Definition and legal classification of the data room
Ein Data room refers, in the legal context, to a physical or electronic, specially secured area in which relevant documents, records, or data related to a specific legal transaction are made available. The use of a data room is particularly common in the context of corporate transactions such as company sales, mergers & acquisitions (M&A), due diligence processes, but also in legal disputes, compliance audits, or public tenders. The data room can also be set up as a “virtual data room” (VDR, Virtual Data Room).
The legal basis for data rooms arises from a variety of regulations, in particular civil law, data protection law, commercial and corporate law, as well as industry-specific regulations. Legally, the data room represents a special form of providing and processing information and is associated with specific rights and obligations for all parties involved.
Functionality and legal framework
1. Purpose and applications
Data rooms are primarily used to securely provide and transmit business documents to a limited group of users. Typical areas of application are:
- Preparation and execution of transactions (particularly in the context of company sales)
- Due diligence processes
- Implementation of financings and investments
- Conducting compliance audits
- Documentation in the context of court proceedings
2. Contract structuring and legal relationships
a) Non-disclosure agreements (NDAs)
Before granting access to a data room, a binding non-disclosure agreement is usually concluded. The contents of this agreement include, amongst others:
- The group of individuals authorized to access
- The obligation of confidentiality towards third parties
- The permissible purposes for using the data room
- Sanctions for breaches of confidentiality
b) Access regulation
The management of the data room is regularly the responsibility of the company setting it up (so-called “vendor”). Access rights are granted individually and for a specific purpose. Logging of accesses and onward transmissions forms part of the legal safeguarding.
c) Liability and warranty
If incorrect, incomplete, or misleading information (whether intentionally or unintentionally) is provided in the data room, this may give rise to civil liability claims. This applies in particular to pre-contractual duties to inform and duties of care (§§ 311 para. 2, 241 para. 2 BGB). Typical warranty risks exist in transactional contracts that are based on information from the data room.
3. Data protection law requirements
The provision and processing of personal data in data rooms is subject to the requirements of the General Data Protection Regulation (GDPR). Important aspects are:
- Legal basis for data processing (e.g., Arts. 6, 28 GDPR)
- Ensuring technical and organizational measures (TOM) in accordance with Art. 32 GDPR
- Processing on behalf and conclusion of corresponding contracts when involving external data room service providers
- Rights of data subjects such as access, rectification, erasure and objection
For cross-border transactions, international data protection regulations are also relevant, for example when data is transferred to third countries (see Chapter V GDPR).
4. Requirements for virtual data rooms
Virtual data rooms (VDR) are cloud-based platforms whose technical and legal requirements go beyond those of traditional document archives. According to § 3a BDSG (state of the art) as well as the requirements of the GDPR, the following must in particular be ensured:
- Access controls and user authorization
- Logging and traceability of accesses (‘audit trail’)
- Encryption of data during transfer and storage
- Protection against unauthorized access, manipulation, or data loss
Operating a VDR may also be subject to supervisory or industry-specific additional requirements (e.g., in banking, healthcare, or for publicly listed companies).
Importance of the data room in due diligence
The detailed and verifiable provision of documents in the data room is a key part of legally compliant due diligence. The aim is to reduce information asymmetries between the contracting parties and create a sound basis for contractual negotiations.
a) Disclosure obligations and liability risks
Complete, truthful, and timely disclosure in the data room can limit the seller’s liability for subsequent claims (so-called ‘disclosure’). On the other hand, deliberately withheld or redacted documents may give rise to liability.
b) Evidentiary function and burden of proof
The data room serves as a tamper-evident archive for proving disclosed facts. Logging and time stamps allow a clear allocation of which information was available to whom and when. This is of central importance in later disputes, for example regarding warranty issues or liability disputes.
Confidentiality, protective rights, and intellectual property
The publication and accessibility of sensitive data in the data room regularly raises questions about the protection of trade and business secrets (§§ 2 ff. GeschGehG). Copyrighted content, patents, trademarks, or know-how must be protected by additional safeguards (e.g., watermarks, access restrictions).
Information not disclosed, or disclosed only selectively, can be additionally protected by clauses in the purchase or cooperation agreement. These particularly include non-disclosure and non-use agreements.
Data room in legal proceedings
In court-ordered proceedings (e.g., antitrust disputes, enforcement of information, discovery), data rooms can be used to allow the parties access to sensitive data while maintaining confidentiality. Specific procedural requirements apply here, such as those from the Code of Civil Procedure (ZPO) or various special statutes.
Summary and outlook
The term data room is legally versatile and multi-layered. The central function of the data room is the secure, traceable, and transparent provision of information along with the preservation of confidentiality and data protection. The structure, operation, and use of a data room require compliance with numerous civil, data protection, and intellectual property law requirements. The significance of digital solutions in the context of the data room is increasing and continually brings new challenges for legal certainty, data protection, and IT security.
Frequently asked questions
What legal requirements must be met when setting up a data room?
When setting up a data room in a legal context, particularly in the context of M&A transactions or due diligence, companies must comply with various legal requirements. These include in particular the data protection provisions of the General Data Protection Regulation (GDPR) in the EU, but also specific regulations that arise from commercial, tax, or company law. Key requirements include selecting suitable technical and organizational measures to ensure the confidentiality, integrity, and availability of stored data. It must be ensured that only authorized persons have access to the sensitive information and that all activities in the data room can be properly logged. Furthermore, any necessary non-disclosure declarations or confidentiality agreements (NDAs) must be concluded with all authorized users before access is granted. Comprehensive documentation of which documents and information have been made available is essential not only for evidence in the event of a dispute, but also helps to mitigate potential liability risks related to omitted or incorrect information provision.
What role does the GDPR play in connection with data rooms?
In the context of using data rooms, the GDPR is of central importance as soon as personal data is processed within them. Responsible companies must first check which personal information is stored and whether its processing is covered by a sufficient legal basis, such as performance of a contract, legitimate interest, or the consent of the data subjects. Moreover, the information obligations to affected individuals must be observed; they must be informed that and how their data is processed in the context of a data room and, where applicable, passed on to third parties (e.g., potential buyers). Of particular relevance are also the requirements for data security and access restrictions, so technical measures such as encryption and two-factor authentication should be implemented. If the data room is provided by an external provider, it must be ensured that processing on behalf in accordance with Article 28 GDPR is legally compliant and secured by contracts.
To what extent are providers and users of a data room liable for data leaks?
Liability for data leaks in the data room is generally divided between the technical operator of the data room and the users responsible for the content. The operator is liable in particular within the framework of civil and, where applicable, data protection law provisions if technical or organizational security deficiencies facilitate a data leak. The users themselves are liable for the legality of the documents provided, particularly if protected information is unlawfully disclosed or required consents are missing. In many cases, contractual liability provisions are agreed as part of participation in the data room, which may include caps and limitations of liability for the provider or users. In addition, there is a significant risk of fines for both sides in the event of GDPR violations, and the specific responsibility must be examined in detail in each case.
What legal requirements apply to the deletion of data in the data room?
The deletion of data in the data room is subject in particular to the data protection requirements of the GDPR, according to which personal data must be deleted as soon as its storage is no longer necessary for the intended purposes or a legal basis for storage no longer exists. Operators of data rooms must provide corresponding technical functions to enable complete and final deletion. This also includes backups and temporary interim storage. For certain business records, commercial and tax law retention periods (e.g., pursuant to HGB or AO in Germany) also apply, after which deletion is mandatory. It is advisable to contractually regulate deletion processes and retention periods and to regularly control and document their compliance in order to avoid later legal disputes or official objections.
What legal aspects must be considered when using a data room across borders?
When using a data room internationally or across borders, topics such as cross-border data protection and export control become particularly important. As soon as personal data of EU citizens is transferred to countries outside the EU or the EEA, the ‘protection mechanisms’ of the GDPR apply, such as the requirement for an adequate level of data protection in the destination country or the conclusion of standard data protection clauses. National export control regulations may also apply, especially when providing technical information on sensitive goods or technologies. Companies should therefore carry out a data protection risk assessment (so-called ‘Transfer Impact Assessment’) in advance and, if necessary, implement additional compliance measures (e.g., IT security certificates, special access restrictions).
What legal aspects need to be considered regarding the logging of accesses?
The logging of accesses to a data room is essential for evidentiary and compliance purposes. Legally relevant is in particular the question of which personal data may be logged. Logging must comply with the data protection principles of the GDPR, meaning that only such information may be stored as is actually necessary for traceability and security. Furthermore, users must be clearly informed about the scope, purpose, and duration of the storage of access data. Log data must be protected against unauthorized access and deleted after the expiry of any retention or limitation periods. Confidentiality and secrecy interests must also be safeguarded.
What special features apply to virtual data rooms in company sales?
Virtual data rooms play a central role in company sales (M&A transactions) and are subject to special legal requirements. In addition to the general requirements on data protection and IT security, stricter confidentiality and audit obligations apply in particular. Sellers are required to provide all relevant information (including any negative findings/disclosure) completely and truthfully in the data room, otherwise there is a risk of liability for concealing or withholding information. Buyers are obligated to carefully review disclosed documents in order not to later claim the absence of certain information. In addition, very detailed confidentiality agreements are usually drawn up in advance to regulate the type, scope, and duration of use of all data in the data room. Warranty rights or liability clauses are also often tied to the information provided in the data room. Legally compliant handling of all processes, from access management and documentation through to deletion after conclusion of the transaction, is therefore essential.
