By: Michelle Sutter
Mergers and acquisitions (M&A) processes are dynamic, intense, and changing operations, which require total concentration and experience to address all those issues that are very specific to them.
Within these processes, there is an activity called Due Diligence (DD), which consists of that one of the parties, the Seller, making available to the party interested in acquiring the business, called the Buyer, through a data room, information, and written documentation of a corporate, financial, accounting, tax, labor, legal, Intellectual Property, Litigation, etc., nature, so that it can know, review, analyze, study and evaluate it, all with the purpose of allowing it to evaluate the price of the company and to know its incidences and contingencies.
From the result of this DD, the party that performs it issues a report of the result, revealing the contingencies detected in such processes, such as losses, claims of any nature, damages, liabilities, administrative fines, tax fines or adjustments, penalties resulting from inaccurate declarations, costs, expenses that may be suffered or are in the process of being suffered by the Target, labor claims, etc. As a consequence of this result, the purchasing party needs to protect itself from the impact that the purchase of this going concern may have on it, either by adjusting the offered purchase price or by reserving an amount thereof, in case these possible contingencies have the nature of being dissipated in time.
Despite these disclosures, the other party, the seller, considers that they do not constitute important contingencies that could affect the business and consequently the sale price, to which effect it proposes to the buyer, and for its security, to subscribe an Escrow Agreement that guarantees such possible contingencies, and that these are released as the possible claims are faded or dissipated, because the litigations were won because the actions have expired, or because the administrative or tax or labor authorities have released it from legal liability.
Conceptually, the escrow account is an escrow contract, in which a portion of the money paid to the seller by the buyer is held in reserve by a bona fide third party, chosen by the parties by mutual agreement, who will be the custodian of the money, shares or assets entrusted to him.
In other words: the parties undertake to use the services of a bona fide third party as depositary of those assets, instructing him by means of a contract of all the terms and conditions necessary for the perfect execution of that mandate. This third party assumes the obligation to faithfully fulfill the rights and obligations of the parties that have entrusted him, releasing the resources, either for the benefit of the seller or the buyer, that is, its main function is to verify the fulfillment of the condition and deliver that amount to whom it corresponds.
The term escrow has its origin in Anglo-Saxon law, it is used to denominate the service that offers a payment system between two persons or institutions, in which before completing the transaction, the money remains in charge of a third party and is released once the previously predisposed conditions are fulfilled. Latin American legislations assimilate this type of legal figures with those that their Civil or Commercial Codes regulate, as is the case of the Deposit Contract.
In our latitudes and depending on the amount deposited in the guarantee, the third party is usually a Bank through an escrow account, a Trust, a Law Firm, or a trusted electronic service provider, that is, it is sufficient that it is a third party unrelated to the parties to the main contract.
In conclusion, we are before a contractual figure that derives from Anglo-Saxon law, which is like the Escrow Agreement, administered by a third party and which has been and continues to be of great utility in company purchase and sale operations.