Intertrust N : The role of escrow in an increasingly complex M&A environment

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In an uncertain world, a payment guarantee such as an escrow arrangement by an independent third party provides financial security for buyer and seller. Jaap Veerman, director of Intertrust Escrow & Settlement and Lout Lapidaire, global head of Intertrust Escrow & Settlement, explain more.

Larger and ever more complicated M&A deals have prompted increased scrutiny and stress-testing of targets. This sometimes leads to litigation and pricing adjustments.

Against this backdrop, specialist escrow services have become a critical piece in the deal-making jigsaw, as well as being an anti-corruption prerequisite in some jurisdictions.

In the US, use of an escrow account, administered by a trusted and independent third party, is an essential element in any sale or acquisition, whereas Europe has been slower to adopt.

Over the past decade, however, as both buyers and sellers began to see the benefit of having robust financial security and payment protection in place during the M&A process, they have become more commonplace.

When is an escrow account useful?

A third-party escrow arrangement protects buyers and sellers and is useful in any size of deal, especially in cross border M&A deals.

It is often put in place during the due diligence process as a safeguard, should the buyer discover irregularities or uncertainties in the assets of a target company.

These could come to light in the course of investigating a company's financial status, reviewing revenue declarations and forecasts, checking up on the possession and retention of licences, or with regard to regulatory issues.

If irregularities are detected, negotiations may need to be reframed, perhaps with a reduced purchase price, or with new conditions of sale put in place.

In the latter scenario, putting part of the purchase amount in an escrow account serves as a deposit that is not released until the new conditions of sale are met. In other scenarios, this sum would be held in escrow until predicted revenues meet forecasts, or expectations and regulatory approval is granted.

So, for example, if the purchase price was USD 100m, both buyer and seller might agree for USD 10m to be deposited in an escrow, only to be released when the accounts were found to be genuine and without irregularities.

Using an escrow account to manage and mitigate M&A risk

An escrow arrangement can also be used to protect against future uncertainties and risk relating to a target. As recent political and economic events have shown, we live in an unpredictable world and many risks are unforeseeable.

For example, lawyers and accountants may have found risks relating to financial profits for the coming year. Or there may be a question mark over whether all accounts receivable are collectible, what taxes are due, whether penalties or environmental risks arise, and whether licences are coming up for renewal. In order to avoid any unexpected outcomes, the seller and purchaser can agree a hold back amount to cover any identified uncertainties.

Escrow arrangements protect businesses against unknown risks which might happen after a takeover or during the closing process, as money is disbursed to the sellers. Although there's no obligation to use an escrow account when putting together a deal, there's also no sense in making a deal without this level of financial security.

How Intertrust can help you

Our Escrow team operates from the Netherlands with a presence also in the UK - and has a global client base. We have significant expertise in assisting on both European deals and M&A deals by US companies buying in Europe. In addition to blocked account agreements, we also assist with paying agency mandates. These involve the disbursement of funds to hundreds of sellers in various currencies and require cash management expertise, operational excellence and good communication skills to help lawyers and involved parties set up the arrangement in a short time frame.

We are equipped with the talent and technology to provide a one-stop solution. We have a European Payment Services licence and can set up escrow agreements in most European countries, including the UK.

The escrow account can be set up under either EU or UK law. For a US company buying a target company in the EU, the escrow can be tailored and structured in line with requirements of clients as long as the independency of the escrow agent is not jeopardised. Such escrow arrangements can be set up in the EU and all proceedings will abide by EU rules. Many of the escrow arrangements administered are used by the purchasing party to test the valuation after the sale. If the purchase price was well determined and there are no irregularities, the secured funds are released to the seller after an agreed period.

The Netherlands is an attractive base for escrow clients because Dutch regulatory law cases are very predictable and reliable. And, many EU companies feel most comfortable operating under EU laws and regulations.

We canact for both buyers and sellers as an independent third party. Setting up an escrow deposited with a third party enables both sides in the M&A transaction to avoid a conflict of interest.

Why Intertrust Group?

• Intertrust Group is a publicly listed company with more than 70 years' experience in providing world-class trust and corporate services to clients around the world.
• Intertrust Group provides a wide range of financial and administrative services to clients operating and investing in the international business environment. We help companies to expand globally, offering support with restructuring, outsourcing and further developments.

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