Legal data room: Use cases and benefits

One of the due diligence challenges many organizations, including law firms, have to face today is the need to make manual methods and legacy solutions more efficient and sustainable, according to the research.

Indeed, legal specialists have to deal with a significant number of sensitive documents every day, requiring a secure place for their storage, distribution, and management. 

A virtual data room is a solution, helping lawyers and other parties with not only due diligence but also litigation management, bankruptcy proceedings, corporate minute book creation, and more.

Keep reading to learn more about legal data rooms and how legal professionals use and benefit from them. 

What is a legal data room?

A legal data room, also known as a virtual data room (VDR), is a secure online repository used by legal firms, lawyers, and other legal professionals for storing and sharing confidential legal documents. The solution facilitates the work of legal teams during various processes, such as litigation, mergers and acquisitions, legal due diligence, legal proceedings, and other legal transactions.

Virtual data rooms allow users to communicate and manage documents in one place, eliminating the need for traditional data rooms. This not only addresses the problem associated with confidential documents scattered across various platforms but also ensures a higher level of security and control.

“We have reached a tipping point where cybersecurity has become too difficult and moves too fast for most organizations to manage it effectively on their own,” says Raja Patel, senior vice president at Sophos, a cybersecurity company.

Professor Stuart E. Madnick, Ph.D.,  in his study, corroborates Raja Patel’s view, confirming that security breaches across the globe reached historically high levels and are getting worse. For example, in just the first nine months of 2023, data breaches in the U.S. increased by nearly 20% compared to 2022. Organizations worldwide are facing similar trends. 

The legal industry is no exception. About 65% of law firms have been a victim of a cyber incident, demonstrating a need for a secure solution to store and share confidential documents. That’s why legal data rooms are becoming increasingly common, as more legal professionals incorporate them into their law practice for security and efficiency. 

The most common legal data room use cases

Legal data rooms are widely used in corporate law, intellectual property cases, bankruptcy, litigation, and corporate minute book creation. Let’s explore each case in more detail:

1. Mergers and acquisitions (M&A). In M&A transactions, legal teams use VDRs to store and share confidential information securely. First, sellers upload relevant files such as financial records, contracts, and intellectual property documents. Then, buyers and their advisors, including legal specialists, access the VDR to conduct due diligence, reviewing and analyzing these documents.
2. Due diligence. Data rooms streamline the due diligence process first by providing due diligence checklists. As a rule, these checklists are customizable and can be adjusted to specific cases. Once necessary legal information is uploaded, the stakeholders involved in the process, such as lawyers, auditors, and potential investors, can access and review it securely.
3. Litigation process management. As confidentiality is paramount during litigation processes, a virtual data room becomes a must-have tool for legal teams. Security measures such as encryption, redaction, and watermarks ensure the secure storage and sharing of case-related documents, like pleadings, evidence, and court orders.
4. Intellectual property management. Legal data rooms are used to securely store and manage intellectual property documents, like patents, trademarks, and licensing agreements. Legal teams, IP managers, and external advisors can securely access and collaborate on this confidential data in one centralized platform.
5. Bankruptcy proceedings. In bankruptcy proceedings, VDRs allow legal teams to share court filings, restructuring plans, and creditor information securely. Role-based access controls ensure that only authorized individuals can access documents, protecting the interests of creditors.
6. Corporate minute books creation. Legal data rooms significantly simplify the creation and distribution of corporate minute books, i.e. a daily task for the majority of legal firms. Additionally, many VDR providers offer convenient minute book templates, reducing the manual work required for their creation.

VDR benefits for legal firms 

Let’s explore a data room’s key advantages through the prism of tools and services they offer so that, when choosing the best data room, admins pay attention to the most important aspects and make informed decisions.

1. Enhanced security measures 

The legal sector operates within a web of strict data protection regulations. Violations lead to serious legal consequences and significant fines. For example, Tuckers, a leading criminal law firm, faced a £98,000 fine after a ransomware attack exposed nearly a million files due to their negligent security practices, including the failure to implement multi-factor authentication. 

“Following the attack, we have successfully implemented a broad range of measures to prevent the recurrence of such criminal incidents, and the ICO acknowledges the strengthened procedures which are now in place as we operate from a state-of-the-art system,” the firm comments.

That’s why it’s so important to be proactive and implement strict security measures in advance, not after a cyberattack. Here’s what legal data rooms offer in terms of security:

• Two-factor authentication

This added layer of security requires users to verify their identity with a second method, such as a mobile code. This is crucial for legal firms, serving as a defense against cyberattacks similar to the one Tuckers faced.

• Advanced permissions

This feature also enhances confidentiality, allowing legal teams to control who can view, edit, or share documents based on their roles and responsibilities.

• Time and IP restrictions

With this feature, data room administrators can limit access to legal documents based on specific time frames or approved IP addresses. For example, access can be limited to working hours only.

• Fence view

By enabling a restricted view mode, users can only see the part of the file where the cursor is hovering, while the rest is blurred out with a sliding barred screen. This prevents screenshot-taking and unauthorized viewing, for example, in public places.

• Redaction

The tool allows the admin to hide a document’s sensitive information selectively, like names or addresses. This is essential for legal specialists dealing with confidential data, as it ensures private details are safely shared without compromising the integrity of the document or violating privacy regulations.

• Watermarks

Watermarks act as a visible trail, marking documents with identifiers like names or IP addresses and discouraging inappropriate distribution of legal documents.

2. Easier document management

According to a survey conducted by Adobe, numerous employees encounter difficulties in effectively managing digital documents. Specifically, 48% reported difficulty finding files quickly, 22% noted challenges integrating files across multiple platforms, and 47% felt their company’s digital systems were ineffective and complicated to use.

Virtual data rooms eliminate these inefficiencies by providing various document management features, such as:

• Bulk upload

Legal proceedings, M&A, and other cases legal professionals work on often involve large volumes of data. The bulk upload feature instantly adds an unlimited amount of documents to the data room.

• Full-text search

The feature enables users to find information quickly within the VDR by searching keywords or applying multiple search filters. This functionality is enhanced by an optical character recognition (OCR) system, which scans documents for words or phrases, making it possible to search through the entire content of documents, not only titles.

• Labels

The feature allows users to categorize documents effectively, enhancing the ease of search and overall document management. Examples of labels include confidential litigation documents, draft contracts, and regulatory compliance.

3. Improved collaboration

According to a research conducted by Deloitte, employees are 20% more satisfied with their workplace culture when they have access to effective digital collaboration tools. However, many organizations underestimate the importance of modern and innovative solutions.

“Employees are used to using their own choice of hardware and software in their personal lives, and for many, there is frustration that the tools they have to use in the workplace feel like 10 steps backward”, comments one of the interviewees. 

By implementing data rooms, legal specialists can significantly enhance collaboration within their teams, enabling faster and more productive work processes and increasing general work satisfaction.

Here are the key collaboration features that most data rooms offer:

• Auto-assignment of questions to experts

The feature allows users to assign questions directly to experts based on different categories without manual routing. Coordinators can easily reassign experts and modify the workflow if needed.

• Task assignment. 

Users can also assign tasks to other users. For example, when a particular document requires extra information, a lawyer may request a client to review it.

• Notifications

Send and receive notifications about uploaded documents, new questions, or tasks. Admins can also set the frequency of when users receive such notifications.

Key takeaways

• A legal data room is a secure online repository used by legal firms, lawyers, and other legal professionals for storing and sharing confidential legal documents. 
• The most common legal data room use cases include mergers and acquisitions, due diligence, litigation management, intellectual property management, and bankruptcy proceedings. 
• Key legal data room benefits include enhanced security measures, easier document management, and improved collaboration.