Escrow at the closing of an M&A transaction

Closing is the moment when a merger or acquisition is legally completed: the securities change hands, the price is paid and the guarantees are put in place. Everything often happens within a few hours, around a single table. At that precise moment, every party fears the same thing — performing its own obligation without receiving the counterpart. Escrow is the tool that neutralises this risk and secures the closing.

Signing and closing: two distinct stages

An M&A transaction rarely unfolds in a single step. Two moments are usually distinguished. The signing is the execution of the sale agreement (share purchase agreement): the parties commit, but the sale is not yet final. The closing is its actual completion — the day the conditions are satisfied, the securities are transferred and the price is paid. Several weeks, or even months, may pass between the two while the conditions precedent are satisfied.

Where every condition is already satisfied at signing, signing and closing may be simultaneous. But as soon as an authorisation, a financing or a consent is awaited, the two stages separate — and it is precisely within that interval that escrow proves its worth.

The risk of unsynchronised performance

Closing rests on an exchange: the seller transfers the securities, the buyer pays the price. These two movements must be strictly simultaneous. If the buyer paid before the transfer, it would risk never receiving the securities; if the seller transferred the securities before being paid, it would risk remaining unpaid. Without a synchronising mechanism, each party hesitates to perform first.

This problem of the order of performance is the same as the one found in any transaction where trust is not complete. It is solved by the intervention of a trusted third party who receives the price in advance and releases it to the seller only at the precise moment the transfer of the securities is established.

Escrow, guarantor of a simultaneous exchange

This is the primary function of escrow at closing. The buyer pays the price into the hands of the escrow agent before completion day, which demonstrates its ability to pay. The seller, reassured that the funds are already deposited, proceeds with the transfer of the securities. The escrow agent then releases the price only upon proof of that transfer: a signed transfer order and an updated share transfer register and shareholder accounts.

The exchange is no longer sequential but simultaneous — price against securities — with neither party ever exposed. The escrow of the price in a share sale thus turns a moment of mutual vulnerability into a fully secured operation.

Satisfying the conditions precedent at closing

Moving from signing to closing requires the satisfaction of the conditions precedent set out in the agreement. Escrow makes it possible to align the release of the funds with that satisfaction: the funds, already deposited, will only be paid out once the conditions are actually met.

• Obtaining the buyer's financing;
• Required regulatory or administrative authorisations (merger control, sector-specific clearances);
• Consent of the shareholders or clearing of a statutory pre-emption right;
• Completion of concurrent operations: reorganisation, contributions, refinancing, release of existing security.

The escrow agent checks that these conditions are met before any release. It thereby gives substance to the mechanics of the closing: nothing unwinds until everything is ready.

Escrowing part of the price for the W&I

Closing does not put an end to every risk. The buyer remains exposed to a liability arising before the sale but revealed afterwards. That is the purpose of the warranty and indemnity, by which the seller undertakes to indemnify the buyer. But that protection is only worth anything if the seller remains solvent and available on the day it is called upon.

To remove this uncertainty, the parties frequently escrow part of the price at closing. These sums — the guarantee of the guarantee — remain blocked for the duration of the warranty and serve, where applicable, to indemnify the buyer, before being released to the seller on expiry. The closing thus arranges, in a single movement, the payment of the price, its release against transfer of the securities, and the constitution of the security backing the warranty.

How a closing secured by escrow unfolds

In practice, escrow orchestrates the sequence of the closing along a controlled path:

• Before closing, the buyer pays the price into the dedicated escrow account, evidencing its availability;
• The parties confirm that the conditions precedent are satisfied and gather the closing documents;
• The transfer of the securities is carried out: signed transfer orders, registers updated;
• The escrow agent releases the price to the seller in light of those elements, retaining where applicable the portion allocated to the warranty and indemnity;
• The escrowed portion is held for the duration of the warranty, then released to the seller on expiry, less any indemnifications.

Are you preparing the closing of an M&A transaction? Fidens acts as escrow agent to secure the exchange of price against securities, the satisfaction of the conditions precedent and the warranty and indemnity, on a CARPA account dedicated to your operation.