Business Law: Joel Furniss on the ‘grey area’ of the digital data room
- Credit: Archant
I recently acted for the sellers of a company and a question arose regarding the use of virtual data rooms.
Traditionally, in corporate transactions, the data room was exactly that – a room filled with documentation and information designed to entice and inform potential buyers. It provided an opportunity for sellers to disclose any ‘skeletons’, and enabled buyers to decide whether to pursue their targets and, crucially, how much to pay for them.
Inevitable technological developments have resulted in the decline of the physical data room in favour of an online version, with providers now offering increasingly advanced products designed to smooth and accelerate the due diligence and disclosure processes.
Naturally, the virtual data room has many advantages. These include: ease and speed of access; the ability to deal with multiple parties simultaneously yet confidentially; attracting bidders from further afield; and, of course, saving the equivalent of several rainforests in paper. It is also possible to track who has viewed which documents, which can be invaluable in the event of a future dispute or warranty claim.
This leads us to the principle of disclosure. As a buyer is confirmed and a deal progresses, a disclosure letter takes shape, setting out information which is inconsistent with the warranties being given by the seller in the main acquisition agreement. It will be updated and amended as the negotiations proceed. A disclosure letter features both general and specific disclosures. The former may include company accounts, statutory books etc., while the latter relate to particular problem areas. Both will be the subject of lawyerly negotiation.
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Disagreement surrounding the use of virtual data rooms often focuses on ‘fair’ disclosure. There is a tendency for sellers to deposit more and more information online then attempt to deem it all as disclosed using a general disclosure.
This tactic is typically rejected by buyers, who are concerned about the potential impact on future warranty claims. There appears to be a paradoxical trend for buyers to use the information held in virtual data rooms to evaluate a deal, yet insist that the same is not deemed as disclosed. Accordingly, the virtual data room currently sits in a grey area. If increased availability and volume of data corresponds with a more conservative view of what is deemed to be disclosed, virtual data rooms risk inhibiting the disclosure process rather than enhancing it.
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: : Joel Furniss is a solicitor at East Anglian law firm Ashton KCJ.