Business Law
Thursday Terminology
Escrow Account
A smart way to reduce the risk for both the seller and the buyer in many transactions - from shares to SaaS to real estate.
An escrow account is basically a smart way to create security and reduce risk for both parties in a transaction. This is done by placing monies or other assets in the hands of a trusted independent third party instead of leaving it with either party in the transaction for a period of time. And then to release whatever is held only upon certain between the parties agreed triggers.
One of the most common areas where escrow is used is in buying and selling shares/companies. In many cases the negotiated share purchase agreement (the "SPA") will include several warranties and indemnifications given by the seller. The buyer may be hesitant to transfer the full share purchase amount to the seller already on closing, as there is a risk that for example one of the warranties does not hold true and that this would entitle the buyer to compensation or a deduction of the share purchase price.
As to ensure that the buyer is not over-paying, or will be at risk of not getting the monies that it is entitled to due to the seller becoming bankrupt (or disappearing), part of the share purchase amount - often 10 or 20 % - is placed with an escrow agent so that none of the parties can dispose of the monies before it is confirmed e.g. whether the warranties and indemnifications hold up or not.
From the perspective of the seller, he or she may be reluctant to sell and transfer the company shares - and access to all assets - if the buyer demands to withhold a substantial part of the agreed share purchase price. From the seller's perspective it will hence also be a reduction in risk if the monies is placed with an escrow agent, given that this verifies that the buyer in fact has the funds required.
The monies in the escrow will be held until one of several specifically defined triggers occurs after which the agent will release the monies to the party (or parties) entiteld to the monies based on what trigger it is.
Other highly relevant areas for escrow accounts include SaaS solutions. In order to ensure that the SaaS providers failure to deliver or breach of contract does not make the operations of its customer fail, the party buying the SaaS could mandate that the code and relevant data is held in escrow and that only if a trigger occurs (such as the SaaS company going bankrupt) will the escrow agent release the code to the buyer. This is typically seen as a good way to reduce the risk for the buyer but also to protect trade secrets and other confidential information that the SaaS company does not want to share with its customers in general.
Keep in mind to think the triggers through - if something happens it will be the design of these that will either give you a right to have the monies/assets released to you or not.
Stockholm, 2023-10-19
Author: Katarina Strandberg
An escrow account is basically a smart way to create security and reduce risk for both parties in a transaction. This is done by placing monies or other assets in the hands of a trusted independent third party instead of leaving it with either party in the transaction for a period of time. And then to release whatever is held only upon certain between the parties agreed triggers.
One of the most common areas where escrow is used is in buying and selling shares/companies. In many cases the negotiated share purchase agreement (the "SPA") will include several warranties and indemnifications given by the seller. The buyer may be hesitant to transfer the full share purchase amount to the seller already on closing, as there is a risk that for example one of the warranties does not hold true and that this would entitle the buyer to compensation or a deduction of the share purchase price.
As to ensure that the buyer is not over-paying, or will be at risk of not getting the monies that it is entitled to due to the seller becoming bankrupt (or disappearing), part of the share purchase amount - often 10 or 20 % - is placed with an escrow agent so that none of the parties can dispose of the monies before it is confirmed e.g. whether the warranties and indemnifications hold up or not.
From the perspective of the seller, he or she may be reluctant to sell and transfer the company shares - and access to all assets - if the buyer demands to withhold a substantial part of the agreed share purchase price. From the seller's perspective it will hence also be a reduction in risk if the monies is placed with an escrow agent, given that this verifies that the buyer in fact has the funds required.
The monies in the escrow will be held until one of several specifically defined triggers occurs after which the agent will release the monies to the party (or parties) entiteld to the monies based on what trigger it is.
Other highly relevant areas for escrow accounts include SaaS solutions. In order to ensure that the SaaS providers failure to deliver or breach of contract does not make the operations of its customer fail, the party buying the SaaS could mandate that the code and relevant data is held in escrow and that only if a trigger occurs (such as the SaaS company going bankrupt) will the escrow agent release the code to the buyer. This is typically seen as a good way to reduce the risk for the buyer but also to protect trade secrets and other confidential information that the SaaS company does not want to share with its customers in general.
Keep in mind to think the triggers through - if something happens it will be the design of these that will either give you a right to have the monies/assets released to you or not.
Stockholm, 2023-10-19
Author: Katarina Strandberg