Escrow of a shareholder's current account

In a share sale, attention naturally focuses on the price of the shares. Yet one element is regularly underestimated: the shareholder's current account (in French, the compte courant d'associe). Where the seller has advanced funds to the company, those sums must be dealt with at completion, failing which the transaction remains incomplete. Escrow provides a secure framework for organising their repayment.

What is a shareholder's current account?

A shareholder's current account refers to the sums a shareholder makes available to the company, over and above their contribution to the share capital. In practical terms, the shareholder lends money to the business: this may be a cash injection to fund the activity, remuneration or dividends deliberately left at the company's disposal, or expenses advanced on the company's behalf. These advances constitute a debt owed by the company to the shareholder, recorded as a liability on the balance sheet.

A shareholder's current account must not be confused with the share capital. Capital is locked in and can only be recovered under strict conditions; the current account, by contrast, is in principle repayable at any time, unless a lock-up agreement provides otherwise. It is a debt of the company, not a fraction of its capital. This distinction becomes essential when the shares are sold.

A claim separate from the share price

In a share sale, the price rewards ownership of the shares. The shareholder's current account, however, is not included in that price: it is a personal claim of the seller against the company, which survives the sale. In other words, a buyer who acquires the shares does not thereby become the holder of the current account: the company remains liable for that sum to the seller.

This duality creates a point of tension at completion. The seller wants to recover the advances they have made; the buyer, for their part, does not wish to take over a company that remains indebted to the former shareholder, nor to see the latter demand repayment at an inconvenient moment. The fate of the current account must therefore be settled at the same time as the transfer of the shares, and not left hanging.

Repaying or assigning the current account

Two main solutions are open to the parties for dealing with the current account at completion:

• Repayment: the company repays the current account to the outgoing shareholder, most often using the funds provided by the buyer or cash raised for the occasion;
• Assignment of the claim: the seller assigns their current account to the buyer, who becomes the company's creditor in their place; the price of that claim is then added to the price of the shares.

In both cases, the exact amount of the current account must be fixed as at the completion date and clearly distinguished from the share price. Confusing the two would distort the economic balance of the transaction and complicate both the accounting and the tax treatment of the transfer.

Why place the current account in escrow

Repaying the current account raises the same concerns as paying the share price: each party wants the certainty that the funds will move at the right time and on the right terms. Escrow answers those concerns by immobilising the sums with a trusted third party.

• Making repayment conditional on completion: the funds intended to settle the current account are deposited with the escrow agent and released only once the sale has actually taken place;
• Protecting the seller: the outgoing shareholder has the assurance that the sums needed for repayment exist and are ring-fenced, regardless of the company's future cash position;
• Protecting the buyer: repayment occurs only on the agreed terms, avoiding any premature settlement or payment of an incorrect amount;
• Serving as security: a portion of the current account may remain in escrow to cover a price adjustment or a call on an asset and liability warranty.

How escrow works with a lawyer

When entrusted to a lawyer, escrow of the current account is arranged through a CARPA account, the account through which every handling of client funds by a French lawyer must pass. The sums are ring-fenced in a sub-account specific to the matter, every movement is checked and traceable, and the whole transaction is covered by legal professional privilege.

The escrow agent receives the funds — whether they come from the buyer or from the company — holds them in that dedicated sub-account, and then releases them to the outgoing shareholder once the agreed conditions are met. Neither party can deal with the sums unilaterally in the meantime: repayment of the current account is thus suspended until the sale is actually completed.

What the escrow agreement provides for

The robustness of the arrangement rests on the precision of the escrow agreement, which is separate from the sale agreement. It defines the escrow agent's mandate and sets out the conditions under which the funds may be released:

• The amount of the current account fixed as at the completion date, distinct from the share price;
• The source of the escrowed funds and the arrangements for paying them to the escrow agent;
• The precise release conditions: completion of the sale, signature of the deeds, satisfaction of the conditions precedent;
• The treatment of any portion retained as security and its release timetable;
• The beneficiary of the funds and the arrangements for returning them should the transaction fall through.

Are you preparing a share sale that includes a shareholder's current account? Fidens sets up escrow of the repayment in a dedicated CARPA account and secures the transaction, from the deposit of the funds through to their release to the outgoing shareholder.