M&A transactions involving escrowed stock are on the rise. According to the 2016 SRS Acquiom M&A Deal Terms Study, deal consideration in the form of all stock or a combination of stock and cash has grown from 15% to 25% since 2012. As a result, it is important to fully understand the mechanics of stock escrows to maximize efficiency and avoid surprises when it comes time to release the stock to shareholders.
A key consideration when negotiating a stock escrow agreement is the way the escrowed stock certificates are initially cut or recorded on the issuer’s books as book entry shares. Deal parties can do this two ways: by issuing individual stock certificates for each shareholder, or by having one aggregate stock certificate in the name of the escrow agent, and issuing individual stock certificates in the names of the shareholders at the final release. In our experience, if no claims are brought forth against the escrow, both options are essentially the same to manage through the life of the escrow.
If any claims are submitted, however, multiple certificates quickly become problematic because any stock released from escrow to satisfy an indemnification claim requires that every single stock certificate must be returned to the issuer, adjusted to reflect the pro rata amount claimed, re-printed, and sent back to the escrow agent. Similarly, if any disputes remain unresolved at the end of the escrow period, each stock certificate must be returned to the buyer and replaced with two brand new certificates: one for the disputed amount remaining in escrow and a second for the balance of shares released to each holder. Once the dispute is resolved, likely for something less than the full original amount, the whole re-cut process must be done again. Deal parties must also deal with fractional share implications each time new stock certificates are issued which could, among other things, require the buyer to pay more cash consideration in lieu of such fractional shares. Issuing individual stock certificates for each holder participating in the escrow can end up being an administrative challenge for deal parties and can create additional and unexpected transactional costs along the way.
The often more efficient structure for a stock escrow is through the use of one stock certificate (per series of stock and per escrow fund) issued in the name of the escrow agent for the aggregate amount of escrowed shares. If a successful claim is brought against the escrow, the escrow agent sends the single stock certificate to the issuer to cut a new certificate for the balance of shares remaining in escrow. Upon release of the escrow, the master stock certificate is cancelled and the buyer or its transfer agent issues and delivers individual stock certificates in the name of each holder. If the parties prefer book entry shares over physical certificates, the escrowed shares are recorded on the issuer’s books in the name of the escrow agent, ensuring the escrow agent is able to maintain control over the shares while in escrow and eliminating the need for physical stock certificates altogether.
One aggregate stock certificate, whether in book entry form or as a physical certificate, minimizes the need for issuances of multiple stock certificates resulting in much less administrative burden and cost if or when claims emerge.
For more information, please refer to the 2016 SRS Acquiom M&A Deal Terms Study. You may also contact us at 415.367.9400 with any questions, or visit srsacquiom.com/our-insights for further reading on other M&A topics.