Escrows explored - what are they and how can they be of benefit?23 Aug 2018
Ocorian's Director of Transaction Management, Chris Wilson, addresses the question of why transaction parties may require the services of an escrow agent.
An escrow defined
An escrow is a contractual financial arrangement in which a third party agent receives and disburses money or other assets on behalf of two or more transacting parties. The disbursement is undertaken in line with pre-agreed terms that are stipulated by the escrow parties.
Why use an escrow agent?
Utilisation of an independent escrow agent provides additional assurance to transactions. This is achieved by keeping the escrow property in a secure and independent environment. As a result, the release only occurs when the escrow agent is satisfied that all of the conditions of the governing agreement have been met.
Below are common scenarios where an escrow arrangement may provide the best solution:
- Amounts may be held in escrow to ensure sufficient funding is available for transaction parties in advance of a public offering.
- Amounts held in escrow may be comprised of part of, or the entire purchase price in relation to a merger and/or acquisition, including any retention amounts related to certain transaction conditions.
- Intellectual property may be placed in escrow and released against delivery of the purchase price.
- Scheduled high yield bond payments may be placed in escrow in advance of due dates as a pre-condition to investment by bondholders.
- An escrow arrangement can be used to mitigate counterparty risk in the financing of a project, with funds to be disbursed upon the attainment of certified key milestones.
- Funds in settlement of litigation may be held in escrow pending a court judgement or appeal.
An escrow in practice
By way of a simple example, picture a situation whereby a property developer wishes to invest in a significant amount of real estate that is currently in disrepair.
As a condition to purchase, the buyer may stipulate that certain conditions are met. These conditions could be the performance of requisite repairs to the property and the certified completion of independent inspections confirming suitability of the repairs.
The seller, on the other hand, will wish to protect their interests knowing that, upon completion of the remedial work, the buyer will follow through with the purchase.
By placing the funds with an independent escrow agent, both the purchaser's and the seller's interests are protected. The purchaser knows that the seller will not receive the purchase price until the work is completed, whereas the seller has the assurance of knowing that the money will not be returned to the purchaser unless the seller has failed to meet the escrow conditions. Additionally, if the transaction is to be funded via means of a separate financing arrangement, it may be that the lenders - as financing parties - also wish to be party to the escrow release in order to safeguard their own positions.
Why choose Ocorian?
Traditional transaction banks continue to be restricted by increased regulation and stringent KYC requirements, thus diminishing their appetite to enter into certain transactions. As a flexible and agile regulated provider, Ocorian is focussed on providing a seamless and complementary service to banks on transactions for which they are constrained from providing a full suite of corporate trust services.
Ocorian has been at the forefront of providing independent, conflict-free services to securitisations and structured finance transactions since the early 1990s. Our law firm roots bring us credibility in the market, with a best-in-class reputation among law firms and arrangers for our proactive and agile service offering.
We have recently extended our offering to include corporate trust services. This represents our commitment to increasing our capabilities across all asset classes in capital markets administration.
In support of our escrow services, we have an experienced team of professionals ready to work closely with the transaction parties. They will ensure the commercial aspects of the escrow arrangements are clearly documented using Ocorian's standard escrow agreement.
Although escrow transactions are often associated with demanding timeframes, we are ready to mobilise resources quickly and effectively. For more information, please contact the Ocorian team below.