on the seller. As a starting point, sellers and their advisers should:
- consider the types of information that a well-advised buyer would normally request from a seller and anticipate the information they are likely to want to review;
- consider whether any information is confidential in nature and how to treat information that falls into this category. One possible solution would be to withhold certain documents until the transaction reaches a more advanced stage. This approach is often used when a buyer is a close competitor of the seller, and the seller wishes to hold back documents that contain commercially sensitive information, such as customer names or pricing details. Alternative solutions would be to redact commercially sensitive or personal information from the documents before they are made available to the prospective buyer in the data room or to restrict users' ability to copy, download or print any commercially sensitive documents included in the data room;
- draw up an index of documents to be included in the data room and adopt an appropriate folder structure and numbering system; and
- populate the data room with the relevant documents, establish data room user groups and their security settings and send the data room login details to authorised representatives of the buyer.
What information should be included in the data room?
The amount and type of information included in the data room will vary depending on the size and nature of the transaction. To streamline the due diligence process, it is important for sellers and their advisers to establish a balanced data room. To reduce the amount of time spent on unnecessary review, the seller will want to limit the size of the data room (where appropriate) and exclude immaterial documents. However, an underpopulated data room is likely to result in requests by the buyer for information that should have been provided at the outset of the due diligence process.
Typically, all material information about the business of the target company will need to be included in the data room, such as:
- material contracts (including those between the target company and key customers and suppliers);
- employment information (including employment contracts, settlement agreements, bonus arrangements and details of any pension arrangements operated by the target company);
- intellectual property information (including details of licenced intellectual property, trademarks or patents);
- property information (including title deeds and lease documentation);
- litigation and claims information (including details of current, pending or threatened litigation);
- financial and tax information (such annual financial statements, management accounts, cash flow forecasts and tax returns); and
- increasingly, buyers are looking to the target's environmental, social and governance credentials or track records.
Key takeaways
Data rooms are an essential part of the due diligence process which, if administered correctly, should encourage collaboration and communication between the buyer and the seller by facilitating the exchange of confidential information in a secure manner.
If you require further advice on any of the issues raised in this article, please get in touch with your usual Brodies contact or one of the contacts listed below who will be happy to assist.
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