M&A: What is a Post-Closing Escrow?

In business mergers and/or acquisitions, it is common for the parties to negotiate at least one post-closing money escrow. These are funded from the seller’s purchase price. In general, an escrow is an agreement in which an agreed-upon neutral third party holds something of value for the parties to a deal until the agreed-upon conditions are met.

Usually the “something of value” is money, but it could be the keys to the house, a check, the title to the vehicle, or really anything. The “something of value” is sometimes called the escrow “corpus.” With mergers and acquisitions, the “neutral third party” is often a financial institution, a title company, a lawyer, or some other person/entity that is agreeable to the parties to the underlying sale/purchase, and this entity/person is called the “escrow agent.” If large sums of money are involved, then there is an obvious need for the escrow agent be able to deposit and hold the funds in a secured financial institution.

The “agreed-upon conditions” are those that the parties agree to such as “receipt of final inventory count and the parties’ agreement on price adjustment.”

Any and all escrows are negotiated contracts and, as such, contract drafting and interpretation legal principles apply. An escrow agreement is usually among three parties – the two to the underlying merger/acquisition and the escrow agent. The escrow agreement binds the escrow agent to release the escrow corpus ONLY according to the escrow agreement. The escrow agent can be sued by either party for violating the “agree-upon conditions” for release of the escrow corpus. Thus, in the above example, there are two conditions – receipt of the final inventory and agreement of the parties on a price adjustment. Until both conditions are met, the escrow agent has no contractual authority to release whatever is being held.

Because escrow agents do not want to be sued, often the escrow agent requires the signature of both parties to the underlying merger/acquisition before release. Thus, many escrows are called “two-signature” or “dual-signature” escrows. However, some escrows can be completed on unilateral conditions if the parties have agreed to that. An example might be: “… receipt from the mortgage lender of a fully and duly executed Release of Mortgage.”

As such, there are often different “agreed-upon conditions” and, as such, there is a trend towards establishing separate escrows for various aspects of the deal that require a post-closing escrow. Here are the advantages of having multiple escrows.

Escrows can be negotiated for many aspects of a transaction. Among common examples would be these:

• Post-closing price adjustments based on many factors such as final month revenues, verification of precise accounts payable/receivable, inventory counts, etc.
• Avoiding a closing delay for clearance letters like tax or bulk sales
• Ensuring indemnity provisions
• Covering known obligations that cannot be precisely calculated at closing like utility charges
• And more

Contact San Diego Corporate Law Today

If you would like more information about how to best structure your merger and acquisition deals, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities.

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