Escrow Services
An escrow arrangement is contract in which an independent third party middle man receives funds, assets or documents to be distributed according to agreed instructions and conditions given to the escrow by counterparties that are involved in a transaction e.g. a buyer and a seller. For example it is usual that the purchase price of property is given to an escrow agent until the parties involved are satisfied that the ownership of the property has been transferred upon completion. Such arrangements are primarily used to alleviate financial risks on closing transactions but remain things to be done for the agreement to be finalised or go through. This is particularly important when the contracting parties are located in different jurisdictions.
Very often, lawyers, stock brokers, insurance brokers, accountants and other professionals may act as escrow agents of their clients (principals) until the client’s transaction is finalised or terminated. Usually the client gives money to the escrow agent who then deposits them in trust account held in the name of the escrow agent, and then uses these funds to pay the client’s obligations e.g. taxes, insurance premiums, stock purchase prices, court decisions etc.
The risks that are usually mitigated by escrow agents are the following:
- Construction / Project Finance. Funds are held by the escrow agent until the completion of agreed construction or project stages. This protects the investors or sponsors to the construction project from part performance or breach in obligations.
- Litigation. Funds are held by the escrow agent pending an appeal of a first instance court judgment or pending their distribution to various beneficiaries, e.g. in multi plaintiff cases, probate actions, liquidation proceedings etc.
- Good will or other undefined purchase price. This is important where the evaluation of the asset to be purchased e.g. an on-going business, is difficult to assess and depends on future performance e.g. on sales turnover. It is also important where employees leave the company after the purchase taking with them a large portion of the client basis or good will. The price difference may be held in escrow until future performance can be assessed.
- Raising capital. Funds are held by the escrow agent pending a successful capital call or another form of capital raising from investors or participants to a scheme, and are not given until all investors participate in the transaction. This applies in particular to hedge funds, private equity funds and venture capital funds.
- Liquidity of counterparty. This is important when there is doubt if one of the parties shall meet its future financial obligations. The property or the assets shall be transferred to the escrow agent who shall only transfer it to the buyer when the financial obligations are met.
- Execution. This is important where the transaction is to be executed according to road map leading to the final transfer of business e.g. to ensure compliance with representations and warranties or performance of covenants in mergers and acquisitions. A percentage of the purchase price is held in escrow for a period of time and the funds are released according to the agreed the road map.
As licenced law practitioners we are under the supervision of the Cyprus Bar Association and are obliged to act according to professional code of ethics. In this capacity we act very frequently as escrow agents of our clients, especially in litigation or business transactions and retain funds, assets or documents for the benefit of the counterparties until completion. We also mediate for drafting escrow agreements that shall satisfy all parties involved in the transaction.