Buying a company's shares — whether shares in a joint-stock company or partnership interests — amounts to acquiring both its assets and its liabilities. Unlike the sale of a business (fonds de commerce), no statutory regime imposes that the price be made unavailable. Even so, buyer and seller have every interest in entrusting all or part of the price to an escrow agent. Here is why.
Backing the representations and warranties
The representations and warranties are at the heart of most share sales. The seller undertakes to indemnify the buyer if an undisclosed liability comes to light after closing, or if an asset turns out to have been overvalued. But this warranty is only worth anything if the seller remains solvent and available. By placing a fraction of the price in escrow, the parties ensure that the sums needed for any indemnification will remain available for the duration of the warranty.
Securing a price adjustment (earn-out)
Many transactions provide for a price adjustment indexed on the company's future performance — the earn-out mechanism. Escrow makes it possible to freeze the corresponding sums, or to guarantee their payment to the seller once the targets are met, without either party being able to deal with them unilaterally in the meantime.
Managing conditions precedent and the gap before closing
Between signing and final completion, a sale is often subject to conditions: obtaining financing, approval by the other shareholders, regulatory authorisation, release of security. Escrow of the price makes it possible to ring-fence the funds as of signing, while ensuring that they will only be released once the agreed conditions are actually met. The buyer demonstrates their ability to pay; the seller ensures they will be paid when the time comes.
What fraction of the price should be held in escrow?
The portion of the price placed in escrow depends on the risk to be covered. Where the aim is to back representations and warranties, the parties generally hold in escrow a fraction representing a significant share of the warranty cap, tapering over time as the main tax and employment risks become time-barred. For an earn-out, it is the maximum amount of the price adjustment that is frozen. The agreement sets the amount, the duration and the pace of release.
Escrow and the conditions precedent to closing
Between signing and final completion (closing), a share sale is frequently subject to conditions. Escrow of the price makes it possible to ring-fence the funds as of signing while ensuring that they will only be released once these conditions are actually met:
- The buyer obtaining financing;
- Approval by the other shareholders or waiver of a statutory pre-emption right;
- Required regulatory or administrative authorisations;
- Completion of concurrent transactions (reorganisation, contributions, linked sales).
A neutral third party between the parties
The escrow agent's only remit is to apply the agreement. They keep the funds in a dedicated account and release them only on the conditions and at the dates provided — to the designated beneficiary, never unilaterally. Entrusted to a lawyer, the escrow relies on the CARPA account, which checks and traces every handling of funds, and on the professional secrecy that covers the entire matter.
Structuring a share sale? Fidens secures the price, the representations and warranties and any price adjustments on a CARPA account.
Frequently asked questions
Is escrow mandatory for a sale of shares or partnership interests?+
No. Unlike the sale of a business (fonds de commerce), a share sale imposes no statutory escrow of the price. It is a contractual choice by the parties, but a very common one, made to back representations and warranties, an earn-out or the satisfaction of conditions precedent.
For how long is the fraction of the price held in escrow?+
The duration is set by the agreement and generally aligns with that of the representations and warranties — often aligned with the tax and employment limitation periods. Release may be progressive as the covered risks expire.
Escrow of the price or a bank guarantee: which to choose?+
Both secure the representations and warranties. Escrow immobilises real funds with a trusted third party; a bank guarantee commits a financial institution. Escrow is often preferred for its simplicity of implementation and its cost, without tying up a line of credit.
A transaction to secure?
Fidens sets up the escrow of the price on a CARPA account, under the responsibility of a lawyer.