Holdback Escrows in M&A Transactions

more+
less-

A Merger and Acquisitions (“M&A”) holdback escrow, where a portion of the purchase price of an acquisition is placed in a third party escrow account to serve as security for the buyer, is a common element in structuring business acquisitions, whether the transaction is an asset or stock sale, or a merger.  Both buyers and sellers benefit from holdback escrows.  First, a holdback escrow can serve as a bridge between differing views of value by allowing uncertainties that might have created a valuation gap to play themselves out over the duration of the escrow.  Second, it allows for specifically targeted risk allocation, by assuring the buyer access to indemnification payments for post closing risks ranging from working capital adjustments, to tax issues, to financial statements representations and warranties.  And third, it can serve the interests of the sellers if the holdback escrow is negotiated to be the exclusive fund to which buyers can look for breaches of representations and warranties; thereby creating a “cap” on indemnification liability.  Accordingly, well thought through holdback escrow provisions should be one of the elements negotiated between buyers and sellers at the outset of a deal, even as early as the letter of intent stage.

The American Bar Association Business Law Section periodically publishes statistics regarding holdback escrows as reported in publicly announced transactions.   Those statistics, which were taken from approximately 250 deals (as reported by J.P Morgan’s escrow services group) whose median size was $60MM, confirm that holdback escrows are common.  They reveal patterns that can be useful guidelines when negotiating the parameters of a holdback escrow.  Some of the most helpful statistics include the following:

  • The median percentage of purchase price placed in the escrow was 9%.
  • The average duration of the escrows was 18 months.
  • Over a quarter of the escrows did have a claim made against the funds held.
  • The average size of a purchaser’s claim against the escrow was over 60% of the amount held, with about 45% returned.
  • Hold back escrow fees were split between purchasers and sellers 75% of the time.

When negotiating the terms of a M&A transaction, it is not only important to detail the price, terms and conditions to closing, but also the post-closing rights and obligations of the parties.  Considering the benefits for both parties of a holdback escrow should be part of those negotiations.  Time spent up front thinking through holdback issues, and understanding typical approaches, may well help both parties get any gaps in the negotiations bridged, enabling them to reach a mutually acceptable understanding.

Topics:  Escrow Holders, M&A Holdback Escrows

Published In: General Business Updates, Finance & Banking Updates, Mergers & Acquisitions Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Carr, McClellan, Ingersoll, Thompson & Horn - Professional Law Corporation | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »