Distribution of Escrow Release Payments

At closing, most shareholders are given an option (when submitting their letter of transmittal) as to how they want their merger consideration distributed – by check, direct deposit (ACH) or by wire. This choice does not necessarily apply to payments under the escrow agreement. In fact, many escrow and paying agent agreements specifically require payment by check for post-closing payments to shareholders.

Escrow banks seem to prefer issuing checks for several reasons that are good for them. Checks must be deposited, which provides a signature verification mechanism for the bank. In addition, banks are concerned about their liability if an electronic payment goes awry. Probably most important, checks generate additional float income for the bank. The parties should ensure that the bank never issues cashier’s checks, especially for escrow releases and other payments subsequent to closing. Cashier’s checks are “near cash” and there are special laws and regulations regarding their negotiation. Among the problems with this, they can be very difficult to cancel or stop payment if it is later discovered that a mistake was made or a check was mailed to a prior address. Therefore, they should be avoided for this purpose.

Shareholders, in contrast, often prefer the convenience and immediacy of electronic payments, especially those who have requested a wire transfer at closing. This is especially true for shareholders located outside the country of the escrow bank or those receiving a large amount. The combination of snail mail time and the difficulty of negotiating checks in a non-local currency can significantly delay receipt of good funds by foreign shareholders.

To address these concerns, when negotiating escrow agreements, SRS Acquiom recommends having escrow release payments made by the original paying agent and having the payment method default to whichever method the shareholder requested at closing. It will streamline the process and ensure that shareholder expectations are met.

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