From the initial discussions and heads of terms in a transaction all the way through to completion and beyond, issues of trust arise on an frequently significant scale. Throughout the planning, drafting and negotiation of the agreements, and regulatory inspections, there are various stages at which the support of an independent escrow agent can address these, providing much-needed comfort, transparency and security.

In particular, escrows act as a safeguard to mitigate risks and, crucially, ensure that deposited funds are available after the transaction to satisfy any liabilities.

Types of M&A Escrow

There are lots of 'types' of M&A escrow.  Often, elements of some or all of them will be included by the parties' legal representatives to protect their respective clients in a single escrow agreement that governs the transaction and holds funds in a single escrow account for the purpose.  In almost every instance, there is a strong business case for the deposit of at least some of the purchase price with an M&A escrow service to secure them for the parties.

M&A: Good Faith Escrow

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.

M&A: Cross-Border Transaction Escrow

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.

M&A: Closing Arrangements Escrow

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.

M&A: Warranties Holdback Escrow

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.

M&A: Earn-Out Escrow

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.

M&A: Takeover Code Escrow

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.

M&A: Paying Agent Escrow

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.

Benefits of Escrow over Insurance/Bonds

Some of the trust shortfalls outlined above can be addressed through the purchase of a contract of insurance or a bond. These typically involve the payment of a fee (a "premium"), and in the event of default, the beneficiary under the policy must make a claim from the insurer or bondsman for their loss.

This approach comes with four primary drawbacks:

1. The premium is spent—regardless of whether or not a claim is made, the insurer or bondsman charges the premium as consideration for assuming the risk in the transaction;
2. There is a credit risk on the insurer/bondsman/guarantor—even the largest underwriters carry a credit risk; a policy of insurance is only as useful as the financial capacity of the underwriter to satisfy all of the claims they are underwriting at any one time. In circumstances where an insurer faces many simultaneous (or a few ultra-high-value) claims, they may not be able to fulfil their obligations;
3. It takes time to process a claim—even a successful claim can entail months of paperwork and administration before it is paid out;
4. Every policy or bond is written with very specific wording—it might be that, for unexpected reasons, an anticipated claim is not actually covered by a policy or bond (either because it is specifically excluded or because the wording allows it to be excluded for some other reason).

Cash-backed escrow, by contrast, addresses all of these issues. It is generally cheaper to administer than the cost of a premium; in most cases, there is no credit risk because the funds are segregated and safeguarded by the escrow agent; payouts generally happen within a few days; and there will not be any circumstances in which a payout is excluded—the terms of the escrow agreement will make it very clear what circumstances need to exist to trigger a payment, rather than necessarily the reasons behind those circumstances.

Why choose dospay over a bank or trustee for your escrow?

We are an established, independent escrow agent not affiliated to any bank or trustee.  We're based in London, in a time zone conveniently located for transactions taking place anywhere in the world. As a small team, we're easy to get hold of, responsive and dependable.  

While our processes are systems are rigorous, they are also flexible. We make the effort to understand each transaction and its nuances, meaning that we can provide the perfect solution for the parties.

Funds secured at the Bank of England

Through our technology partners, we are able to open custodial/escrow accounts at the Bank of England with the click of a button. Unlike a bank (who accepts your escrow funds as a "deposit", whereupon it becomes part of their balance sheet and can be loaned to others), our accounts are all segregated (kept separately from our own) and safeguarded (not used for any other purpose). This means we are probably the most secure escrow agent in the United Kingdom.

We simply hold the funds liquid and unencumbered at the Bank of England, ready for use in the transaction. Exactly as escrow should be.

No existing or future banking/trustee relationship required

Most banks and trustees see escrow as a slightly painful service they need to offer in order to justify their moniker of being 'full-service' - it's a service that most clients will wish for, but compared to their lending, advisory and trustee fee revenues, few banks consider escrow to be a profitable exercise.

As a consequence, most will ask for at least one of the parties to be (or to become) a client of the bank or trustee going forward - very few will offer it to entirely unrelated parties with whom they have no opportunity to make money in future.

We're different.  We only exist to provide escrow services, and those are frequently once-in-a-lifetime deals - while we are delighted to enjoy repeat custom, we haven't built our business model on it.

Lower fees

We don't carry the overheads of a large bank or trust corporation, or anything like them. As a small team, we've invested heavily in technology to do the heavy lifting and we have no legacy systems that make life difficult for us - it's all cutting-edge, encrypted, bank-level technology, but without the legacy costs.

We are therefore almost always cheaper, often by a considerable margin  (and, if for any reason we're not, we're always happy to have a commercial conversation).

Fast account opening

Our streamlined systems and processes lend themselves to fast account opening.  Often, the detail of escrow arrangements is left until quite late in the transaction - this isn't a problem for us; indeed, we're used to it - it's what we do.

Our accounts can be opened same-day if we have all of the information, and the vast majority are opened within 3-5 business days (most of which time is taken up with us carrying out our mandatory compliance activities).

Flexible terms

Unlike a bank or trust company that is required to operate on standard terms, with 3-5 day turnaround times for their internal legal teams to sign off any deviations, we can work either on our standard conditions or on the basis of a document agreed between the parties, and we're flexible about what that looks like.

Each transaction is different, so we don't try to shoe-horn them into chapters of legalese - the terms of our participation are clear, concise and flexible.