Pitfalls of Using Data Room

3 Dangerous Pitfalls of Using Data Room During Financial Transactions and M&A

Considering the ever-changing nature of the corporate business and economic demands, as well as the relevance of data protection at the EU level, due diligence in M&A and financial transactions is a topic worth exploring. Data disclosure, transmission, and processing creates problems at various phases of the due diligence process throughout a purchase, and surely complicates matters

Data Security in Mergers and Acquisitions

Justifications based on objective standards and procedures or greater common good are difficult to invoke in the circumstances of due diligence and would necessitate the approval of the data subject or the pursuit of a private interest. It may make sense for businesses to stop processing personal information unless there is a clear reason for doing so.

Consent must be freely provided and based on accurate facts. Given the number of documents involved in a transaction, a corporation might become lost in a maze of consents if it tries to gain consent from each partner. This also raises concerns about timeliness and secrecy, as finance and M&A deals are often kept private.

This may leave only the justification of an overriding private interest, in which a firm might argue that the relevant personal data must be disclosed and processed in order to fulfill a contract with the data subject. This rationale, however, is not as simple as it may appear, as the corporation will have to evaluate the disclosure interest against the privacy of the data subject.

The quality of the research contained in such documents, as well as their virtual essence in the internet age, may further complicate the situation, as a virtual data room necessitates careful handling and supervision, which includes setting up access restrictions and restricting its contents to the perusal and review of the documents contained therein.

Due Diligence from a Legal Standpoint

Financial due diligence is an examination of a target company’s affairs by legal specialists who investigate its structure, constitutional papers, agreements, and other business documentation. In the context of M&A deals, assessing the possible legal risks of purchasing a target firm, as well as its stock and assets, is critical. The ultimate goal of a due diligence process is to clear a business, finance, restructuring, or M&A transaction and decrease the risk of unpleasant shocks once it closes.

The Completion of Legal Due Diligence Generally Results in the Creation of a Report

Financial and tax advisers must also do financial due diligence, thus these documents are only one component of the due diligence process.

The execution of judicial investigative work generally results in the creation of a document which:

  • reflects the research results of the company overview and investigation;
  • identifies the key issues that should be brought to the attention of the parties to the upcoming transaction;
  • and makes potential recommendations on any problematic issues that could jeopardize the successful execution and conclusion of the transaction.

A virtual data room is frequently constructed to improve the flow of information used for due diligence in the digital era, and in the spirit of the ‘think green – keep it on the screen’ approach. This eliminates the need for legal and financial specialists to meet face to face and exchange pleasantries, instead providing access to a virtual data room where all important information and documents are posted. Each participant is given the option of doing their own risk assessment of the transaction at hand.