Escrow Agreements What You Need to Know to Make Your Deal Successful 23 September 2009, Limassol Taras Burhan, Senior Associate, Banking and International Finance, Kyiv
What is an Escrow Agreement? A contract which: sets out the terms and conditions under which an escrow account is operated is entered into by the escrow agent (usually a bank) and the parties to the transaction helps to settle the transaction
What is an Escrow Account? A bank (deposit) account: held by a third party (the escrow agent which is usually a bank) which holds money from one party which will be released to another party on fulfillment of conditions set out in the escrow agreement
Escrow Structure 1 Buyer Seller (1) $ FUNDS DEPOSITED WITH ESCROW AGENT (2) $ FUNDS DEPOSITED WITH ESCROW BANK INDEPENDENT ESCROW AGENT e.g. specialist company or law firm (4) $ FUNDS RELEASED PLUS INTEREST MINUS ESCROW FEE (3) $ FUNDS PLUS INTEREST TRANSFERRED TO AGENT ESCROW BANK
Escrow Structure 2 Buyer ESCROW AGENT (2) ESCROW AGENT DATES AND FILES JOINT TRANSFER INSTRUCTIONS Seller ESCROW BANK (1) $ FUNDS DEPOSITED WITH ESCROW BANK ESCROW ACCOUNT (JOINT ACCOUNT) (3) $ FUNDS RELEASED PLUS INTEREST MINUS ESCROW FEE
Escrow Structure 3 (Ukraine specific) Buyer ESCROW BANK Seller (1) $ FUNDS DEPOSITED WITH ESCROW BANK ESCROW ACCOUNT (TRANSIT OR SECURITIES TRADER S ACCOUNT) (2) $ FUNDS RELEASED PLUS INTEREST MINUS ESCROW FEE
When are escrow arrangements used? - 1 Mergers and Acquisitions E.g. Buyer will be reluctant to hand over money until the seller executes the share transfers and vice versa Part of proceeds ( purchase price ) held in escrow just in case there is a breach of the warranties and indemnities
M&A (3) $ FUNDS RELEASED IF CONDITIONS MET: 80% upon transfer of shares 20% within 6 months if warranties are not breached ESCROW ACCOUNT (1) $ FUNDS DEPOSITED Seller Buyer (2) TRANSFER OF SHARES OF THE TARGET COMPANY
When are escrow arrangements used? - 2 Real Estate In some jurisdictions registration of title can take some time, the purchase funds can be held in an escrow account until all the documentation is in place
Real Estate (3) $ FUNDS RELEASED (1) $ FUNDS DEPOSITED ESCROW ACCOUNT Seller Buyer (2) ASSETS TRANSFERRED AND TITLE REGISTERED
Standard Form Agreements Biased towards the bank/agent Automatic process The agent/bank does not want to think!
Agent/Bank Will Limit Liability The agreement will: limit liability provide for indemnity state that no representations are made give the agent/bank discretion not to comply with the agreement An independent agent will want a clause which excludes liability for any loss as a result of the insolvency of the bank
Agent/Bank Wants to Do as Little as Possible Agreement will provide that agent/bank will not: Monitor or enforce compliance Act on any opinion obtained Check that the terms of the escrow agreement are consistent with the terms of the [sale] agreement
Agent/Bank Will Include Get Out Clauses Agreement will include clauses providing for: a mechanism for varying the agreement circumstances in which the escrow arrangement can be terminated e.g. if one of the parties becomes insolvent the replacement or retirement of the escrow agent (bank)
Areas Parties May Be Able to Negotiate On: Conditions for the release of funds How interest dealt with who it is paid to and when Fees charged by the escrow agent/bank
Alternatives Letters of credit Guarantees e.g. Banker draft guarantee that cleared funds are available Insurance e.g. warranties and indemnities insurance Conditions precedent
What if the Bank Becomes Insolvent Who Can Claim? Escrow account typically in the joint names of the buyer and seller Parties will have a claim as joint creditors if the bank becomes insolvent Will be unsecured creditors so recovery likely to be <100%
Summary Escrow agent/bank will protect its own interests You should consider: Is escrow the best arrangement in the situation weighing up the pros and cons? How confident are you that the escrow bank will remain solvent? Is there any room to negotiate on the contents of the escrow agreement? If there is, make sure it isn t drafted in the other parties favour at your expense.
Questions?
Thank you for your attention! CMS Cameron McKenna LLC 6th Floor 38, Volodymyrska St Kyiv, Ukraine +38 044 391 33 77 Taras Burhan taras.burhan@cms-cmck.com