Six months into the global pandemic and most of us are settled into our new daily routines – work from home, online school, food delivery and social distancing. Yet as we grow accustomed to the “new normal,” we know the pandemic can be disruptive. In the current global context, what is today may not stand tomorrow. Because things can change quickly, especially in the financial services industry, we look for assurances to help mitigate risks. One common but often overlooked vehicle that is effective in certain types of transactions is escrow services. Whether the deal is small or large, simple or complex, an escrow agent can bring an extra measure of certainty.
Merger and acquisition transactions are no exception to the unexpected and with a number of post-closing variables, it's best to ensure that a comprehensive mechanism is already in place to account for things such as indemnifications and purchase price adjustments. Although representation and warranty insurance has become fairly popular in recent years, as with any insurance policy, there can be exclusions and other considerations. Therefore, it may not always be best suited for your particular transaction.
Protect your transactions
Enter the escrow agent, an independent third-party charged with holding funds or securities associated with a transaction in an escrow account in accordance with an escrow agreement. Once the conditions of the agreement are met, funds are released based on the outlined provisions or at the joint instruction of the parties, providing each with the peace of mind that funds or securities will be distributed based on predefined conditions.
Besides cash and securities, an escrow agent can hold your proprietary and valuable business information during a transaction, project or service agreement. This can include documents, source codes, domains, formulae and even secret recipes. Physical assets would be held in secure vaults with restricted access.
By placing part of its purchase price in escrow, for example, a purchaser has assurance that funds will be available for applicable adjustments or indemnity related to discoveries made during the due diligence and purchase process or thereafter. A significant amount of time, effort and money can go into chasing down funds owed in relation to post-closing discoveries. While it might not always be possible for buyers and sellers to avoid disputes over the terms of the sale agreement, with funds in escrow and reserved for distribution according to pre-defined conditions, including terms surrounding any dispute, both parties can mitigate the risk of financial loss.
Questions to ask when choosing an escrow agent
If you or your organization are new to escrow services and are looking for an escrow agent, make sure you find one with these three attributes:
- Impartial and independent. Is the escrow agent a neutral third-party to all parties involved or are they linked to one of the parties?
- Expertise. Are escrow services the agent's core business and do they have a dedicated team? How many escrow mandates do they have under their belt?
- Knowledge and experience. Does the agent use market-accepted agreements and terms and apply appropriate Know Your Client (KYC), taxation and other legal requirements?
For those who regularly use escrow services, you want to work with an agent who can serve as a trusted partner and is able to go above and beyond in these three areas:
- Consultative. Is the agent knowledgeable and able to offer proactive suggestions to make your job easier? Will they work to find solutions to meet the complex and unique nature of your transaction or business?
- Innovative. Is the escrow agent up to date and in the know about the changing market landscape? Are they looking to leverage the latest technology in payment and transaction management?
- Depth. Beyond the transactional process, does the agent facilitate stakeholders' roles, allowing each to concentrate on the core considerations of the mandate? Are you working with the same agent to ensure the terms, conditions and closing documentation are static each time?
It's clear you should not entrust your funds or proprietary assets to an unestablished escrow agent. An expert agent with a proven track record and who is trusted by the industry can give you and your stakeholders the extra measure of assurance that your deal will proceed as planned and close in a manner that is satisfactory to all parties involved.
With over $10 billion USD in assets under administration, Computershare offers a full suite of escrow services. We have been called upon to act in some of the largest and most complex transactions around the globe, servicing major corporations in the private and public sectors, governments, institutions and industry leaders. For over two decades, Computershare has completed thousands of escrow mandates that have helped mergers and acquisitions (M&A), subscription offerings and other matters move forward quickly and close accurately.
For more information about how an escrow agent can help, reach out to me directly at Alessandra.Pansera@computershare.com or to your local Computershare contact.
© 2020 Computershare.