In Short
- Virtual data rooms are commonly used in sales, mergers, and investments, but they often contain personal and sensitive information.
- Your business must comply with UK data protection law when sharing documents during due diligence.
- Strong contracts, access controls, and security measures are essential to reduce data protection and privacy risks.
Tips for Businesses
Before uploading documents, check whether personal data is necessary or whether anonymised information will suffice. Limit access to the data room to essential parties only and use platforms with strong security controls, such as encryption and activity tracking. Ensure your agreement with the data room provider clearly sets out data protection responsibilities and data deletion obligations.
Summary
This article explains data protection and security considerations for business owners using virtual data rooms during corporate transactions in the United Kingdom. Prepared by LegalVision, a commercial law firm specialising in advising clients on data protection and corporate transaction matters, it outlines how to manage personal data lawfully throughout the due diligence process.
When your business is preparing for a corporate transaction, such as a sale, merger, or investment, due diligence can play a central role in your negotiations and the progress of the deal.
Buyers need to fully understand the target business’ structure, contracts, and any potential risks. As the seller, your business must disclose this information clearly, while ensuring it is shared in a controlled and secure way. Virtual data rooms have become a standard tool for facilitating this process. Although virtual data rooms support efficient disclosure, your business should carefully manage privacy and data security risks both when using a data room in a sales transaction and throughout the wider process. It is essential to carefully consider and comply with data protection requirements.
This article explores important considerations when using data rooms, with a focus on data protection and security issues.
This factsheet outlines the steps for notifying the ICO and affected individuals about personal data breaches.
Using a Virtual Data Room
When acquiring or selling a business, it is important to assess the potential legal risks associated with the target company. The due diligence process enables commercial parties to decide whether a proposed transaction can proceed and helps reduce the risk of unexpected issues arising after completion of a transaction. A virtual data room is often an important tool in this process by providing a secure online platform for parties to store, organise and share documents during a transaction.
Your business can use a virtual data room to replace a traditional physical data room and allow authorised individuals to access materials in a controlled way remotely. By sharing information without granting access to internal systems or physical files, you can experience increased efficiency throughout the due diligence process.
During legal due diligence, advisers will typically review documents to identify legal and commercial risks. Your business may need to upload:
- a range of records;
- company documents;
- shareholder arrangements;
- contracts;
- financing documents;
- employment materials; and
- sensitive information relating to disputes (many of which might contain personal data).
Contractual Issues When Working With a Data Room Provider
When appointing a virtual data room provider, your business should carefully consider the contractual framework governing both your arrangement and how personal data will be handled. Data room providers will typically act as processors, meaning they will process personal data on your behalf and upon your strict instructions only.
You must document the relationship through a robust agreement that complies with the processor requirements under Article 28 of the UK GDPR.
The agreement should specify that the provider can only process personal data according to your business’ documented instructions and include other necessary terms, including:
- ensure confidentiality obligations apply to authorised personnel;
- implement appropriate security measures to protect data;
- address the deletion of data at the end of the engagement; and
- assist your business in meeting data subject rights obligations.
You will also need a broader services agreement with the provider that includes commercial terms to protect your business from potential risks. A data protection and commercial solicitor can help you draft an appropriate agreement or review a third-party provider’s own agreement to check for compliance and guide you on negotiation and other wider commercial risks.
Continue reading this article below the formManaging Data Risks in Data Rooms
As well as entering into a contract, your business should actively reduce risks associated with the use of virtual data rooms.
In the initial stages of a sale process, a business will often establish a virtual data room to help host extensive information about the target business. Considering the volume and breadth of personal information processed by a business, it can be common to disclose personal data even in straightforward transactions. This might include:
- personal data contained in employment contracts;
- information relating to disputes involving individuals; or
- personal details in various types of contracts, e.g., signatures and contact details.
When operating a virtual data room, your business must comply with data security. For example, your business should ensure that the data room requires secure authentication and uses robust protective measures such as encryption. To help prevent information from leaving the controlled data room, your business should use platforms that allow you to:
- track user access;
- apply document watermarks; and
- restrict or disable downloading and printing.
Important Practical Steps to Consider When Using a Data Room
- Your business must ensure it has a valid legal basis for processing and sharing any personal data in connection with the transaction. Special category data (if applicable) requires additional legal safeguards.
- Before uploading documents to a virtual data room, your business should carefully consider whether it needs to disclose personal data at all. Where possible, check whether anonymised or aggregated information would provide sufficient insight without identifying individuals.
- You should limit access to personal data to only those individuals who truly need to review it.
- You must ensure there are robust technical and organisational security measures to protect personal data and actively monitor activity within the data room throughout the transaction. Cybersecurity plays a crucial role in protecting both confidential information and personal data in a data room setting.
While these are some general considerations, a data protection solicitor can guide your business on its specific requirements depending on the nature of the data involved in the transaction.
Data Protection in Corporate Transactions
Data protection considerations go beyond managing the virtual data room and must be addressed throughout the entire lifecycle of a business transaction. For example, before any transactional activity begins, your business may need to ensure its privacy notices explain the sharing of personal data in the context of corporate transactions where necessary.
Due diligence usually requires careful attention to understand data flows, especially when data is shared outside of the UK.
Data protection law compliance is also essential after completion of a deal, whereby buyers need to assess how to manage data protection issues and compliance requirements.
Key Takeaways
Using virtual data rooms can make the due diligence process more efficient, but they also raise important legal considerations. One key consideration is how to handle any personal data shared in the data room. Your business should take active steps to protect personal information by:
- minimising the personal data it shares; using highly secure and trusted data room platforms; and
- putting appropriate contractual protections in place with data room providers to address data protection compliance.
Seeking advice from a data protection solicitor can help you address and mitigate data protection risks throughout all stages of a corporate deal.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced lawyers help businesses manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A virtual data room is a secure online platform your business can use to store and share materials and documents during transactions such as mergers, acquisitions and investments.
Your business should share only strictly necessary personal data, redact documents where possible, restrict access on a need-to-know basis, use strong security measures and ensure the virtual data room provider contract complies with data protection law.
We appreciate your feedback – your submission has been successfully received.
