Meaning
Financial arrangements hold a portion of an acquisition’s total consideration in a secure third-party account to cover potential post-closing indemnity claims. This mechanism protects the buyer from the risk that the seller will be unable or unwilling to pay for breaches of representations or warranties. Setting up a purchase price escrow is a standard practice in corporate mergers and acquisitions to secure the buyer’s recovery of losses.
The fund is held for a specified period and then released to the seller if no claims are made.
Fund Administration
An independent escrow agent, usually a commercial bank, holds the funds in a designated account and manages them according to the escrow agreement. This agreement specifies where the funds can be invested and how interest is allocated between the buyer and the seller. In a typical purchase price escrow, the funds cannot be released without joint instructions from both parties or a final court order.
This neutral custody ensures that neither party can unilaterally access the money during a dispute.
Claims Process
If the buyer discovers a breach of the purchase agreement, they must submit a formal claim notice to the escrow agent and the seller. The notice must describe the breach and estimate the financial loss. Under the rules of a purchase price escrow, the seller has a set period to dispute the claim.
If the seller does not dispute the claim, the agent releases the requested amount to the buyer. If a dispute arises, the funds remain in escrow until it is resolved.
Release Condition
The funds are released to the seller in installments as the indemnity survival periods expire without outstanding claims. For example, half of the escrow might be released after twelve months, and the remainder after eighteen months. This step-by-step release reduces the seller’s cash lock-up while maintaining protection for the buyer.
