This post is part of our First Year Associate series, where we’ll provide explanations to simple issues faced by first year corporate associates. We’ll focus on the basic problems that you might be embarrassed to ask a senior attorney. And if you already asked, the answer was so brief it provided just enough context to bring you here.
If you read Part II of this series, you know that parties in a corporate M&A transaction often put closing proceeds aside in an escrow fund for obligations that arise after the closing. This is where the escrow agent sneaks into the picture—sometimes as an afterthought as the deal approaches closing. But be careful, this small infiltration can still hijack the whole closing process!
The escrow agent is typically an independent third party, and in most cases, it is a reputable bank or financial institution. Often the escrow agent is recommended by one of the parties as a result of a prior relationship (or sometimes the law firm will make the recommendation) and both parties will need to agree to use that institution. Its primary role is to accept the deposit of escrow funds into an independent account and distribute those funds in accordance with the instructions of the parties.
Enter the escrow agreement—this is an ancillary document you will see in just about every corporate transaction. The escrow agreement details the responsibilities of the escrow agent, when they should release the funds in the escrow account and to whom those funds should be issued. Most importantly for the escrow agent, it will want to disclaim any liability it may have for the funds (such as disclaiming interest in the funds and any responsibility for determining authenticity of any claims it receives). Instead, it will require that the escrow agreement clearly sets out certain principles: