An “online data room” or “virtual data room” is an online warehouse of key documents about a company. Online data rooms are frequently used in connection with M&A transactions, to facilitate the extensive due diligence process typically undertaken by buyers.

The online data room is populated with the selling company’s important documents: contracts, intellectual property information, employee information, financial statements, capitalization table, and much more. The online data room allows the selling company to provide valuable information in a controlled manner and in a way to help preserve confidentiality. The online data room avoids the need to have a physical data room where the documents are kept, and helps expedite an M&A process.

The online data room can be established to allow access to all documents or only to a subset of documents, and only to pre-approved individuals. A number of online data rooms allow the seller or its investment bankers to review who has been in the data room, how often that party has been in the data room, and the dates of entry into the data room.

Access to the online data room is made via the Internet, with a secure user identification and a protected password.

The online data room provides the benefit of cost savings over traditional physical data rooms, easy access to documents when needed, a search function, easy updating and adding of new documents, and security of sensitive information.

Vendors of Online Data Rooms

There are many vendors of online data rooms, including Intralinks, Merrill Corp., Ansarada, Firmex, Box, RR Donnelly, and ShareFile. Most data room vendors charge based on the amount of storage used and the length of time that the data room will be functioning. Some law firms with sophisticated M&A practices also provide a private online data room for their clients.

Tips for Preparing the Online Data Room

Preparation of the online data room is extremely important for an M&A transaction. Here are some tips for preparing it:

The management team of the selling company must understand that a complete online data room is essential to a successful M&A transaction. Knowledgeable key employees have to be given the responsibility to collect the needed documents.

The preparation of the data room is very time consuming and must be started as soon as possible in the M&A process. Failure to have a complete data room ready will slow up or potentially kill the transaction.

The online data room should be prepared in conjunction with preparation of the selling company’s disclosure schedules attached to the acquisition agreement, as complete and accurate disclosure schedules are key to getting an acquisition completed.

Problems in Preparing the Online Data Room

Due diligence investigations by buyers frequently find problems in the seller’s historical documentation process, including some or all of the following problems that can show up when preparing the online data room:

Contracts not signed by both parties

Contracts that have been amended but without the amendment terms signed

Missing or unsigned Board minutes or resolutions

Missing or unsigned stockholder minutes or resolutions

Board or stockholder minutes/resolutions missing referenced exhibits

Incomplete/unsigned employee-related documents, such as stock option agreements or invention assignment agreements

Incomplete patent documents

Incomplete capitalization table

Missing stock purchase agreements and related investor rights documents

Deficiencies of this kind may be so important to a buyer that the buyer will require certain matters to be remedied as a condition to closing. That can sometimes be problematic, such as instances where a buyer insists that ex-employees be located and required to sign invention assignment agreements.

What Should Be in the Online Data Room?

Typically, everything material about the business of the selling company will need to be included in the online data room, including key contracts, intellectual property information, employee information, financial statements, and much more. Below is a comprehensive list that sets forth the types of information that may need to be included in an online data room. (See also 20 Key Due Diligence Activities in an M&A Transaction.)

Note that this is a sample list and additional documents may be appropriate in the context of a particular company or transaction. Do not include any attorney-client privileged documents into the data room. The information here should generally apply to the company and each of its subsidiaries and predecessors. Also, consider whether any information that is highly confidential (e.g., customer pricing) should be redacted. Consider the sensitivity of any term sheets or letters of intent from potential acquirers.

1. Basic Corporate Documents

Certificate of Incorporations and Amendments thereto

Corporate Bylaws and Amendments thereto

List of Subsidiaries and ownership percentage

Subsidiary Certificates and Bylaws

Shareholder Minutes and Consents

Business Licenses

Business Permits

Board Committee Minutes and Consents

List of jurisdictions where Company is qualified to do business, owns or leases real property, or is otherwise operating

Good standing certificate in jurisdiction of incorporation

Franchise tax board certificate in jurisdiction of incorporation

List of current officers and directors

2. Capital Stock and Other Securities

Shareholder List (name, amount, date of issuance, consideration received, common or preferred, etc.)

Optionholder List (name, amount of options, date of grant, vesting schedule)

Warrantholder List

Cap Table

Convertible Note Register

Stock Purchase Agreements

Voting Agreements

Registration Rights Agreements

Management Rights Agreements

Stock Option Agreements

Stockholder Agreements

Stock Certificates


Buy-Sell Agreements

Securities law filings and permits

Recap and organization documents, including reincorporations

Disclosure documents used in private placements of company securities

Term sheets signed in connection with prior securities issuances

3. Financial and Tax Matters

Audited Financial Statements

Unaudited Financial Statements

Monthly Financials

Quarterly Financials

Letters from Auditors

Projections and Assumptions/Operating Plans (current)

Federal Income Tax Returns

State Income Tax Returns

Foreign Income Tax Returns

Other Tax Returns/Filings

Reassessment or deficiency or audit notices

Banking Accounts and Signatories

Loans and Promissory Notes

Capital Leases

Security Agreements

Accounts Receivable Aging Schedule

Accounts Payable Schedule

Description of any changes to accounting methods or principles

409A Valuations


Bridge Financings

Inventories: (i) inventory summary by major product as of most recent practicable date; (ii) schedule of consigned inventory; (iii) copies of the Company’s policies for providing for obsolete and slow-moving inventory and summary of obsolescence write-offs and provisions for slow-moving inventory for the last year; and (iv) description of the Company’s methods of inventory control

Schedule of material prepaid expenses and “other assets” as of most recent practicable date

Schedule of property, plant and equipment, and accumulated depreciation broken down into category (i.e., land, buildings, equipment, etc.) for the last year (indicating beginning balances, additions (or provisions), retirements, and ending balances

Cash flow and working capital analysis as of most recent practicable date

Pricing policies, including commission and rate schedules

Product return rate analysis for last fiscal year and current fiscal year to date

Capital expenditure programs for last and current fiscal year

List and copies of all tax sharing and transfer pricing agreements currently in effect (if there are no written transfer pricing agreements, explain the transfer pricing methodology used between affiliated entities)

Schedule of the amount, origin, and status of any U.S. net operating losses or credit carryforwards (including information on any ownership changes or other events to date which might affect such items)

Copy of most recently filed Form 5500 for 401(k) plan

Agreements waiving statutes of limitation or extending the time during which suit might be brought with respect to taxes

Correspondence regarding any tax liens

4. Property and Assets

Schedule and summary of all owned real property

Schedule and summary of all leased property

Real property mortgage and loan documents

Security agreements, pledges, and encumbrances on assets

List of material personal property assets

Documents relating to any environmental matters concerning leased or owned property

Real property leases and amendments and consents related thereto

Personal property leases and amendments

5. Intellectual Property (IP)

Summary of Patents and Patent Applications

Patent Applications

Patents Issued

Summary of contracts where Company IP is licensed to a third party, and actual contracts

Software License Agreements summary

Software License Agreements

Employee Non-Disclosure and Proprietary Inventions Assignment Agreements

Consultant Non-Disclosure and Proprietary Inventions Assignment Agreements

IP litigation summary

IP litigation case filings

Claims or communications against the Company for IP infringement

Claims or communications against third parties for IP infringement

List of open source software used


Service marks

Technology license agreements

IP transfer or sale agreements

IP escrow agreements

Third party non-disclosure or confidentiality agreements (consider redaction of names)

Internal policies to protect IP

List of registered copyrights

List of domain names, with expiration dates

Schedule of mask work registrations and applications

Clinical trial information (for biotech companies)

6. Material Agreements

Summary of Material Agreements

Summary of agreements needing consent in the event of change in control

Material Sales Agreements

Intellectual Property Agreements (see Section 5)

Distribution Agreements

Partnership or Joint Venture Agreements

Leases (see Section 4)

Non-Competition Agreements

Employment Agreements

Change in Control Agreements

Inter-company agreements

Agency agreements

Prior M&A agreements

Investment Banker engagement letters

Indemnification Agreements

Loan or Credit Agreements


Privacy Policy

Terms of Web Site Use Agreement

Other material agreements

7. Customers, Sales, and Marketing

List of customers and key metric information

Form of Sales Agreement

Accounts Receivable summary

Sales Commission Plan

Sales allowances and return policies

Reseller information

Credit and collection policies and processes


Sales projections and assumptions

List of products and summary

Product road maps

Marketing materials and sales literature

Product campaigns and launches (summary)

Industry and analyst reports

8. Suppliers and Manufacturers

List of key suppliers and products supplied

Supplier agreements

Original Equipment Manufacturer (OEM) agreements

List of key manufacturers and manufacturing summaries

Manufacturing agreements

9. Customer and Product Support

Customer satisfaction surveys

Current sales brochures

10. Regulatory Matters

Government permits

Notices of violations from governmental or regulatory bodies

Government licenses


11. Litigation/Disputes

Summary of any litigation or arbitration matters

Copies of all litigation complaints

Copies of all arbitration filings

List of all orders, writs, decrees, injunctions, judgments, or rulings by any court or agency

Documents related to any threatened litigation, arbitration, or governmental action

Environmental claims and actions

Copies of lawyers’ letters to auditors

Past settlement agreements

12. Insurance

Summary of all insurance policies

Copy of directors and officers liability insurance (D&O) policies

Copy of liability policies

Copy of key person insurance policies

Copy of workers’ compensation policies

Other insurance policies

Insurance claims pending

Description of any self-insurance programs or captive insurance programs

13. HR/Employees/Consultants

List of all employees by title, salary, commission, options, non-cash compensation, bonus, date of hire, severance obligations

Organization chart

Employment agreements

Standard offer letter to employees

Non-competition and non-solicitation agreements

Benefit plan summary

401(k) plan

Health and medical plan

Life insurance plan

Dental plan

Retirement plan

Disability plan

Vision plan

Childcare plan

Other benefit plans

Employee handbook

Employee policies not reflected in handbook

Collective bargaining agreements

Bonus plans

Profit-sharing plan

Incentive plans

Change in control plans or agreements

Stock option or restricted stock plan

Listing of consultants and independent contractors and summary of arrangements

Consulting and independent contractor agreements

Severance plans

Description of any pending or threatened labor or employment disputes or work stoppages during the last three years

14. Press and PR

Press releases

Newspaper articles

Analyst reviews

15. Related Party Transactions

Written agreements (and description of oral arrangements) between the Company and any current or former stockholder, officer, director, or employee of the Company

Description of any direct or indirect interest of any stockholder, officer, director, or employee of the Company in any corporation or business that competes with, conducts any business similar to, or has any present (or contemplated) arrangement or agreement with (whether as a customer or supplier) (i) the Company or (ii) the acquirer

Documents not covered by the above relating to agreements of the Company in which either current or former stockholders, officers, directors, or employees of the Company are or were materially interested

List identifying any stockholders, officers, directors, or employees of the company who have an interest in any of the assets of the Company

Copyright © by Richard D. Harroch. All Rights Reserved. Many thanks to Richard Smith, an M&A partner at Orrick, Herrington & Sutfcliffe, for his helpful input into this article.

Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a large venture capital fund in the San Francisco area. His focus is on investing in Internet and digital media companies, and he was the founder of several Internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.com. Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on small business. He was also a corporate partner at the law firm of Orrick, Herrington & Sutcliffe, with experience in startups, mergers and acquisitions, strategic alliances, and venture capital.

The post The Importance of Online Data Rooms in Mergers and Acquisitions appeared first on AllBusiness.com

The post The Importance of Online Data Rooms in Mergers and Acquisitions appeared first on AllBusiness.com. Click for more information about Richard Harroch.

Show more