Context:
The key purpose of an escrow in M&A is to help each party perform its contractual obligations when it is not possible to have certainty as to various matters at completion of the acquisition.
In such cases, the transaction parties will typically turn to an independent, professional third party escrow agent, who can hold cash and/or documents pending the outcome of various future events.
Commercial Problem:
It is not always possible at the time of completing an M&A transaction to determine the value or quantum of all obligations owed by each party, as they may be contingent on future events or outcomes. We set out below various solutions that escrows can provide.
Commercial Solution for the Buyer:
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Scenario
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Solution
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Holdback
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Escrow provides a mechanism to provide cash for potential future claims of the Buyer following completion e.g. breaches of warranties, incorrect representations, tax liabilities, general claims
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Purchase Price Adjustment
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Mitigates post-signing risk of mis-valuation. Once completion accounts received, any adjustment in purchase price can be made from escrow account to buyer
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Good Faith Deposit
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Cash placed in escrow to evidence serious intent of the buyer to complete the deal
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Cash Confirmation
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Total consideration payable under the terms of a public offer to be held in escrow to meet certainty of funds requirements (e.g. UK Takeover Code, Rule 2.7)
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Termination Fee
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Cash held in escrow to be distributed to the buyer as compensation in case the transaction falls through
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Commercial Solution for the Seller:
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Scenario
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Solution
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Earn-outs
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Funds held in escrow to cover payment of additional consideration due to the seller upon specified objectives / milestones (usually financial) being met following the acquisition
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Purchase Price Adjustment
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Mitigates post-signing risk of mis-valuation. Once completion accounts received, any adjustment in purchase price can be made from escrow account to Seller
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Management Retention
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Funds held in escrow and paid out to key staff members to reduce management turnover following acquisition (often paid out on an annual basis for a number of years following completion)
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Break Fee
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Cash held in escrow to be disbursed by the buyer to the seller in the event that the buyer pulls out of the process whether for commercial, regulatory or other reasons)
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We are valued for our independence and best in class service:
- We have standard documentation available for use
- We can open escrow accounts without delay
- Our KYC on-boarding process is efficient and quick
Please do contact key team members with any questions:
Tom Speer, Associate Director: 07593 572 049 / tom.speer@lawdeb.com
