Virtual Data Rooms for Bankruptcy
6 May, 2020
The worldwide coronavirus pandemic has put the thumbscrews on businesses across a myriad of sectors and accelerated the demise of companies that were already in trouble as Americans (and their dollars) stay home amid shelter-in-place orders and economic shutdowns. Some types of businesses are impacted more than others, but those most impacted are faced with difficult choices. Some have the resources to hold on until mandates are lifted and economies slowly get back on their feet. Others are being forced to consider restructuring, asset sales, or bankruptcy.
We may be looking at a scenario similar to what we saw during the last financial crisis when bankruptcy filings among publicly-traded companies increased by 74 percent in 2008 over the previous year.
One of the major differences between now and then is that the use of virtual data rooms has become much more commonplace, not just for M&A transactions, but also for bankruptcy filings and asset sale transactions.
It’s not hard to see why.
Virtual data rooms allow companies to host, manage and securely share thousands of documents online, in an electronic format, with anyone, at any time. That means that an asset sale transaction or bankruptcy can be conducted just as efficiently when the parties involved shelter in place as if they were when sitting across from one another in a conference room.
There are other benefits as well.
FACILITATING AND ACCELERATING THE RESTRUCTURING PROCESS
In a bankruptcy or restructuring scenario, companies must deal with complex procedures and deadlines as well as manage an abundance of documents that need to be reviewed by multiple parties, sometimes spread across the globe. These might be creditors, committees, banks, advisors, bankruptcy attorneys, or court-appointed trustees—all of whom need to be informed in detail by those documents while preserving the confidentiality of that information, because those documents are necessarily being shared outside the protective boundaries of the firm. The workflow associated with that process can be a tremendous logistical challenge and often creates difficulties, especially in such a rapidly changing business environment.
Insufficient, incomplete and inaccurate records are a frequent problem for companies that have gotten into trouble, and frequently are one of the root causes of the difficulty. Without good and complete information, it’s hard to navigate the challenging restructuring environment. However, these challenges are greatly mitigated by making use of a virtual data room. Virtual data rooms provide a single repository for housing information and making it readily accessible to selected users. Virtual data rooms also provide a more logical and efficient structuring of the documents making the information more accessible and streamlining the review process.
The ability to undertake a full text search and to communicate easily with other parties can actively speed up the due diligence period and galvanize the entirety of the bankruptcy process. Additionally, a streamlined, well-organized environment enables the individuals involved to concentrate on restructuring the business, rather than being burdened with the administrative nightmare of information gathering and presentation.
Restructuring a troubled business often includes disposing of some of its less vital assets, which can also be supported by a virtual data room. Once the restructuring is decided upon, the virtual data room can be used to divest certain units of a business and optimize a portfolio that better fits into the company’s long-term strategy. A virtual data room allows for easy compartmentalizing of assets for more efficient review and sale.
REDUCED COSTS
It is very expensive to maintain a physical data room and keep it monitored while third parties are reviewing documents. A virtual data room eliminates this cost. Further, in any restructuring process a large amount of documents need to be printed and reviewed by multiple parties. A restructuring or asset sale transaction can easily involve 25,000 pages that need to be reviewed by at least 10 people. That’s 250,000 pages. With a virtual data room the cost of duplication and dissemination of those documents is eliminated.
Online access to due diligence materials also increases the locations, diversity and number of interested parties, expanding the lender, investor and buyer universe without added expense. By accelerating bankruptcy and asset sale processes, a virtual data room not only helps a company recover from a difficult situation faster, but may also bring more bidders to the table, increasing competition and resulting in higher valuations. A streamlined transaction process also leaves less time for changing market factors to potentially disrupt a deal.
REDUCED RISK
A threat that goes hand-in-hand with bankruptcy is the potential for litigation. Keeping track of which documents were accessed and who accessed them is essential in a bankruptcy scenario, and very challenging in a paper-based environment. Litigation surrounding the availability of critical information can often lead to a prosecution. The time may come when parties on both sides of the transaction say, “Prove it.” Prove that specific documents were made available. Prove that specific documents were accurate and truthful. Prove that the people charged with evaluating documents have done so thoroughly. A virtual data room generates this proof by providing granular audit trails and reports showing who viewed which documents and for how long, even down to the page level.
Further, because it’s easy to control user rights for viewing, printing or saving documents, virtual data rooms effectively reduce risk by providing accurate records of what is available, who gets access, and what level of access they get. The transparent tracking of all user activity prevents the potential misuse of information and the very structure of the data room provides the ability to track all documents that have been added, removed or deleted during the entire lifecycle of the data room greatly reducing the risk of post-closing attacks or litigation. Additionally, all records and audit trails can be kept by the seller in anticipation of issues that could arise in the future.
INCREASED SECURITY
Virtual data rooms provide bank-grade security for documents, something that is not possible with paper-based, physical data rooms or transaction scenarios where printed documents often have to be sent to multiple parties by mail. In addition to controlling who gets to see which documents, and what they are allowed to do with those documents (view, print, save), virtual data rooms also provide the ability to “virtually shred” documents, even after they’ve been downloaded.
During challenging economic environments, strategic companies need to regularly evaluate their business assets. These assets, including intellectual property, real estate, PP&E, and core and non-core business units, may need to be rebalanced or disposed of in order to maximize financial agility or liquidity. A virtual data room is the best way to conduct these transactions efficiently and securely while achieving the most attractive deal outcomes.
Stay safe out there. It’s a good day to work in the cloud.
For more information about how virtual data rooms facilitate bankruptcy filings, restructurings and asset sales, click here.