JP Morgan 24-hour legal news as it breaks, plus comment, analysis, features and blogs

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1 JP Morgan 24-hour legal news as it breaks, plus comment, analysis, features and blogs

2 J.P. Morgan Treasury Services solutions for lawyers J.P. Morgan Escrow Services: Mitigating risks for lawyers and their clients Minimising transactional risk has never been more important. Commercial law firms on both sides of a transaction need flexible solutions to mitigate risks on behalf of their clients. And these days, law firms, like their clients, are acutely aware of the need to manage risks associated with their business while cost-effectively managing resources. Specifically, firms are carefully evaluating the risk and resource impact of transactions that may require long-term oversight and the careful monitoring of complex financial obligations. Fortunately, there is a solution that enables lawyers to mitigate risk for both their firm and for their client escrow accounts. An independent solution The right escrow structure can address risk issues for participants on both sides of a transaction and can be used to either prevent risks from occurring or to mitigate against existing risks, says Faisal Ansari, Londonbased J.P. Morgan Escrow Services global product executive. The escrow agent acts as a neutral third-party to the deal. That gives deal participants an added measure of assurance that the transaction will flow smoothly, but it also enables the law firm to give the responsibility of the funds to a party outside the firm and to focus on what they do best. John Salmon, J.P. Morgan s Escrow Services, adds, An essential part of the value of an escrow is that it is a legal agreement, with the terms and conditions carried out by an independent escrow agent. The agreement controls the disbursements of assets -- often a good faith deposit in the case of an M&A deal-in which both parties to the escrow have a vested interest. Salmon says that the law firm retains control of the client relationship, while the escrow agent takes on the risks and administrative burdens of the escrow. The benefits for the law firm, J.P. Morgan s Escrow Services, says her interaction with clients confirms that escrows are more in demand. She says that while many commercial lawyers historically arranged joint solicitor accounts, holding client money in escrow themselves, they are increasingly aware of the risks involved and are concerned about compromising client relationships. They would also rather stick to their core business. Some law firms, she notes, have actually formulated internal policies prohibiting solicitors from arranging joint solicitor accounts for their clients escrows. Going to a commercial escrow agent like J.P. Morgan is no longer the exception, but the rule, says Ruani. The J.P. Morgan advantage J.P. Morgan is a leading global provider of escrow services, with a team of experts located around the world who are dedicated exclusively to escrow and are knowledgeable in a wide array of transactions, including mergers and acquisitions, private equity deals and joint ventures. Ruani suggests that, Clients look for an escrow provider that can translate their unique risk mitigation requirements into a simple, workable solution. J.P. Morgan is one of the few banks in the world with a dedicated escrow group, with more than 100 professionals around the globe in Asia, Europe, Africa and the Americas. Ultimately, J.P. Morgan proposes a solution based on the holding, investment, and future disbursement requirements of the escrowed asset, working in conjunction with the lawyers to ensure that the client s wishes are fulfilled. Ruani notes that, Law firms want an expert who can offer global coverage to enable the client to deposit various types of assets, including cash and securities, and who is familiar with the various nuances of regional settlement systems. With J.P. Morgan, escrow clients have access to a broad range of related capabilities, including leading payment services, foreign exchange services and a full range of investment products that provide liquidity, safety, and return. She adds, J.P. Morgan guides its clients through the steps needed to complete a transaction, including fast, easy document preparation. Perhaps most importantly, J.P. Morgan s Escrow solutions are backed by the financial strength of the firm, with more than $2 trillion in assets. Next week: How J.P. Morgan Escrow Services can help law firms working in the oil & gas and infrastructure & construction sectors.

3 In law, as in business, certainty is paramount, especially where transactional work is concerned. As last week s article indicated, financial relationships are likely to evolve during transactions which require all relevant parties to control the subsequent flow of funds with unfaltering efficiency. Clients and lawyers alike are looking for effective solutions that meet all their basic requirements. With law firms looking to keep their back office systems lean, homegrown options may take up time and resources - unlike escrow and structured accounts, which offer proven and economical solutions to problems. Two significant sectors in which law firms are increasingly making use of these capabilities are oil & gas, and infrastructure & construction. Oil & Gas Sectors J.P. Morgan is one of the top escrow providers in the oil & gas sector active in North and South America, Africa and Asia and the bank s dedicated escrow experts offer invaluable advice specifically tailored to each individual client. Escrows for the oil & gas sector typically last several years, and often lawyers do not want to consider such a lengthy undertaking. John Salmon, J.P. Morgan Escrow Services, says, We have the expertise that comes from doing hundreds of these transactions every year. By their nature, they are often complex, with participants from many countries dealing in multiple currencies. The service is flexible, Salmon says, whether the escrow requirement lasts for one or two days, or for decades. He recalls a recent joint venture (JV) in Eastern Europe requiring an escrow account to receive cash on a monthly basis for an estimated 40 years. Bayo Osolake, from J.P. Morgan s Nigeria office, says the bank also positions itself to mitigate the risks of other partners in JVs, particularly for the oil & gas industry, and suggests that the use of escrow accounts enables a reduction in counterparty risk. As an example of this, Osolake references an oil & gas company that was buying an upstream asset in West Africa, the rights to which were disputed. A solution was reached in which the acquirer paid into escrow several hundred million dollars to acquire the asset. The funds were then held there until the dispute was settled. Using an escrow account ensures that once an underlying dispute is resolved, the funds are passed to the seller and the title passes to the buyer. However, if the dispute exposes, for example, that the seller is not the true owner of the title, the buyer s money remains protected. Another example of the value of escrow accounts in the sector, according to Osolake, is with merger and acquisition (M&A) transactions involving multiple bidders. In some instances, the seller will request a 10% deposit of the acquisition price in escrow in order to pinpoint the serious bidders. When negotiations are concluded, the funds are either returned to the bidder if unsuccessful or used as a contribution to the total acquisition price. Where large sums of money are involved, Osolake says, an escrow really is a perfect instrument to mitigate acquisition risks. Infrastructure & Construction Sectors The use of escrows is equally prevalent in the infrastructure & construction sector,, J.P. Morgan Escrow Services, points out that cash is not the only asset used in escrows. Relevant also are de-materialised securities bonds or stocks, securities in paper form, or title documents. This flexibility adds to the appeal of an escrow solution because it enables parties to select asset types that are available at the time of the transaction rather than force the conversion of a valued asset to cash. Escrow services can accommodate the specific requirements of the sector by offering customised template agreements. Ruani adds, We have been preparing and tailoring these agreements for decades. We can also review draft contracts that the parties may be looking at. Ruani also says that J.P. Morgan helps ensure that the mechanics of the escrow contract are clear and unambiguous. Ruani explains how the agreements can be customised to suit the requirements of all parties. With a construction funds escrow agreement or a capital raising escrow agreement for example, the terms and conditions remain the same, but we are able to customise the operating procedures of the accounts and the funds release mechanics. These may vary between joint or unilateral release instructions or they may involve customised payment schedules, trigger dates or claim notices, or a combination thereof. Additionally, there are commercial benefits. Often, before a construction project begins, each of the parties must deposit their contribution towards the JV into independent escrow accounts. Upon notification, a portion of those funds is then placed into an escrow master account. Effectively, Ruani says, at the beginning of negotiations between investors, escrows can work as a fantastic tool to encourage potential JV partners to engage in a construction project. An escrow provides investors and sponsors a clear view of whether co-investors have placed cash in escrow equal to their relative stake, and this reassurance helps maintain momentum behind the transaction. These infrastructure escrows, the benefits of which are summarised in the box below, are, according to Ruani, typically very active throughout the life of the escrow period, meaning that the dedicated monitoring of the accounts is essential something J.P. Morgan is well placed to provide. Escrows in the infrastructure world According to Ruani, there are three main ways in which escrows can be used, connected to the various stages of a given project: 1. At inception, escrows are effective as a good-faith deposit to ensure confidence in co-investors available cash resources relative to their investment. 2. During the project, escrows are useful for managing the payments and cash flow of the construction companies and suppliers involved. It can also help to ensure that specific contract stipulations, such as project milestones, are reached. With a construction fund escrow, deposits are drawn down and disbursed to vendors based on pre-agreed project completion timelines. 3. Once the project is complete, escrows can also be used to channel revenue streams and make payments in such a way that there is minimal risk, as well as prevention of unjust enrichment. Additionally, payment waterfalls associated with creditors such as sub-contractors can be controlled effectively. Next week: J.P. Morgan s role in providing escrow accounts for Technology, Media and Telecommunications sector clients.

4 In this challenging credit environment, escrow accounts offer many benefits for law firms. They allow parties to collateralise their potential exposure, giving them the commercial freedom to move forward, as well as providing a neutral, reliable third party who can monitor and control the accounts on behalf of the law firms and their clients. The question is, with the exception of time saved, how does this benefit the law firms in the long term? Process Control J.P. Morgan handles the validation of written release instructions, monitors trigger dates and implements payment schedules. According to, Escrow Services, there is a clearly controlled path taken regarding escrows, starting with the signing of the agreement and ending when the funds leave the account. The bank engineered an efficient structure, underpinned by five separate cash and securities escrow agreements, each one tailored to the legal and tax jurisdictions of the five main seller groups. This, Ruani says, enabled the bank to source expert knowledge from their 12 dedicated escrow centres, and so take a potentially complex deal and simplify the dynamics radically, enabling the deal to be done. Without an escrow structure in this complex acquisition, it is highly likely that the buyer would have pulled out. Ruani adds that outside the US, buyers in the TMT sector have been active in looking to acquire US technology companies, and that the same holds true for US companies looking to purchase targets abroad. She notes, We have seen a spike in the use of escrows by companies outside the US, particularly when the deal involves a company in the US where escrows are traditionally used in M&A transactions. We carefully control every step of the process, we monitor accounts closely and also support the varied and specific needs of our clients, says Ruani. The complexity of scheduled, time-critical payments that are often cross-border makes a global bank like J.P. Morgan a provider of choice for escrow services. Often, law firms find that appointing a specialist escrow provider is more effective than managing the process themselves. Security & Service Law firms place a premium on the security of the cash in escrow and equally on the range of investment vehicles available. J.P. Morgan s capital standing acts as a reassurance for clients as explains John Salmon, vice president of J.P. Morgan s escrow team. He continues Law firms are not only looking for an escrow agent that is creditworthy, but also has the flexibility to offer different investment options. Clients may initially want to deposit cash but also invest it in other products, such as money market funds - and they expect their bank to offer a range of services. Beyond the investment of the escrow funds, providing a dedicated service to clients that is expert and responsive is equally important, as Salmon notes. Being able to provide a rapid turnaround on legal agreements can be vital. Salmon works closely with his legal department to achieve this with full law-firm buy-in. He adds, Both sets of lawyers review our escrow legal agreement to ensure it is in sync with their underlying agreement. Technology, Media & Telecommunications A prevalent area in which process control and security and service come together is in the technology, media and telecommunications (TMT) sector according to Ruani there were many escrow accounts arranged in 2009/10 involving TMT clients. Our TMT clients operate internationally and so a global bank like J.P. Morgan is well placed to support the sector, she adds. Ruani also points out that merger & acquisition (M&A) transactions in the TMT sector can be subject to cross-border counterparty risk, but her experience shows that escrows have proved to be effective in mitigating that risk. Another example highlighted by Ruani relates to buyers concerned with sellers representations or future covenants, which frequently require that a percentage of the purchase price is held in escrow. In one particular case, a large technology company placed 30% of the purchase price in escrow and pushed for a duration of three years for the account. The sellers, however, would only accept the proposal if the buyer would agree to partial releases. J.P. Morgan was able to accommodate this request successfully. Such deals are common when a longer duration is proposed, aided by automatic payments scheduled in advance. John Salmon notes In cross-border transactions, we offer flexibility around preferred operating mechanics, legal jurisdiction and sometimes, the physical location of the accounts. Ruani illustrates some key situations in which TMT transactions and escrow accounts come together. For example, if sellers do not know whether buyers have sufficient cash resources to pay for the company being sold, then the good-faith escrow deposit is reassuring. TMT deals also often require regulatory approval, so escrows offer a robust solution in these situations, i.e., where capital is being raised to finance an acquisition, but regulatory approval is still pending. The pre-funding of cash proceeds into an escrow assures investors that if the purchase is not approved, they will receive their share back. Specifically, if a buyer is raising funds via high-yield bonds, and depositing them into an escrow pending completion of an acquisition it makes the investment safer for bondholders. Similarly, earn-out premiums suit escrows. An earn-out is a mechanism in which part of the purchase price is dependent on the future performance of the target business. For the seller, it potentially increases the purchase price. For the buyer, there are also benefits because the seller will be motivated to maximise business performance during the earn-out period. Sellers may be concerned that the buyer could be unwilling to pay the agreed premiums if the sold business performs beyond expectations. It is highly likely, Ruani adds, that sellers will request the buyer to pre-pay these amounts in escrow, and then, if the performance meets the pre-agreed levels, the escrow funds will be delivered to the seller. Ruani gives the example of a large US technology company, which J.P. Morgan provided with a multi-currency indemnity escrow for the acquisition of targets on five continents from 250 selling shareholders. See how J.P. Morgan can help mitigate risk in your transaction with responsive and comprehensive global escrow services video at:

5 The complexities of private equity transactions, especially those involving cross-border elements, will be familiar to many commercial lawyers. Law firms need to be assured that the structure of a deal is suitable for all parties. Escrow is a unique solution assuring all parties that their interests will be safe-guarded until all the pre-agreed conditions of the deal are met. Private Equity and Escrows John Salmon, J.P. Morgan Escrow Services, notes a recent example involving a variety of asset types. One recent private equity deal involved a Russian company with assets, including shares, to be escrowed in one country, in addition to ADRs (American Depositary Receipts) and cash escrowed in an entirely separate country. Salmon emphasizes the number of parties across the globe involved in the deal. Each party s specific requirement in this cross-border acquisition was for an escrow agent with the global capacity to hold securities both in physical or dematerialised form, and to be able to take multi-currency cash deposits. J.P. Morgan s escrow team guided the parties through each step of the transaction, which included quick and efficient preparation of all documents for the holding of the various assets. Salmon points out that although some of the lawyers involved had used escrows occasionally, others were less familiar, but were aware of the general escrow concept. Once fully briefed however, all parties were very satisfied and comfortable to progress with an escrow solution. He adds, We spent a lot of time working on the structure, providing enough information for them to feel comfortable with the role that J.P. Morgan would undertake as escrow agent how we were mitigating the risk, and how the disbursement mechanics agreed between the parties would work. Assistance with Escrow Accounts Salmon s colleague believes that J.P. Morgan can help law firms dealing with private equity acquisitions in two principal ways: 1) Safeguarding against unforeseen events taking place with respect to the target company post-purchase: Retention escrows are often used by buyers and sellers to withhold a percentage of the purchase price pending the resolution of uncertain events within the target company. Ruani says If the parties hit a stumbling block in their final negotiations, escrows serve as an excellent temporary solution and an opportunity for the parties to complete the transaction while undertaking to resolve in the future any outstanding issues that may affect the purchase price. 2) Managing the collection of requisite funds and disbursing to selling parties: Closing escrows are also popular, according to Ruani, especially in multijurisdictional acquisitions. We help facilitate a controlled collection and disbursement of acquisition funds and sale proceeds, while minimising operational and payment risks. J.P. Morgan helps the buyer to concentrate the acquisition monies, whereas post-completion, J.P. Morgan s global network and infrastructure sets about disbursing the sale proceeds to selling shareholders, wherever they may be located, and in whatever currency they require. Ruani offers an example of the complexity of such work. In a multi-billion dollar private equity deal, we helped set up 32 individual cash accounts for acquisition funds anticipated from various bidding companies (BidCos) incorporated across 32 countries. The account structure served three core purposes: To ensure a seamless inflow and outflow of funds, whilst also minimising operational risk, as all the authorised disbursements were centrally controlled by a single servicing team To mitigate the operational risk of the BidCos incorporated across various jurisdictions, through concentrating all the cash accounts in one location To mitigate the payment risk and facilitate a single flow of funds to the Seller Escrows: A Global Solution to a Global Marketplace Are there Alternatives? Ian Borman, a partner at SJ Berwin, indicates that bank guarantees and letters of credit can be used for the same purpose as escrows but are increasingly costly to set up and manage, as well as it being difficult to convince banks to commit capital where there is no collateral business. Salmon maintains that the attraction of escrow accounts is the offer of a compromise between hard financial guarantees where and merely trusting the word of the counterparty. Where clients are less likely to suggest an element of doubt, risk or mistrust, and where guarantees are culturally inappropriate, an escrow account can be a reassuring solution. So what do commercial lawyers think of such services? SJ Berwin s Borman, offering a general view, suggests that until recently, bona fide escrow service providers were thin on the ground. Genuine arrangements of this kind imply that the agent takes on some professional liability for ensuring that the escrow release conditions are met, and in Borman s experience, banks have historically been reluctant to assume responsibility. Borman says there has been an increase in the use of escrows with sophisticated escrow providers like J.P. Morgan, presumably as market participants are behaving more cautiously Elsewhere, Will Lawes, a partner at Magic Circle law firm Freshfields Bruckhaus Deringer, says that his company has worked with J.P. Morgan s escrow team on a number of matters recently. We have always been pleased with the responsiveness, the flexibility and the general helpfulness of the service they provide. We will certainly continue to suggest them to our clients. See how J.P. Morgan can help mitigate risk in your transaction with responsive and comprehensive global escrow services video at: