The Escrow mechanism is a practice in merger or acquisition transactions aimed at ensuring that the performance of the action takes place at a later date under conditions where the immediate performance of the act is not appropriate. Escrow arises in the form of the transfer of the debts of the parties to an independent trusted third party to guarantee the performance of the contractual debts that form the basis of the transaction in merger and acquisition transactions. For this purpose, the parties to the merger and/or share transfer agreement shall draw up an escrow agreement based on the master contract to secure the performance of the shares arising from the contract and the debts covering the conditions under which the payment will be returned to the parties.
Relationship Between Escrow Agreement and Merger and Acquisition Agreements
The escrow agreement is intended to secure the performance of debts arising from the merger and/or share transfer agreement. Escrow arrangements are particularly useful when conducting cross-border transactions.
The basis of the escrow agreement is the merger and acquisition agreement. In this case, there are two separate contracts, with different parties imposing different rights and obligations. Thus, one party to the escrow agreement is the party to the merger and/or share transfer agreement, and the other party is a third party (the escrow agent) who is not a party to the underlying contract. In an escrow contract, the disposition authority over the contracted asset passes to the escrow agent until certain conditions set out in the underlying contract are met.
In the master contract, it can be clearly shown that the escrow contract will be concluded, or it is possible to include the full text or essential elements of the escrow contract. In this context, it is essential that the escrow agreement to be concluded between the escrow broker and the parties to the merger or share transfer agreement includes the following issues.
- Information about the transaction, which is the basis of the Escrow relationship,
- Detailed information about the asset deposited with the Escrow agent (for example, if the deposited asset is a stock, the quantity, nature, distinguishing features of the securities concerned; if the deposited asset is semen, the quantity and nature of the semen),
- The Escrow agent’s debts in connection with the custody,
- Detailed information on the conditions under which the deposited asset can be returned to the parties to the contract following the fulfillment of these conditions and the procedures to be followed following the fulfillment of these conditions
- The fate of the rights and liabilities related to the asset deposited in the custody process
- In the event that none of the conditions for the return of the deposited asset are fulfilled, the conditions for the return of the deposited asset,
- The fee payable to the Escrow agent,
- Information on the applicable law and jurisdiction for disputes arising out of the Escrow contract.
The Relationship of Property Transfers and Business Transfers Contracts to Escrow Contracts
Escrow contracts are also preferred as a collateral mechanism in asset transfers and business transfers. In particular, during the contract negotiations for the buyer, it may not be possible to determine the accuracy of the statements and commitments made by the seller regarding the transferred company or property. In this case, the buyer will want to pay the full amount following the realization of the declarations and commitments that are the subject of the basic contractual relationship. On the other hand, it is clear that the seller will want to transfer the company or assets subject to the transfer after the payment of the seme in full. In this case, escrow, which is a mechanism that guarantees risk for both parties, is also a means of assurance regarding these declarations and commitments.
The buyer and seller may request the opening of a bank account on behalf of the escrow broker as a neutral third party. The price of the escrow account opened on behalf of the escrow agent is only paid to the parties depending on whether certain terms or conditions in the underlying contract are fulfilled or not. Here, the seller or buyer does not have the sole authority to dispose of the escrow account. This authority can only be exercised by the parties, provided that they are together with the escrow agent.
The escrow agent is also obliged to act with loyalty and care as in the contract of mandate. Since the escrow agreement and the provisions included in it are decisive in this relationship, the escrow agreement must contain clear and descriptive clauses that foresee any disruptions and all kinds of situations that may arise.