The language of escrow

The terms used for holding the price, holdbacks and closing flows, from deposit to release of the funds. The definitions are general and do not constitute legal advice.

Conventional escrow (séquestre conventionnel)

The deposit, by agreement of the parties, of a sum or an asset with a third party who undertakes to hold it and to hand it over to the party entitled to it once the agreed conditions are met (articles 1956 et seq. of the French Civil Code). It is the tool used to secure the flows of a business sale.

Escrow agreement

The contract between the parties and the escrow agent. It sets the deposited item, the term, the conditions and terms of release, the instructions to be given, the procedure in case of disagreement, the fees and the scope of the escrow agent’s liability. Its drafting determines how effective the mechanism is.

Escrow agent (escrow lawyer)

A neutral person who receives and holds the funds. Where the escrow agent is a lawyer, the funds must be deposited on a CARPA account, which guarantees they can always be returned and rules out any commingling with the firm’s own funds.

Dedicated CARPA sub-account

An account opened in the books of the CARPA in the name of the escrow lawyer and assigned to a specific transaction. Every movement is checked by the CARPA, which verifies the reason for the payment and the identity of the beneficiary before any disbursement.

Depositing party and beneficiary

The depositing party hands the funds to the escrow agent (most often the buyer); the beneficiary is the party to whom they will be released (the seller, or the buyer if the warranty is called). The same party may be both, depending on how the transaction ends.

Release event

A fact or date, defined in the agreement, that triggers the release of the funds: signing of the completion deed, expiry of the creditors’ opposition period, end of the representations and warranties period, achievement of an earn-out target, court decision. The escrow agent releases only on the agreed evidence.

Joint instructions

A release order signed by all the parties, which spares the escrow agent any assessment. Without joint instructions or the agreed event, the escrow agent keeps the funds; it never settles the dispute itself.

Release of funds

Payment of the escrowed sums to the beneficiary, in one or several instalments according to the agreed timetable, against a receipt. Partial release allows the undisputed portion to be returned to the seller at each warranty milestone.

Holdback

A portion of the sale price, usually 5 to 15%, kept in escrow for the duration of the representations and warranties so as to cover the buyer’s claims. It spares the buyer from having to pursue a seller who has become insolvent.

Earn-out escrow

Deposit of part of the price subject to future results. The funds are released to the seller if the targets are met and returned to the buyer otherwise, on the basis of accounts prepared according to the method set out in the sale agreement.

Escrow of the price of a business (fonds de commerce)

In the sale of a business, the price is held in escrow during the formalities: the seller’s creditors may lodge an opposition within ten days of publication (article L. 141-14 of the French Commercial Code), and the buyer remains jointly liable for the seller’s taxes for ninety days, reduced to thirty under conditions (article 1684 of the French General Tax Code). Escrow protects the buyer against paying twice.

Creditors’ opposition

The act by which a creditor of the seller of a business blocks payment of the price in the hands of the escrow agent up to the amount of its claim. The price cannot be released until the oppositions are lifted or ring-fenced by the court.

Funds flow

A closing document listing, for each payment in the transaction, the payer, the payee, the amount, the account and the timing of the transfer: price, repayment of existing debt, fees, holdback, escrow. It is validated the day before closing with the bank and the escrow agent.

Dispute and court deposit

In case of a persistent disagreement over the release, the escrow agent keeps the funds until an agreement or a court decision; where the agreement so provides, it may deposit them with the Caisse des Dépôts et Consignations and be discharged from its mission.

Receipt and discharge

A receipt signed by the beneficiary on receiving the funds, which releases the escrow agent from any obligation. The discharge ends the mission; the escrow agent keeps the supporting documents in line with its professional and anti-money-laundering obligations.

Escrow fees

The escrow agent’s fees, flat or proportional to the amount deposited, borne as set out in the agreement, usually shared equally between seller and buyer. Funds deposited with the CARPA do not earn interest for the parties.

Escrow of non-cash assets

Deposit of assets other than funds: securities, signed transfer orders, source code, documents. The escrow agent holds and releases them under the same rules, which makes it possible, for instance, to secure a share transfer conditional on a deferred payment.

Escrow

An arrangement in which a sum or an asset is handed to a third party, the escrow agent, who releases it only once the agreed conditions are met. Under French law, escrow corresponds to the séquestre conventionnel; when entrusted to a lawyer, it operates through a CARPA account.

Escrow account (compte séquestre)

The account on which the funds are blocked: they remain unavailable to the parties until release. With a French lawyer, the escrow account is a CARPA sub-account dedicated to the transaction.

Court-ordered escrow (séquestre judiciaire)

Escrow ordered by a court where assets or sums are in dispute (article 1961 of the French Civil Code). The escrow agent is appointed by the decision and reports to the court, unlike conventional escrow, which the parties choose freely.

Conditions precedent

Future and uncertain events on which the effectiveness of an obligation depends (article 1304 of the French Civil Code). In an escrow, their fulfilment triggers the release of funds to the beneficiary; if they fail, the funds are returned under the agreement.

Representations and warranties (GAP)

The seller’s undertaking to indemnify the buyer if an undisclosed liability or an overstated asset comes to light after the sale and originates before it. It is framed by a cap, a threshold or deductible, and a duration; its performance is often secured by a holdback kept in escrow.

First-demand guarantee

An undertaking by which the guarantor agrees to pay a sum on the beneficiary’s simple demand, without being able to raise defences relating to the guaranteed obligation, save for manifest abuse or fraud (article 2321 of the French Civil Code). It may complement or replace an escrow.

Share deal and asset deal

A share deal transfers the shares of the company that holds the business or asset; an asset deal transfers the asset or business directly. The choice affects taxation, the transfer of contracts and liabilities, and therefore the subject and duration of the escrow.

Paying agent

An agent that makes payments on behalf of one or more parties. Unlike an escrow agent, it does not hold funds pending a condition: it pays according to the instructions received.

International escrow

An escrow set up in a transaction involving parties, funds or accounts located in several countries. The funds are paid into the escrow account by international transfer; the agreement specifies the governing law, the competent courts, the currency and the reference language, and KYC and AML/CFT checks cover the source of the foreign funds. Bank charges specific to international transfers are additional.

CARPA

Caisse des Règlements Pécuniaires des Avocats: the body through which all funds handled by French lawyers must pass. It checks the origin and destination of each movement and keeps client funds separate from the firm’s own money.

Closing

The day the transaction completes: signing of the transfer documents, payment of the price according to the funds flow and, where applicable, payment into escrow of the portion held back.

KYC (Know Your Customer)

Verification of the identity of the parties and of the source of funds, carried out before any escrow and required of the lawyer by anti-money-laundering and counter-terrorist-financing (AML/CFT) rules.

Cash collateral

Security created by handing a sum of money to the creditor, or to an account opened in its favour, which the creditor may use if the debtor defaults. Unlike escrow, the funds are not entrusted to a neutral third party.