From the earliest stages of a transaction, a seller may wish to see 'proof of funds' or even proof of 'good faith', which can be deposited with an escrow agent and held until either the transaction completes, or it is abandoned.
In certain jurisdictions (particularly Latin America), escrow is required as an anti-corruption mechanism, but that is not the only cross-border context in which escrow arrangements can bolster M&A transactions and offer security to the purchasing party.
In the context of warranties and representations, in the event that there is a successful award under the sale and purchase agreement (which could well be regulated by the law of England and Wales), such an award would still need to be enforced overseas. The largest cross-border risk in M&A is where the seller is based overseas, particularly if the cultural distance between the UK and their jurisdiction is large, as it may not be possible (or it may be very difficult, expensive or time-consuming) to enforce the UK judgment.
By placing a portion of the transaction funds in a UK-based escrow for an agreed period, the purchaser can be confident of enforcing the judgment against the escrow proceeds in a speedy and low-cost way.
A frequently-deployed use of escrow arrangements in the business M&A context is to ensure certain post-completion/closing arrangements, as the case may be. In particular, the seller may be required to assist in future arrangements, transitionary operations or to provide additional documentation as a condition subsequent.
By holding back funds in escrow, the purchaser receives the comfort either that the post-completion/closing requirements will be satisfied, or that they will be able to claw this back from the escrow and so receive a discount on the purchase price. This way, the seller is incentivised to actually carry out their obligations as set out in the transaction agreements.
When buying or selling businesses, there will frequently be a shortage of time. The due diligence exercise is designed to give the purchasing party as much information about the acquisition target as possible, but there is a limit to the amount of time and resource that can be spent on due diligence.
Often, then, lawyers for the purchasing party will seek to 'bridge the gap' with warranties and representations. Although those will give the purchasing party some recourse, it could be that the seller is based overseas; is a private individual who fully intends to spend their exit proceeds or whose creditworthiness is otherwise in question.
This is when the deployment of an escrow can help enormously - in a 'holdback' situation, a portion of the purchase funds are paid not to the seller, but to an escrow agent instead, who holds them until certain conditions from the transaction agreements are met. This way, in the event that the purchase conditions are not met by an agreed deadline, the purchasing party can recover the relevant amount from the escrow agent instead, and doesn't have to take a credit or jurisdiction risk on the seller.
Earn-out provisions tie the purchase price of the acquisition of the business to its future performance, often representing a compromise between buyers and sellers - in essence, the purchaser tells the seller to 'put their money where their mouth is' - if the business or asset performs as the seller says it will, as more particularly set out in the transaction agreements, they get additional consideration for the sale.
This introduces risk for the seller, however. How do they know that the buyer will honour the additional consideration requirements? How can they ensure the buyer will be able to honour them - that it will have enough money? How can they be sure they won't end up in months of protracted negotiation or even litigation with the buyer in order to secure their entitlement?
This is where an M&A escrow can help - the buyer places the earn-out funds in escrow as security and, that way, once (or as) the conditions are satisfied (usually, as signed off by the company's auditors or accountants, or an independent expert), the seller can simply make a request of the escrow agent and be paid them promptly.
When the acquisition will be subject to the Takeover Code, rule 24.8 includes a requirement for a security escrow arrangement whereby, if the offer is for cash or includes an element of cash, the offer document must include confirmation by an appropriate third party (a bank or escrow agent) that resources are available to the offeror sufficient to satisfy all of their transaction requirements - eg, that the offeror has sufficient cash to complete the transaction.
In support of this concept of 'cash confirmation', we are able to receive escrow deposits and provide the necessary assurance to the offeror's financial advisor that the funds will be readily available and remain segregated and safeguarded for the duration of the process.
It is usually the buyer in an M&A transaction who pays the purchase price to the seller. The buyer is also responsible for any related tax reporting. Sometimes, 'paying agents' or 'payments administrators' are used instead. Paying agents hold the funds securely in escrow to ensure that that the purchaser's payment requirements can be satisfied at completion.
dospay is a trading name of DOS & Co. Ltd, a company registered in England and Wales with company number 08294966.
DOS & Co. Ltd. is registered with the Financial Conduct Authority under the Payment Services Regulations 2017 (FRN: 833374) for the provision of payment services.
All of our GBP escrow and third-party managed accounts are segregated and safeguarded at the Bank of England.
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