News in Practice

Share purchase deals: what the data room becomes when the system knows the matter

A liability spotted on day three of a review, traced to the clause that deals with it twelve weeks later. It will have changed hands four times.

For teams working on acquisitions and disposals. What happens to a due diligence finding between the moment it is made and the moment it becomes a clause.

Day three of the review. A second-year associate opens, in the environmental folder of the data room, a soil survey commissioned four years earlier on a subsidiary's industrial site. The report concludes that residual contamination exists with no immediate remediation obligation. There is no administrative order, no litigation, no provision in the accounts. The associate logs it in the review schedule, line 214, with an assessment: point of attention, to be confirmed. Twelve weeks later, that point will have become a condition precedent. In between, it will have changed hands four times, and each handover will have cost something.

Week 2: the conclusion survives, the reasoning does not

The associate escalates the point to the senior associate coordinating the review. They discuss it for ten minutes. She asks him to check two things: whether the site is classified, and whether the lease or the deed places remediation on the operator. Answers: not classified, and the deed is silent. She decides: not a deal-breaker, but it requires a specific warranty from the seller and a dedicated indemnity outside the general cap.

That decision is taken on the Wednesday of week 2. It rests on four elements: the survey, the absence of classification, the silence of the deed, and a risk assessment grounded in the senior's experience. Three of those elements are in the data room. The fourth is in her head.

The due diligence report, drafted in week 4, will record the conclusion: specific warranty and indemnity outside the cap recommended. It will not record that the absence of classification was checked, nor that the silence of the deed was the deciding factor. Those checks were made, they took half a day, and they appear nowhere in a form attached to the conclusion they support.

Week 5: the supplemental document nobody connects

The seller uploads a further batch. Among it, a letter from the regional environmental authority, dated eighteen months earlier, requesting additional measures on the same site. The letter is filed under administrative correspondence, not under environmental.

It is read. It is even logged, by a third team member who joined in week 4 to absorb the volume. But he does not know that a decision was taken in week 2 on that specific site, and he has no way of knowing: line 214 of the review schedule carries a conclusion, not an address. The letter is treated as administrative correspondence with no known follow-up.

This is where the deal has just taken its real risk, and nobody knows it. The week 2 conclusion rested on the absence of any request from the authority. That premise is now false. Nothing, in any of the team's tools, connects that invalidation back to the conclusion it concerns.

Line 214 carries a conclusion, not an address. Nothing can therefore tell it that it has just been invalidated.

Week 6: the alignment meeting, where the question is not asked

The responsible partner convenes the team to settle the salient points before drafting. Eleven points are covered in two hours. The industrial site ranks eleventh, in the category of matters already dealt with.

The discussion lasts four minutes. The senior confirms her week 2 recommendation, the partner endorses it. Nobody mentions the week 5 letter, for the simplest of reasons: the only person who read it is not in the room, she is on the employment review, and had she been there she would not have made the connection.

That meeting is the last moment at which the error could have been caught at no cost. What would have sufficed fits in one line: that point 11 display, alongside its conclusion, the list of documents uploaded since that conclusion was reached, concerning the same site. Not an intelligent alert; simply a connection.

Week 8: drafting receives a report, not a matter

Drafting of the sale agreement begins. It is handled by a partly different team, which is the rule rather than the exception: review and drafting call on distinct skills, and on a deal of this size they barely overlap.

What passes between the two teams is the due diligence report, that is to say a set of conclusions. The associate handling representations and warranties reads the recommendation on the industrial site and translates it correctly: a specific representation on the absence of pending administrative proceedings, and a dedicated indemnity.

The representation so drafted is accurate against the report and false against the matter. The seller will be unable to give it, or will give it knowing of the eighteen-month-old letter, which will shift the entire negotiation on that point at the least favourable moment.

It is worth measuring what has happened. None of the four people made a mistake. The associate flagged, the senior decided, the third read the document, the drafter translated the conclusion. What failed is nobody's work: it is the chain between them.

Week 11: the question that can no longer be reconstructed

The other side challenges the uncapped indemnity on the environmental point. The partner leading the negotiation then asks the question a partner always asks at that stage: why did we ask for this outside the cap, and what are we holding to?

The answer exists. It was formulated on a Wednesday in week 2, in ten minutes, and it rests on four elements, one of which was never written down. The senior who took it has been on another deal for three weeks. The associate who ran the checks remembers running them but not their precise outcome.

What follows is a reconstruction exercise: reopening the data room, retrieving the survey, rechecking classification, rereading the deed. Half a day to redo what was done in week 2. That half-day appears in no budget, it falls at the point of greatest timetable pressure, and it produces nothing new.

Week 12: closing, and what the firm will never know

The deal signs. The environmental representation was renegotiated at short notice, the dedicated indemnity was held at a level below what had been sought, and the timetable slipped by four days.

The internal debrief, if there is one, will conclude that the deal went well. That will be true. Nobody will connect the indemnity shortfall to a misfiled letter in week 5, because nobody holds the chain linking the two.

And this is the costliest point in the long run: the firm cannot learn from what happened, since it cannot see it. The same sequence will recur on the next deal, with other people, and will again be put down to the complexity of the matter.

What a matter held together changes at these six moments

The shift does not concern the reading, which is done well, nor the drafting, which is excellent. It concerns what connects the two, and it consists in making a conclusion an attached object rather than a line in a schedule.

Take the six moments again. In week 2, the decision exists with its four grounds, including the senior's assessment, articulated because articulating it takes thirty seconds when it is made and half a day when it must be reconstructed. In week 5, the authority's letter concerns a site to which a decision is already attached, and it is that attachment which triggers the escalation. In week 6, point 11 of the agenda carries the list of documents filed since. In week 8, the drafter receives not a conclusion but a position with its reasoning. In week 11, the partner consults instead of commissioning a reconstruction. And in week 12, the firm can see what happened, which is the condition for not repeating it.

None of this accelerates anything in the usual sense. The review takes the same time. So does the drafting. What changes is that the deal does not run on a false premise for six weeks.

What the partner continues to carry

Deciding that a residual environmental liability warrants a condition precedent rather than a specific warranty is a judgement call. It depends on the client's appetite for that risk, on the relative value of the asset, on what the timetable allows one to negotiate. No system makes it.

But it is made on a body of material. A partner exercising judgement in week 11 on a note reconstructed that morning is not doing so on the same footing as one who has the week 2 decision, its grounds, and the fact that a week 5 letter altered one of them. The second is not faster. He knows what he is negotiating.