This is the second part in a series of seven blogs that outlines the process of the sale of a company - before, during and after the negotiation and signing of the share sale and purchase agreement.
In this Part 2 of the blog series, we focus on the importance of data rooms and the role they play in streamlining the due diligence process. Follow the links to read Part 1: Confidentiality Agreements and Part 3: The SPA and Ancillary Documents.
What does "due diligence" involve?
When buying or selling a private company, the seller will typically provide the buyer with key documents and information relevant to the target company. This allows the buyer and it's legal and financial advisors to undertake "due diligence" – a comprehensive review of legal, financial and business information about the company – which is essential to enable the buyer to identify and analyse risks and prospects in relation to the proposed transaction, make informed decisions and negotiate key deal terms with the seller. To facilitate the due diligence process, data rooms are often used to enable efficient sharing of information between the parties.
What is a data room?
A data room can either be physical or virtual, but it will always be some sort of secure space where information and documents relating to the target company can be stored, organised, and shared among the parties and their legal and financial advisors. Nowadays, virtual data rooms are much more common due to convenience and accessibility. A virtual data room is simply a secure internet website (as opposed to a physical room under lock and key) which allows authorised users to access relevant documentation.
Setting up a data room:
Who: The seller (usually via their lawyers) will typically be the one to set up and administer the data room because they will be providing access to information about their company. This allows the seller to control who has access to the data site (whether in whole or certain sections only) by sending a secure weblink invitation to identified persons only. It is important to ensure that anyone having access to the data room is first required to agree to user terms and conditions, including confidentiality undertakings.
What: Generally, the data room set up by the seller is populated with documents and information in response to due diligence questionnaires issued by the buyer and their advisors. Before uploading any information to the data room the seller should be mindful of commercially sensitive or confidential information (or information which should not be shared given data protection restrictions) which may require to be redacted or withheld until a later stage of the transaction process. It is helpful to advisors who are to review the information if documentation is uploaded into named folders with the same types of information all together and an index of documents indicating what is in the data room and any subsequent changes/additions to the data room.
The types of information which might be uploaded will vary depending on the specific transaction, but common documents include:
- Company documents: incorporation and corporate governance documentation such as articles of association and shareholder agreements
- Material contracts: including those between the target company and key customers and suppliers
- Employment: employment contracts, settlement agreements, bonus arrangements, details of any pension arrangements operated by the target company and details of any employment related issues or disputes
- Intellectual property: details of registered and licensed intellectual property e.g. trademarks and patents
- Real estate: title deeds and lease documentation
- Litigation: details of any current, pending or threatened litigation
- Financial and tax: annual and management accounts, cash flow forecasts and tax returns
- ESG: increasingly, buyers are thinking about the environmental, social and governance credentials of companies.
Why:
- Accessibility: a virtual data room is an easily accessible space whereby parties can review information about the target company instantaneously. It can also save time and resources, as it allows a large volume of documents to be uploaded electronically (i.e. documents do not have to be printed and copied for potential buyers and there is no requirement for the seller to monitor access to physical data rooms).
- Confidentiality and security: maintaining confidentiality is vital in the sale of a company. Virtual data rooms offer a secure environment with personalised access permissions and encryption features so that sensitive business information can be protected and only authorised users can access the documents.
- Organisation: virtual data rooms allow for the creation of a clear and systematic folder structure of a vast number of documents, which should streamline the due diligence process and make it easy for buyers to review the company information.
When: Setting up a data room takes time and preparation. As such, as a seller it is a good idea to try and plan ahead and pull together due diligence information as early as possible, so that you are in good shape when the buyer is ready to commence their investigations of the company.
Key takeaways
In company share sales, data rooms play a crucial role in enabling an efficient exchange of information between the seller and buyer (and their respective advisors). By providing a secure and efficient space for information sharing, they allow the parties to undertake thorough investigations and reach informed decisions throughout the due diligence process.
How Brodies can help
If you would like any advice on the issues raised in this blog, please get in touch with one of Brodies Corporate Team below or your usual Brodies contact who will be happy to assist.
View our downloadable guide, "Taking the blinkers off when selling your business", by Neil Ritchie, Director of Personal Tax, on what to watch out for from a personal perspective when selling your business.