Uses and Implications of Virtual Data Room Features for Corporate Real Estate Due Diligence

Corporate Real Estate Journal Volume 5 Number 1

Uses and implications of virtual data room features for corporate real estate due diligence

Kevin Timson Received: 22nd May, 2015 RR Donnelley Global Capital Markets, 225 Greenwich Street, New York, NY 10007, USA E-mail: [email protected]

Kevin Timson is an attorney admitted to prac- willing to share confidential documents due to the tise law in New York state. Mr Timson is Director significant security tools that VDRs provide. of Business Development at RR Donnelley, a Ultimately, the analysis facilitated by virtual data leading provider of virtual data room solutions. rooms helps acquirers by providing more data to For the past nine years, Mr Timson has been clarify and validate key deal components of real responsible for training and educating clients property transactions, as expressed in the represen- using data rooms at law firms, investment banks, tations and warranties of a purchase agreement, Fortune 250 corporations and private equity title policies and property environmental reports. firms. Mr Timson focuses this training on the security and workflow issues of data rooms Keywords: data room, virtual data room related to mergers, acquisitions, initial public (VDR), corporate real estate, merger, offerings, bankruptcy and private placements. acquisition Additionally, Mr Timson has more than 20 years of strategic planning and business development experience from his work at RR Donnelley, MTA WHAT IS A VIRTUAL DATA ROOM? NYC Transit and the US National Science Virtual data rooms (VDRs) have been com- Foundation. Mr Timson received a juris doctor monly used in corporate asset transactions for degree from New York Law School, a master of the past ten years.1 A VDR is a document public administration degree from Syracuse repository stored in an off-site computer University and a bachelor of arts degree from server that enables transacting parties to Rice University. exchange documents with each other by using an internet browser to upload and Abstract download documents.2 Far from being a Virtual data rooms (VDRs) can significantly consumer-focused file-sharing tool, the improve the due diligence process for sellers and VDR marries the security technology needed acquirers of corporate real estate. A seller can easily to exchange sensitive documents between and confidentially collect and organise sensitive transacting parties with the ease of use and property documents located anywhere in the seller’s accessibility needed to organise thousands of organisation into a central online repository acces- document pages online, enabling hundreds of sible to acquirers around the world. Such online reviewers to access these pages on a custom- access brings in more interested acquirers to review ised, need-to-know basis. a property or portfolio because acquirers initially It is easier to describe a VDR’s advan- Corporate Real Estate Journal can rely less on site visits and analyse more prop- tages by examining the physical data room it Vol. 5 No. 1, pp. 21–33 © Henry Stewart Publications, erty documents in less time. Sellers become more replaced. Before VDRs were introduced, 2043–9148

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prospective acquirers of corporate assets wherever they have an internet connection.6 travelled to a ‘data room’ at a specific geo- When corporate sellers scan their hardcopy graphic location, typically close to where legal, financial and operating files and host the seller or the seller’s outside counsel was them in an online repository, it becomes located.3 The data room itself was a confer- even easier for acquirers to access just the ence room full of boxes of hardcopy legal files they need to assess the attractiveness of and financial documents.4 Typically, some- a target company or asset. Acquirers also one from the seller’s organisation or its advi- benefit because they can access documents sors had to be in the conference room to let without revealing their identity to other interested parties come in, one party at a bidders. time, to review these files. This arrangement presented several challenges that limited the effectiveness of any due diligence. An HOW DO VDRS IMPACT CORPORATE acquirer often incurred significant expense DUE DILIGENCE? from sending a ‘deal team’ of several indi- VDRs provide several advantages for both viduals to a remote location just to view files acquirers and sellers of corporate assets (see related to the deal.5 Also, this visit might last Figure 1); however, to understand the rele- only a few hours because other interested vance of these advantages, it is important to parties wanted to review these documents discuss the specific due diligence issues that within the same narrow timeframe. corporate acquirers and sellers face when Furthermore, reviewers often could not get getting involved in a corporate sale, merger copies of the documents because the seller or similar transaction. was concerned about keeping these documents confidential. In such a situation, acquirers had to rely solely upon the notes VDR SECURITY PROVIDES SELLERS they took during their session. With a phys- AND THEIR ATTORNEYS WITH ical data room, sellers might not have offered GREATER SAFEGUARDS TO SECURE relevant documents that were scattered in CONFIDENTIAL CORPORATE DATA remote or unknown locations because of DURING A TRANSACTION the difficulty of collecting these documents Data security is critical to corporations with little advance notice. Even if the docu- using data rooms because of the conse- ments were eventually found, acquirers had quences of any enterprise data breach.7 For little opportunity to make subsequent trips example, these breaches can subject com back to the physical data room. These limi- panies to potential suits by customers who tations were also detrimental to a seller, who entrust their credit card numbers, social found fewer acquirers willing to pay higher security numbers and other personal infor- prices for an asset when many of their con- mation with these companies.8 Likewise, cerns were left unanswered by the docu- sellers need to mitigate the risks associated ments in the physical data room. with sharing confidential information with By comparison, parties now can avoid competitors during a property sale. When a the inconveniences of a physical data room company puts property up for sale, it carries by using a VDR. Sellers can quickly collect the likelihood that acquirers who are direct legal and financial documents from multiple competitors may gain access to the prop sources and put them in an online docu- erty’s lease terms, rent rolls, maintenance ment repository. Competing acquirers in a costs and other confidential information. corporate asset sale can simultaneously While such disclosure is a necessary part of access just the documents they need from due diligence, sellers first must seek to gauge

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Figure 1 Virtual data room advantages

how serious a competitor’s interest is before detail the issue of protecting client informa- disclosing information that might be used tion in a cloud-computing environment.13 against the company if that competitor does not become the winning bidder in the trans- Potential VDR solutions action. Correspondingly, outside counsel VDRs offer corporations the opportunity to must be prepared to take greater steps to leverage the efficiencies of cloud computing secure client information during transac- while maintaining a high level of security to tions because the threat of corporate espio- keep documents confidential during a trans- nage occurring on law firm IT systems has action. VDRs offer several sophisticated tools grown significantly over the past few years.9 to restrict and monitor unauthorised access to For example, unidentified hackers compro- these documents: mised the computer networks of seven different law firms in 2010 in an attempt to •• password-protected access to the files; disrupt BHP Billiton’s US$40bn acquisition •• advanced encryption standards to store offer to Potash Corporation.10 The threat of and transmit files; cyber hacking is not limited to large transac- •• permissioning tools that allow sellers to tions, however; all transactional attorneys grant individual acquirers with progres- face some risk of client data breaches with sively greater access to property docu- the use of cloud computing growing among ments as the seriousness of each acquirer’s businesses and law firms.11 The consequence bid is established more clearly; of these breaches is significant because attor- •• ‘watermarks’ attached to each page listing neys have obligations to protect confidential the user, project name and date/time client information under US state profes- when the user accessed the document; sional responsibility rules.12 In several states, •• auditable records of which users have these rules are beginning to address in more accessed documents, with specifics related to

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time/date, pages read, duration of viewing, •• the material information within specific internet protocol (IP) address and whether documents may be limited to just a few documents were printed or downloaded. pages in a document with hundreds of pages. All of the above features are commonly incor- porated into an overall set of safeguards outlined Acquirers often have a difficult time review- by one of several industry-wide security stan- ing documents because they are not organised dards used by VDR providers. Certification via in a manner favourable to an acquirer’s review. AT 101 or other security standards is a particu- Sellers will set up files in a data room using a larly important feature of data rooms for sellers set index (ie a set of folders and sub-folders trying to limit their liability should a data breach organised by topic); however, the acquirer occur within a data room. Security standards may have a hard time navigating through the can become a way to demonstrate that a com- data room documents because the index may pany has taken reasonable care with customer have been organised for a prior, unrelated data despite the breach occurring. For instance, project. The seller also may have organised AT 101 is a standard by which accountants can the index to answer the information requests attest to the document controls at firms using of multiple bidders, producing an index that is cloud-computing services. These controls not optimised for any one bidder to review. In demonstrate a service’s commitment to data addition, acquirers may miss material infor- security, data integrity, client confidentiality and mation in documents that have been uploaded system availability.14 A VDR vendor’s security well after the acquirer team has started its precautions are tested by expert third-party review. This might occur because sellers have organisations (including ‘white-hat’ hacker uploaded documents as soon as they have organisations and large accounting firms) that located them to expedite due diligence. It also certify a VDR platform using internationally might occur when documents are uploaded recognised standards like AT 101 to ensure data in response to questions from other acquirer security and data integrity. As the threat of cor- teams and these questions are not disclosed to porate data breaches grows, certification pro- all bidders accessing the VDR. vided by cloud-based computer services should All of the above-mentioned challenges are only grow in importance. magnified when a transaction includes multiple properties where each property might have different documents reviewed by differ- VDRS HELP ACQUIRERS BETTER ent subject-matter experts on behalf of the LOCATE RELEVANT DOCUMENTS acquirer. Each property might have: THAT ADDRESS VALUATION CONCERNS ABOUT PROPERTIES •• title documents; For acquirers looking at documents in a •• surveys; VDR, finding information that is most rele- •• tenant leases; vant to their due diligence on properties is •• Phase I environmental assessments; often like looking for a needle in a haystack. •• insurance policies; This is because: •• operating cost data; •• maintenance and repair records; •• sellers can err on the side of providing too •• tax assessments; many documents to review; •• rent roll data. •• documents that are most material from an acquirer’s perspective are often inter- While representations and warranties serve spersed with less material documents; an important purpose in reducing transac-

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tion risk, that risk is never completely elimi- VDR search tools enable users to limit searches nated because the success of an acquirer’s by file type, language and date uploaded; users purchase is still dependent upon a multitude can exclude terms as well. In some cases, of facts and circumstances not necessarily search tools will look for synonyms or similar disclosed in the purchase agreement.15 words (eg returning documents using ‘asset’ Acquirers can overlook important informa- when a user searches for ‘assets’ or including tion disclosed by the seller during due dili- ‘turnover’ when searching for ‘revenue’). Key gence because the tremendous volume of terms can be highlighted on the pages where disclosed documents makes a thorough they are found, leading reviewers past hun- review by the acquirer all but impossible, dreds of other pages that might not be rele- especially when acquirers have a limited time vant. As a result of these features, reviewers to review the documents and make a bid. rely less on how documents are organised in An acquirer could easily overlook informa- an index of folders. Data room search tools can tion, fully disclosed by the seller, that con- help to locate detailed records on property firms or conflicts with a representation or conditions that impact purchaser liability. warranty made in the purchase agreement. These records include evidence of contamina- Accordingly, acquirers might take on unan- tion, title limitations, warranties on building ticipated costs when overlooking such construction and repair work, and mainten important property data. This could occur ance records. For example, VDR search tools particularly with documents like leases, envi- allow an acquirer to leverage the expertise of ronmental reports and title documents. For environmental consultants and outside counsel example, acquirers incur significant post- experienced in regulatory matters who can transaction costs when: search for key text within each document that might flag property concerns. Information •• the acquirer has purchased property but that may raise red flags regarding environmen- has overlooked remediation reports, tal liability includes: agency correspondence and other documents that might help to determine the •• standard industrial classification (SIC) data environmental liability of a property;16 indicating the current or former presence •• title insurers exclude coverage to a given of particular types of operations that are property if the title insurer can cite docu- more likely to trigger greater environ- ments disclosed in the data room to dem- mental liability;18 onstrate that the acquirer had actual •• descriptions of groundwater monitoring knowledge of the encumbrance;17 wells installed at a given property that may •• the acquirer cannot immediately occupy a indicate the type of hazardous substances building it purchased due to a tenancy being monitored;19 that was presumed to be ended by the •• site plans and blueprints for areas within a acquisition not ending because the terms property that may have been used previ- of the lease did not expire with a change ously for hazardous waste storage;20 in control of the landlord. •• regulatory compliance records maintained as a requirement for state or federal regu- Potential VDR solutions latory agencies;21 Document text search •• contracts with off-site disposal facilities VDRs have several technologies that allow that indicate potential on-site generation acquirers to search for just the documents they of hazardous waste;22 need in a more efficient manner by searching •• correspondence with third parties regard- for keywords in the text of every document. ing tort claims;23

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•• the dates of older Phase I reports, which in a way that optimises their review time. may indicate whether a property is in Additionally, acquirers can review a set of compliance with current or evolving state properties from multiple angles, where each and federal regulations.24 angle may highlight a different set of risks. For instance, the acquirer can organise docu- Regarding title limitations for properties in ments by subject matter across different prop- the USA or other jurisdictions where title erties so that experts can efficiently access the insurance is obtained, VDR search tools can documents relevant to their expertise. So, help acquirers of a property to locate docu- with 50 properties for sale: ments referencing property encumbrances not recorded with local authorities that could •• a financial analyst could analyse the profit limit the property’s title insurance coverage. and loss statements of all 50 properties; For instance, a search of keywords would •• an environmental engineer could look at look into the text of property surveys, utility all relevant environmental testing reports maps and building plans to help acquirers across all the properties; determine whether boilerplate language in a •• an attorney could review the language in title insurance policy addressed specific every lease across all the properties. encumbrances referenced in these files. In contrast, the acquirer also could organise Document alerts documents by property to highlight conflict- In addition to the search function, other tools ing information between all the documents highlight recently uploaded documents by associated with the property. For instance, alerting acquirers via e-mail or displaying only surveys and title reports accessible to outside those documents that were recently added or counsel and other consultants may provide have not yet been read by the reviewer. These the confirmation needed by the acquirer that features are particularly important when doc- a seller’s representations on property egress ument distribution comes in stages and and ingress are adequate.25 acquirers want to expedite their reviews by looking at documents as soon as they are An integrated set of due diligence uploaded. These features also encourage workflow tools acquirers to request follow-up documents The tools cited above and others can combine because of how easy it is to know when docu- to produce a more efficient workflow when ments have been added to the data room. acquirers review property documents. For instance, if a seller of a corporate entity Custom views included several hundred office lease interests VDRs allow acquirers to build custom views in the sale and warranted in the purchase into a data room to organise documents in a agreement that these leases were assignable to way that best facilitates the acquirer’s review. the acquirer, a reviewer could search for spe- For instance, the acquirer may organise doc- cific keywords to help better locate assignment uments both by subject matter and by specific provisions in each lease. The reviewer then properties. Acquirers can drag and drop files could tag these documents with comments across the data room index into a virtual using a data room’s internal note-taking sys- folder that they can easily reference to review tems, which are typically standalone notes just the documents they need to see. Acquirers appended to the document in the VDR’s also can bulk download the entire set of files index accessed in a separate window later for for which they were given access so that they review. Next, the reviewer could segregate rel- can organise the entire document set offline evant documents into a customised view

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within the data room for later review and •• whether and when acquirers were alerted retrieval. Reviewers then could submit to the to new or updated documents; data room’s question and answer (Q&A) mod- •• what tools acquirers had (eg search, cus- ule any questions clarifying an assignment tom views etc) to access these documents. clause’s applicability. Q&A modules allow reviewers to confidentially transfer questions to data room administrators and documents in VDR PERMISSIONING TOOLS HELP the data room. In most VDRs, these Q&As SELLERS AND ACQUIRERS can be exchanged securely within the VDR. DISTRIBUTE DUE DILIGENCE FILES The VDR administrator gets a complete ON A ‘NEED TO KNOW’ BASIS record of all questions posed and answers given If a seller provides too little information, within the VDR, including who asked the bidders may walk away from the deal or, question, what document or folder it related worse, sue the seller post-transaction for not to, and when the question was asked and disclosing material information. If a seller answered. provides too much information, the seller The Q&A module provides a confidential, unnecessarily discloses confidential company auditable list of questions submitted by information to an outside party. This is par- reviewers and the answers posted by the ticularly troubling when competitors of a seller. These questions might even lead to seller make bids on the asset or company further disclosures.26 A seller could expedite being sold. In addition, acquirers might want further disclosure by providing upload rights to restrict documents accessed by their to selected folders for whoever has the related experts and consultants. This is because documents within its organisation. This indi- acquirers might want to balance having vidual then could upload these documents enough people to review an opportunity quickly from wherever they are, using a web with keeping the deal team small enough for browser and internet connection. This confidentiality reasons. Limiting the deal upload then may trigger an e-mail alert to the team to a few individuals protects the confi- acquirer’s team to locate the new documents dentiality of the project, but also limits how and begin the review process anew. much information the team can effectively review. This is especially true when team Greater seller assurance that acquirers members lack the requisite expertise to have reasonable access to documents examine certain documents. From a seller’s perspective, VDRs can document that the seller has provided all acquirers Potential VDR solution for sellers with material documents and the tools to get VDR permissioning tools allow sellers to to those documents. Sellers could effectively control exactly what information is provided counter any unsuccessful bidder’s claim of to each bidding team. Thus, sellers can grant difficulty in accessing material documents disclosure on a ‘need to know’ basis while using detailed reports demonstrating: demonstrating a good faith effort to disclose the information requested by bidders. •• what documents were provided to an Additionally, sellers can organise each acquirer acquirer; team into sub-groups with different access •• when the acquirer was given access; rights to specific folders and documents. •• whether and when acquirers accessed These access rights may or may not overlap these documents; between groups. A seller will often limit dis- •• whether acquirers were given view, print closure to a specific deal team based on what or save capabilities for specific documents; information that team has requested through

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the due diligence request list which they have VDRS ACCELERATE DOCUMENT provided to a seller. DISTRIBUTION ACROSS MULTIPLE GEOGRAPHIC AREAS Potential VDR solution for acquirers The geographical distance between parties has Using a VDR, an acquirer can leverage these been an historical challenge to ‘getting deals permissioning distinctions within their team done’. In the not so distant past, exchanging when bringing in experts from outside of the information between transacting parties core deal team. Experts can be placed in involved the use of not only physical data groups separate from the acquirer’s main deal rooms but the exchange of information by team and given access to specific files in mail, e-mail and extended conference calls. selected folders. For instance, if a data room Each of these methods added time and cost for contains folders on 20 properties and the deal any bidder looking at the opportunity, eg was team wants an outside consultant to evaluate the opportunity potentially worth the cost of only five properties, the seller can parse out sending a 10–20-person team to a distant loca- access to the consultant for the files on just tion? If not, acquirers could have the docu- those five properties. Experts could then get ments sent to their offices, but that added time print, download and search rights from the and cost as well. For example, before they seller as the acquirer progresses to additional could review the first document, an acquirer’s stages in a negotiation. For example, an deal team might have to spend money ship- appraiser may have expertise based on certain ping hard drives full of files by a bonded cou- types of properties or certain geographic areas, rier. The team would then have to spend time so limiting their document access to relevant organising those files on a local computer properties would support a seller’s desire to server in a way that made it easy for multiple provide access on a need-to-know basis. This team members to review them. Only then role-based permissioning can apply across sev- could an acquirer’s deal team get down to the eral foreseeable scenarios for acquirers. An essential task of reviewing documents for due acquirer could provide an environmental diligence. With all these costs, acquirer teams engineering firm with access only to environ- often had to ask whether an opportunity was mental documents in the data room that worth the cost just to review the associated related to a specific set of properties. due diligence documents. This necessary cal- Additionally, a UK-based acquirer looking to culus by acquirers ultimately meant that sellers purchase several US and European properties looking to get more bidders interested in an could provide a US accounting firm with asset sale were often limited to parties local to access only to tax documents for the US their region or those with the financial where- properties. Furthermore, valuation experts withal to access the due diligence documents. hired by the acquirer in the USA and Europe could get access only to diligence files on the Potential VDR solution for acquirers specific properties they are reviewing. In all of With the growth of internet technology these scenarios, the risk of unauthorised commonly known as ‘software as a service’, access to confidential documents is mitigated sellers and acquirers can access due diligence because these outside experts would have documents without expensive travel and their access limited to just the confidential without re-configuring hundreds of docu- documents they must review. Most impor- ments onto a local shared server for their tantly, this access would occur regardless of review team. As long as the members of an how the documents are actually organised in acquirer deal team have an internet connec- the VDR. tion, they can access documents right away.

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VDRs have grown in sophistication so that, the VDR and what documents they have no matter what the browser or operating sys- accessed. For example, sellers can bench- tem, reviewers can easily view, print or mark a bidder’s interest relative to other bid- download documents to review an opportu- ders by noting: nity in real time. VDRs further accelerate document access because most VDRs require •• How many individuals from the bidder’s little or no additional software to download team have entered the room? locally onto a user’s PC. Additionally, access •• How many documents have these indi- commonly extends beyond PCs because viduals read and not read? many VDRs offer document access on •• What properties did they review the most, smartphones and tablet devices. With these based on their access to specific folders? advancements in internet-based access, the •• When did these individuals read the doc- cost of document access for acquirers is sig- uments — as soon as they were uploaded nificantly reduced. It does not matter or much later? whether the acquirer is looking at real estate •• Who accessed these documents — ie locally or halfway around the world.27 For what did members from the bidder’s instance, an acquirer in Asia can do an initial executive team review? review of properties in North America just as easily as for properties in the acquirer’s own region. Parties that might not otherwise VDR UPLOAD TOOLS HELP SELLERS travel to a site to pursue a remote deal can AND ACQUIRERS GET THE BEST better evaluate an opportunity by first PRICE FOR A PROPERTY BY remotely viewing maps, rent rolls, labour FACILITATING A QUICKER DUE contracts and other files. Such documents DILIGENCE REVIEW provide greater detail on a prospective pur- No matter what the transaction, acquirers chase to sufficiently inform a ‘go/no go’ and sellers of corporate real estate strive to decision on whether to travel to the property perform due diligence quickly to get the best for further review. price for a property. Sellers often want to dis- pose of properties quickly to leverage greater Potential VDR solution for sellers acquirer demand due to favourable real estate On the other side of a deal, the easier access market conditions. Sellers also may want to provided by VDRs can help sellers to get sell a property when favourable financing higher prices for their properties. A seller conditions encourage more parties to bid on can attract more interested acquirers from a property. Additionally, a seller may want to across the world. More parties reviewing expedite an asset sale to apply the proceeds to these documents can lead to more bids and other parts of their business that are currently more bids can lead to higher prices for a struggling. Correspondingly, a bidder on given property. VDRs help to boost final corporate real estate may need to make a prices for sellers in other ways too, especially quick decision on a property to get a favour- when more parties are reviewing an oppor- able price. A bidder also may want to pre- tunity. The VDR acts as a screening tool to empt competitors making bids on the related help sellers determine which bidders are asset. Where a property may have interest more serious and what about a property may from multiple bidders, an acquirer may not be most attractive to bidders. A seller can use get a chance to extend the amount of time VDR reports to help to gauge the interest of that it has to perform its due diligence. This any given bidder. These reports detail which is because other bidders may try to act quickly individuals on a bidder’s team have gone into to make the seller an offer that ‘locks up’ the

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property to the exclusion of other bidders. and distribute these documents more quickly Also, bidders may see operating or financial before this vetting helps to start the due dili- synergies with other assets for sale by other gence phase of a transaction much sooner. sellers. Thus, when under such pressure to act quickly, any additional time savings that the data room provides to an acquirer become VDR FILE MANAGEMENT TOOLS even more valuable. Acquirers and sellers will ENABLE ACQUIRER ACCESS TO have a difficult time expediting due diligence, OVERSIZED FILES THAT MIGHT however, when the logistics of getting mate- OTHERWISE NOT BE SHARED WITH rial documents into a centralised location are ACQUIRERS difficult. Files might be spread out across dif- When corporate real estate is put up for sale, ferent individuals or departments within the there may be oversized files describing the seller’s organisation. Files also might be stored property, including scanned maps, surveys, across a patchwork of different IT networks architectural drawings, mechanical drawings, retained from the seller’s prior acquisitions. photographs and even videos of property Often, advisors outside the seller’s computer ‘walkthroughs’. These files provide acquirers network may have additional material docu- with unique details about the property and ments. The task of collecting these files from help sellers to market the property’s attrac- such multiple sources significantly increases tiveness relative to similar properties. Each of the due diligence period for any given trans- these files often can be several gigabytes in action. In the absence of better alternatives, size. The problem with these files revolves individuals with important documents would around the fact that many corporate IT net- have to e-mail them to one central adminis- works restrict the size of files which can be trator, who would then place these files into received by e-mail. The restriction is often a central online place for the acquirer to deemed necessary to minimise the risk that review. Collecting documents from multiple malicious software programs will enter a sources and locations could delay the due firm’s IT network and shut down the entire diligence phase on any transaction by weeks system. To prevent such an attack, IT net- or months.28 works look at the size of any incoming file and prevent users from accepting files when Potential VDR solution they exceed a pre-determined size. Since A VDR can compress the overall time many of the files described above are similar needed for due diligence by reducing this in size to the kind of software that gets collection period. VDR upload tools restricted by IT networks, these files often quicken collection by making documents do not reach their intended recipients. easier to upload for seller employees and Alternatives to e-mail typically prove equally external parties that have direct access to frustrating to transacting parties — while these documents. Many VDRs feature ‘drag many of these files can be sent to acquirers in and drop’ technology that does not require a a printed format, this adds time and cost of user to have special software or any particular getting files printed and then distributed to technological savvy. As long as these users everyone on an acquirer’s team who must have an internet connection, they can bypass review them. the need to e-mail documents to a central administrator and upload them directly into Potential VDR solution the VDR. While sellers must still take the With a VDR, acquirers can examine over- time to vet the uploaded documents before sized files that sellers cannot easily transfer by making them accessible, the ability to locate e-mail or physical delivery. Acquirers can

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access oversized files online through a VDR, room to determine who from the acquirer’s which often can host and distribute individ- team reviewed specific data room documents ual files as large as several gigabytes in size. during due diligence. This report is helpful Many VDRs feature advanced document after a transaction when the acquirer needs management systems that can coordinate to locate these individuals to help answer requests from thousands of users accessing questions about an acquired property. This several terabytes of documents simultane- ‘institutional history’ helps transition the ously. These capabilities enable fast, reliable property to the new operating team and distribution of larger files when needed. allows that team to build upon the detailed records already collected on the property.29 The effort also allows acquirers to position VDR DOWNLOAD OPTIONS CREATE properties for sale or financing purposes A PROPERTY’S ‘INSTITUTIONAL from the time the portfolio is acquired. Once HISTORY’ FOR POST-SALE an acquirer gets the data room documents, it INTEGRATION becomes easier to re-purpose those docu- Once a transaction has closed, an acquirer of ments in new data rooms to support initial a property has only just begun the work of public offerings (IPOs), follow-up financ- integrating the property into its business. The ings, subleases, regulatory approvals and asset responsibility for maintaining the property sales because there is less of a need to collect quickly shifts from the seller to the acquirer. documents from multiple sources. Operating personnel must be brought in to take control of the property. Many of these individuals typically have had no prior access CONCLUSION to the property’s related VDR documents VDR features have evolved to offer greater because the confidentiality of the transaction efficiency in due diligence for purchasing limited document access to only a few indi- corporate real estate. Security features and viduals within the acquiring company. Once upload tools give sellers greater comfort and the transaction has closed, however, the ease to share more confidential documents acquirer’s operating personnel must quickly with acquirers. Search tools allow acquirers access the title documents, mechanical draw- to sift through these documents more quickly ings, leases, maintenance contracts, tax and to better validate seller representations records and other documents needed to and warranties, environmental conditions, maintain the property. the state of a property’s title and other details influencing the property’s risks and overall Potential VDR solutions value. While by no means exhaustive, this To ramp up an integration team’s review of a paper provides a good starting point for recently acquired property, the team can demonstrating the usefulness of VDRs when either keep the VDR open for their exclu- corporate real estate is put up for sale as a sive use or rely on DVD archives of all the standalone asset or as part of a larger business files and reports from a closed VDR. A data merger or acquisition transaction. This paper room’s property documents can become the also offers a framework for future discussions critical mass needed to create a permanent on how data room technologies are most record for the property, once the transaction effective depending on the type of transac- is complete and the acquirer has integrated tion, eg real property sales versus the pur- the property into its business operations. An chase of the corporate owner’s stock; acquirer also can get a complete report on all negotiated sales versus auctions; and sales to user activities and permissions from the data financial sponsors versus sales to strategic

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acquirers. Additionally, this paper might (5) (2013) ‘Using virtual deal rooms for due prompt subsequent discussions about how diligence’, Business Counselor Update, No. 1, sellers and acquirers benefit differently from p. 6, Westlaw 2013 NO 1 BTS-BCU 6. using VDRs. While both sellers and acquir- (6) See generally: Lewis, M. M. (2011) ers do benefit, acquirers appear to benefit ‘Sharing through a virtual data room: more when VDRs are used in corporate Privilege in cross-border tax planning’, Journal of International Taxation, Vol. 22, asset sales. This is probably a natural conse- No. 61, p. 61 (discussing the definition of a quence of the increased disclosure that a virtual data room generally in legal VDR helps to facilitate for an acquirer. practice). Nonetheless, for sellers, VDRs are more (7) PricewaterhouseCoopers LLP (2014) than just a cost of doing business when sell- ‘Managing cyber risks in an interconnected ing property. VDRs offer a seller the oppor- world: Key findings from the global state of tunity to attract more prospective acquirers information security survey 2015’, 30th and to extract more value from a transaction, September, pp. 7–8, available at: http:// using detailed property facts to buttress the www.pwc.com/gx/en/consulting-services/ seller’s negotiations with potential acquirers. information-security-survey/download. jhtml (last accessed 12th July, 2015). (8) More recent examples include suits against NOTE retailers for neglecting to protect customer This paper was adapted from a research paper credit card data from hackers. Suits have written by the author when he was a student been directed against Target (Greenwald, J. at New York Law School. The author would (2015) ‘Target’s data breach liabilities mount as card issuers’ suits proceed’, Business like to acknowledge that he is solely respon- Insurance, 4th January, available at: http:// sible for this document and this paper does www.businessinsurance.com) and Home not represent the opinion of either RR Depot for similar data theft by hackers Donnelley or New York Law School. (Kell, J. (2014) ‘Home Depot facing dozens of data breach lawsuits’, Fortune, 25th November, available at: http://fortune. References and Notes com/2014/11/25/home-depot-data- (1) Law360, ‘A decade with electronic data lawsuits/) (last accessed 12th July, 2015). rooms’, available at: www.law360.com/ (9) See Pardau, S. and Edwards, B. (2014) ‘The articles/417360/a-decade-with-electronic- ethical implications of cloud computing for data-rooms (accessed 2nd May, 2014); lawyers’, John Marshall Journal of Information Intralinks, available at: www.intralinks.com/ Technology & Privacy Law, Vol. 31, No. 1, about-us (accessed 2nd May, 2014). pp. 69–71. (2) Rumberger, E. T. Jr and Dillon, C. (eds) (10) Riley, M. and Pearson, S. (2012) ‘China- (2009) ‘The Acquisition and Sale of based hackers target law firms to get secret Emerging Growth Companies: The M&A deal data’, available at: http://www. Exit’, 2nd edn, Rockwell, § 4: 7. bloomberg.com/news/articles/2012-01-31/ (3) See generally: Hess, W. A. (2013) ‘Recent china-based-hackers-target-law-firms developments and trends in middle-market (last accessed 12th July, 2015). M&A due diligence practices’, in Platner, (11) Pardau and Edwards, ref. 9 above, pp. M. G., Bajwa, K. S, Mason, E., Hess, 69–71. W. A., Flaherty, P. E. and O’Brien, C. (eds) (12) Ibid. ‘Business Due Diligence Strategies’, No. 3, (13) Ibid. Aspatore, Eagan, MN, Westlaw 2013 WL (14) For more information on the AT 101 2137397. standard, see the American Institute (4) Ibid. of Certified Public Accountants

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(AICPA) website: www.aicpa.org/ (20) Schnapf, L. (2004) ‘Conducting cost- interestareas/frc/assuranceadvisoryservices/ effective environmental due diligence in pages/cpas.aspx (last accessed 12th July, corporate mergers and acquisitions’, p. 5, 2015). available at: http://www.environmental-law. (15) Hagy, J. C. (1998) ‘Mergers and net/wp-content/uploads/2011/07/ acquisitions: Maximizing the value of real Cost-effectivediligence.rtf (accessed 12th estate due diligence’, Site Selection, April/ July, 2015). May, p. 302–306. (21) Ibid. (16) Payne, J. L. (2012) ‘Gathering data for (22) Ibid. environmental due diligence: (23) Tollin, H. M. (2012) ‘Business transactions Determining the type and amount of data to involving contaminated property and gather for multiple applications is crucial’, environmental insurance’, American Practical Real Estate Lawyer, January, p. 30. College of Real Estate Lawyers annual (17) American Land Title Association, meeting, p. 9, available at: http://www. ‘Owner’s policy of title insurance’ (adopted acrel.org/DrawPublications.aspx?Action=D 17th June, 2006), p. 3, available at: http:// rawOneArticle&ArticleID=3179&Article www.alta.org/forms/download. Type=Seminar (accessed 12th July, 2015). cfm?formID=155&type=word (last (24) Payne, ref. 16 above, p. 35. accessed 12th July, 2015). (25) Ibid., p. 4. (18) Schnapf, L. (2004) ‘Top ten mistakes (26) Payne, ref. 16 above, p. 36. committed by clients when performing (27) See generally: Amiel, P. H. (2005) ‘Top-down environmental due diligence for corporate technology: A large firm’s example’, Texas Bar transactions’, p. 6, available at: http://www. Journal, Vol. 68, No. 7, pp. 589–590; environmental-law.net/wp-content/ Rumberger et al., ref. 2 above, § 4: 7. uploads/2011/07/TopTenMistakesby (28) See generally, Rumberger et al., ref. 2 Clients_000.rtf (accessed 12th July, 2015) above, § 4: 7. (19) Ibid., p. 11. (29) Payne, ref. 16 above, p. 39.

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