How Your M&A Escrow Can Go Wrong
By: William Daniel
In the world of M&A transactions, there is always a large debate between buyer and seller on proper security for certain liabilities that the buyer may experience after the closing. A solution very commonly used is to place a certain percentage of the purchase price into escrow with an escrow agent, such as a bank, to hold the money post-closing and release it if one of those liabilities occurs. This is a standard process, and it normally strikes a good middle ground as the parties can be confident the bank will properly handle the funds.
What happens when the bank does not properly handle the funds and disbursements?
The typical structure calls for the release of funds only when joint written instructions are provided. We recently closed an M&A deal that escrowed a portion of the purchase price under this exact setup, only the bank then went off and disbursed funds without getting authorization from the seller (our client). This improper disbursement put everything in flux because the typical escrow agreement essentially provides for zero responsibility on the part of the bank, even if the bank makes an improper disbursement.
Where does that leave a seller who now has a portion of their proceeds paid out of escrow without their consent?
This situation is never something parties want to have happen; post-closing is not the time that you want to spend legal expenses fighting over issues such as this after all the money spent in getting the deal done. Human errors do happen even by banks, so it is important to get as much of the purchase price as possible in your hands at closing. This ensures that any kind of post-closing liability has to be discussed with you.
If you’re selling your business, increased attention should be paid to the terms of any proposed escrow arrangement because no bank is perfect, as seen in our client’s situation and in recent news with Silicon Valley Bank. Reducing the amount of escrow and the time the money spends in escrow are key issues that should always warrant close attention. While escrow is still a very viable solution when it comes to post-closing liabilities, sellers should try their best to negotiate these issues to minimize the risk of these kinds of errors post-closing.
Our experienced team of M&A attorneys is here to help with these issues and all the other issues that can come up when buying and selling a business.