Virtual Data Room outsmarts Seller saving Buyer $1.3 million and the Deal

By D.M. (Doug) Robbins FCBI, M&AMI, CM&AA, MCBC, CSBA, CMEA

 

(GRIMSBY, ON.  CANADA)  Virtual Data Rooms, also known as deal vaults are being utilized by many M&A Advisors for convenience and efficiency. The encryption and secure communications for uploading and downloading electronic documents with sensitive information is a key consideration of all virtual data room users. Confidentiality is especially a concern of Sellers and Buyers during the exchange of information for due diligence and for the communication of purchase documents.

Since 2003, US Healthcare professionals have been using national standards for privacy under the HIPAA Privacy Rule. Today, many virtual data rooms are feature-rich with document level controls and user access level protection to HIPAA standard. Here’s a Canadian transaction story where the features of using a virtual data room provided the M&A Advisor a valuable benefit to closing a sale.

Robbinex, recently sold a business for $10,500,000 with multiple locations, a number of which, by the nature of the business, had environmental concerns.

An Environmental Engineering firm was retained to complete phase one review of all sites and concluded that most of the sites were clean, but that 8 sites required phase two intrusion testing.

The drilling and sampling of each of the concerned sites was completed and all the test reports of those concerned site reports came back clean. Copies of each of the site reports were posted in the virtual data room for all concerned to see, about 3½ weeks before closing. The due diligence was completed, and the conditions removed, and the closing proceeded.

Three days before closing, the Seller went onto the virtual data room and switched one of the reports with another that indicated contamination at one site was indeed present. The cost to clean that particular site was estimated to be $800,000.

When the Purchaser called the Seller about the problem site, the Seller said that the new report was posted at the time of the posting of all the reports, and claimed that the Purchaser had known, or should have known about the potential clean-up costs.

Unbeknown to the Seller at the time of the report switch, was that any/all changes made to the virtual data room result in a notice of change/insertion, sent to all parties linked to the data room of any change/insertion.

Needless to say, the Purchaser was alarmed. Not only was there the apparent problem that required significant financial expense to remediate that site, in addition, the Purchaser had the more devastating issue of questioning the Seller’s character for pulling the report switch, causing questions to arise at many levels.

When confronted, the Seller naturally became defensive and decided he would not complete the transaction. But after receiving a notice of intent to sue for specific performance from the Buyer, and being duly advised from both his lawyer and the broker (who also threatened to sue for commissions), the Seller posted security for the cleanup, and the transaction did close, albeit a week later than scheduled.

This story is one to consider what the consequences may have been had all the documents been hard and not electronic? There may have been a report switch without consequence to the Seller and grave negative financial consequences to the Buyer. That would have meant nearly an 8% premium to the Buyer for purchasing the business. Unfortunately, once an error is found after closing, a Buyer may have a long and difficult civil suit to file, over many years. With opportunities afforded to both parties for delays and appeals, litigation can easily last 5 years. Those expenses are never easy to swallow when the only thing you did wrong was trust the other party. In this case though, the virtual data room tool provided the instantaneous time stamp and the opportunity for averting the negative consequences of impropriety.

But that’s not the end of the story. The Buyer did close on the business because the Seller posted security for the remediation of the site. Subsequently, the Purchaser also cancelled a 5-year consulting contract with the Seller worth $100,000 a year, on the basis of character — a proven lack of trustworthiness, thanks to the document tracking and time-stamp capabilities of a virtual data room.