Meaning
Security deposits held by a neutral third party during corporate acquisitions provide a source of recovery for the buyer if the seller breaches representations and warranties. These indemnity escrows usually represent a percentage of the total purchase price, set aside for a period of one to two years. They protect the buyer from undisclosed liabilities discovered after the transaction closes.
The seller receives the remaining balance after the period expires.
Liability Mitigation
Allocation of risk between transaction parties is managed through this holding mechanism. This balance ensures that the buyer does not have to collect funds from dozens of individual shareholders if a breach occurs. The escrow account limits the seller’s immediate liability to the held amount.
This arrangement provides security for both transaction parties.
Release Process
Distribution of the remaining funds requires joint written instructions from both the buyer and the seller. This step occurs after the survival period of the transaction representations ends. If there are pending claims, the disputed portion remains locked in the account.
The undisputed amount is distributed to the former shareholders.
Administrative Cost
Maintaining these accounts involves paying fees to the escrow bank. These charges are often split between the buyer and the seller.
