Expense funds are often set up in merger agreements to allow the shareholder representative to pay for any third-party expenses that may arise after closing, such as engaging attorneys or accountants with respect to any post-closing disputes. Generally, those funds are held separately from the escrow and can be released at the sole discretion of the shareholder representative.  Once the escrow is released, any earnouts have either been missed or paid, and the selling shareholders are comfortable that the risk of any additional post-closing issues has lapsed, they will generally instruct the shareholder representative to release the balance of any expense fund to the shareholders.

In connection with this, we suggest that the shareholders should avoid hard-coding the release date of the expense fund (such as at the end of the escrow period). Instead, leave to the discretion of the shareholder representative (as directed by the Advisory Committee), since issues could remain after the escrow is released. It simply is not possible to know at the time of closing when the time will be right for the shareholders to determine that the risk of additional issues is acceptably low to justify the expense fund being terminated. Suggested bad language to watch out for and what we believe to generally be a better alternative are below.

  • Bad language: At the end of the Escrow Period, the remaining balance of the Escrow Amount (less any outstanding Claims) and the Expense Fund shall be released to the Shareholders.
  • Good language: As soon as practicable following the completion of the Representative’s responsibilities, the Representative will deliver any remaining balance of the Expense Fund to the Paying Agent for further distribution to the Shareholders.
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