Merger agreements typically require the buyer to give notice of any indemnification claims to both the shareholder representative and the escrow bank. Most escrow agreements contemplate that if the representative does not object to a claim on behalf of the shareholders within a certain period after notice is given to the escrow bank, the claim is deemed accepted and the escrow bank shall automatically disburse the claim amount to the buyer. The escrow bank typically does not have any obligation to verify that the representative actually received notice. This presents two related but meaningful risks.
First, if notice is given only to the bank, it is possible that money could leave the escrow account without the representative being aware of it until a later date. While escrow agreements usually require joint signatures for most disbursements, this is a contingency that could trigger a release without the representative’s consent or knowledge. The representative likely would have a claim of inadequate notice, but at that point would have to recoup the money rather than having the protections that come with establishing an escrow fund.
Second, the representative and the bank might be working under different assumptions regarding timing. For instance, if the bank received notice by fax and the representative received notice days later by mail, the shareholder representative and the escrow bank may calculate the date of notice (and therefore the response deadline) differently. While the representative is at least aware of the claim in this situation, it could still result in the same outcome of money leaving the account without the representative having responded on the escrow bank’s timeline.
To address this, the agreement could require the three parties to confirm and agree upon the timing of the receipt of the notice of claim as part of the notice provisions. Alternatively, the parties could require that in the event the escrow bank does not receive a response from the representative during the applicable period, the escrow bank would need to give some period of advance notice that an automatic release is about to occur before disbursing the money. This would at least give the representative time to assert that it never got the claim or is calculating the response deadline differently. While somewhat cumbersome, one of these options is likely the only way to avoid the possibility of the parties operating under different assumptions that could trigger inadvertent releases.