Print Edition
September 2010 
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Using VDRs To Manage Bankruptcy Scenarios |
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Pauline Renaud, February 2009 |
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Page 2 of 3 |
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Once this has been completed, an interested party can draft, edit and execute a sales agreement completely within the virtual room.
VDRs are also useful tools for reducing the time, and therefore costs associated with contract reviews. They can also present new opportunities by opening investment channels. “By offering online access to their information, which expands the locations and number of potential participants, clients can expand their lender, investor and buyer universe without added expense,” observes Fred Mather, executive vice president Global Sales at IntraLinks. He also explains that through the acceleration of the bankruptcy process, a VDR can not only support a company in recovering from a difficult situation faster, but also enable the reduction of certain risks, commonly found in such environments. “VDRs can help minimise risk during bankruptcy and restructuring by shortening deal timelines and therefore leaving less time for market factors to disrupt a deal,” Mr Mather adds.
Limiting risks, reducing costs
A threat that goes hand-in-hand with bankruptcy is the potential for litigation.
Keeping track of who accesses what data and which types of documents are consulted is essential in a bankruptcy situation, but a challenge to achieve in a paper-based environment. Litigation surrounding the availability of critical information can often lead to a prosecution, notes Mr Hartzell. “On the risk management side, you are preparing for when both sides say ‘prove it’. Prove that these documents were made available, prove that these documents were accurate – in other words that there were truthful – prove that the people who are charged with evaluating this have done so thoroughly. When you are buying a VDR, you are buying a framework that allows you to generate this proof,” he adds. With a virtual room in place, all documents are captured and indexed in a single online database, simultaneously guaranteeing both availability and proof.
Furthermore, it is easy to control access to information. User rights for viewing, printing or accessing documents can be defined by the VDR manager and can change depending on the situation. “VDRs, if properly set up, manage and monitor risks by providing accurate record-keeping of what is available, who gets access and what sort of access each user is given. There is also the ability to create discrete categories of information according to differing needs of differing stakeholders,” observes Mr Schnelling. Indeed, this monitoring ability goes further than simply offering protection from potential litigation. “The transparent tracking of all user activities also avoids any misuse of information,” adds Mr Grellier. “With today’s technology, it is possible to track all documents that have been added, removed or deleted in the lifecycle of the data room. As such, it offers fewer angles to attack the transaction post closing. Also, all the information can be kept by the seller so that they are well prepared for future issues.”
The security of the information disclosed is evidently enhanced, particularly in comparison with a paper-based environment in which printed documents often have to be sent to multiple external parties by mail. “In some cases, there is also the ability, even after a document has been downloaded, to digitally shred it, if you decide afterwards you did not want that piece of information to get out. This really helps you communicate effectively and fluidly while being able to maintain the security over those documents,” says Mr Badger. Of course, the ability to easily distribute documents to different parties involved is not just a matter of risk. VDRs also have a direct impact on the costs involved in a bankruptcy process and, for a distressed business, making such savings can be very valuable.
From the buyer’s point of view, those savings break down into two types: travel and scheduling costs, both of which are eliminated by the adoption of a VDR. “The review of information can be simultaneous for all users in a VDR, compared to an often linear timeline in a paper-based process, expediting the document review,” suggests Mr Farley. “Coupling the shorter review cycle with the relative elimination of travel to the physical hosting site translates into significant time and cost benefits.” These cost benefits, which can be in the region of thousands of dollars, can also encourage more parties, which may have been deterred by a paper-based environment, to get involved in the process.
On the seller’s side, it is often very expensive to rent a physical data room and have someone monitor it while people are assessing the documents. When using a VDR, this is another cost that can be eliminated. In any restructuring process, a large amount of documents need to be printed and reviewed by several parties. On average, a virtual data room will contain 25,000 pages that need to be reviewed by at least 10 people, with the total number of pages produced for a single deal easily reaching 200,000 to 250,000 copies. With virtual rooms, the double cost of duplication and dissemination fall to almost nothing. “For all parties involved, time and cost savings during a restructuring or bankruptcy engagement are paramount,” argues Mr Mather. “VDRs enable professionals to focus on high-level strategy by reducing the administrative resources needed to gather and distribute information during a traditional, offline process.” Furthermore, according to Merrill Corporation, some preliminary research indicates that VDRs can actually reduce the overall carbon footprint of a bankruptcy by as much as 95 percent, compared to the old, paper-based method.
Use of VDRs in 2009
This array of benefits, coupled with an increase in bankruptcies to be expected this year, is likely to make the use of VDRs increasingly common in the coming months.
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