A comprehensive due diligence investigation in a transaction involving parties with a broad scope of business activities will inevitably call for delivery of a voluminous amount of documentation. Companies must learn how to accurately and efficiently track and review all of the contracts and other materials that are exchanged during the course of an investigation. Typically this process begins by referring to the aforementioned list of documents, commonly referred to as the “due diligence checklist,” and making sure that each document is indexed against the list and assigned an appropriate document number. All documents would then be packaged into bankers’ boxes and sent to a central location, such as a conference room at a law firm, where they would be available for review and copying by authorized parties. While this became accepted practice it was an imperfect and expensive solution for several reasons. First, whoever was responsible for storing and securing the documents had to make sure that it had someone in the room at all times whenever documents were being reviewed in order to be sure that documents were not removed or tampered with by visitors. Second, even when the review process was being monitored there was a high likelihood that documents could be lost or misplaced while they were being refilled. Third, parties needing to review documents often needed to incur significant travel expenses (i.e., airfare, hotel and meals) to get to the site where the documents were maintained. Finally, the need to be physically present to review documents raised privacy concerns since competitors could “stake out” a storage site to see who else might be conducting due diligence.
The drawbacks of the traditional method of collecting and reviewing information during the due diligence investigation have been largely overcome by the creation and growing use of “virtual” deal or data rooms, popularly referred to as a “VDR,” which allow the parties to a transaction to conduct the document-related phase of the investigation safely and securely in a collaborative online workspace. When using a VDR for due diligence the parties first scan all of the relevant documents and transfer them to a VDR vendor who uploads the documents on to its data room server. While companies can, and often do, make their documents available online, a VDR vendor provides various value-added services that are specifically useful for the due diligence environment—documents can be arranged in hierarchical order, document indexes can be prepared so that users can immediately see what is available when they log in, levels of permission can be created and enforced to restrict access to certain documents and/or the ability of a user to download or print out copies of documents, and reports can be generated that detail who has looked at which documents and how often. In addition, it is generally agreed that a qualified and experienced VDR vendor can greatly accelerate the process of getting documents ready for viewing. For example, vendors usually can provide scanning services directly or through sub-contractors and are typically able to get the VDR up and running within a few business days after all the documents are identified.
A VDR can be established and used on a deal-by-deal basis or companies that are continuously engaged in transactions may purchase a subscription which establishes their VDR and keeps it up and running for all transactions without having to pay separately for each new deal. Fees are typically based on the number of pages in the VDR and the use of additional services such as scanning, indexing, site management, consulting services, and technical support. Companies should get demonstrations from several vendors before making a choice and should select a service that fulfills their expectations with respect to navigability of the site, ease of use, availability of support and flexibility. Before beginning the selection process the company should conduct an internal assessment to determine the volume and type of documents that would be transferred to the VDR. This allows the company to seek and obtain more accurate estimates of the costs of the VDR and determine which features (i.e., access restrictions) will be most necessary and useful. As of early 2008 it was estimated that a VDR was being used in about half of the mergers and acquisitions transactions involving public companies in the US and there are a number of major vendors competing for a share of a rapidly growing market including long-time financial printers Bowne & Co. and Merrill Corporation.