From M&A transactions to the purchase of real estate or crypto-assets (including cryptocurrencies), escrow agents serve a critical role in facilitating and securing transactions: At its core, escrow is a mechanism where two parties in a transaction engage a third party (the escrow agent) under an escrow agreement to temporarily safekeep (or ‘hold in escrow’) funds or a wide range of assets (including securities) to provide certainty and trust that both parties fulfill their obligations. With this, escrow services solve the problem of which party has to pay / deliver first – either party can be sure that the escrow agent only releases the asset once the other party has fulfilled its obligation.
In this blog post, we discuss the typical use cases for escrow services in Switzerland, the role of the escrow agent, and how the escrow agreement is structured.
Common use cases for escrow services
While almost any type of asset and transaction can be executed through an escrow agent, the following are typical examples of when an escrow agent is commonly used in practice:
- Share transfers: Whether in the context of an M&A deal or a simple secondary transaction, the buyer of shares often wishes to make sure that the seller actually delivers the shares and vice versa regarding the purchase price.
- M&A transactions: Escrow services are often crucial in mergers and acquisitions (M&A), where post-closing adjustments to the purchase price are common. Determining the exact price can take several months; and the effective enforcement of such adjustments is dependent on the existence of a robust escrow set-up.
- Lock-up and claw-back arrangements: An independent third party is well positioned to safeguard shares in lock-up and claw-back arrangements which are commonly found in employee participation plans, investment and shareholder agreements as well as in share purchase agreements.
- Reps & Warranties claims: In all financial arrangements containing representations and warranties, escrow services can secure the effective enforcement of claims (i.e., for false representations or breaches of warranty). In these cases, an escrow agent holds a so-called “Holdback” account, allowing parties to place a portion of the purchase price or a specific amount of money in an escrow account until the agreement’s terms are satisfied or the claim time limitations have expired.
- Deferred payments: In transactions where payment for services, goods or other assets (such as shares) is not made upfront, but is instead deferred to a later date or until the occurrence of a particular event, milestone or target, the seller may require the buyer to put part or all of the price into escrow.
- Online shopping or e-commerce: In cases where high-value items, such as jewelry or art, are purchased online, the buyer might feel more comfortable sending their payment to an escrow agent. The agent holds the money until the product is received and verified, at which point the funds are released to the seller.
- Cross-border transactions: Escrow services can be particularly useful in cross-border sales or purchases of goods. Here, the seller might require assurance of receiving payment when the goods reach their destination, while the buyer might want to pay for the goods only if they arrive in good condition. An escrow agent can hold the buyer’s funds and disburse them to the seller once the goods arrive as expected.
- Crypto transactions: When transacting in cryptocurrencies, crypto-assets, or other types of blockchain-based tokens, most will consider regulated (or even unregulated) on- and off-ramp service providers, centralized or decentralized exchanges. In high-volume peer-to-peer transactions (involving two or more parties), it is beneficial to execute the transaction through an escrow agent. This neutral third party ensures neither party is favored, adding an additional layer of confidentiality, trust and security to the transaction.
The role of the escrow agent
The escrow agent is a vital component of any escrow arrangement. Here are some factors to consider when choosing one:
- Impartiality: The escrow agent should be a neutral, independent third party, adhering strictly to the escrow agreement’s terms (explained below) and showing no favoritism to any party involved.
- Infrastructure and expertise: The escrow agent should deploy secure infrastructure, especially when dealing with crypto-asset transactions. When dealing with fiat transactions, the escrow agent should work with other trusted and regulated partners. They should also be experts in the operational aspects of receiving, safekeeping, and dispensing the underlying assets (which is highly dependent on the type of the asset), as well as in the legal and regulatory framework in which the transaction and escrow set-up are performed. The escrow agent should also have a deep understanding of the underlying transaction concluded between the parties and the interests at hand of different stakeholders.
- Regulatory compliance: In most jurisdictions, providing escrow services is a regulated activity. Choosing a regulated escrow service provider ensures compliance with anti-money laundering due diligence and conflict of interest principles (see factor 1), providing more confidence in the transaction.
The structure of the escrow agreement
The escrow agreement is a tri- or multi-partite agreement between the depository(ies), the beneficiary(ies), and the escrow agent. It is not to be confused with the agreement between the parties relating to the underlying transaction(s) – the escrow agent is not a party to this underlying transaction. The escrow agreement sets out the terms and conditions relating to the receipt, safekeeping, and dispensing of the assets under escrow. Key terms to be considered in an escrow agreement are:
- Description of assets: A precise description of the type and value of the assets to be put under escrow is essential.
- Asset deposit modalities: The agreement should detail how the assets are put into escrow, including the transfer process by the depository(ies) and the receipt process by the escrow agent, as well as the relevant dates.
- Safeguarding modalities: The agreement should specify how the escrow agent will safeguard the assets (e.g., segregated addresses in cold storage for crypto-assets), and if applicable, how the assets can be used by the escrow agent.
- Escrow period and release conditions: The agreement should stipulate the escrow period as well as the so-called release triggers. These triggers typically relate to
- the occurrence of given events, such as joint instructions by the relevant parties, final and enforceable court decisions or arbitral awards, receipt of certain closing deliveries, payment of an amount or transfer of an asset by one party to the other, etc.;
- the non-occurrence of given events, such as the absence of a petition, request or claim to be filed by a certain date with relevant instances;
- or simply a definite time limit.
- Release modalities: The agreement should detail where and how the assets will be released once the release triggers are satisfied in favour of one or the other party, e.g., a designated account, custodian or address for the delivery of assets under escrow.
- Risk allocation: The agreement should specify which party bears the risks attached to the assets under escrow. It will be this party who is to benefit from the profits as well as bear the risks related to the relevant assets.
- Duties and liabilities of the escrow agent: The agreement should clearly outline the responsibilities and liabilities of the escrow agent. These typically relate to safeguarding modalities.
Are you looking for a Swiss escrow agent?
LEXR Finance is a Swiss AMLA regulated financial intermediary supervised by the SRO VQF, and offers escrow services that cover many of the above-mentioned use cases.
And whether you’re a buyer, seller, investor, lender, or founder, using LEXR Finance can provide the peace of mind and high level of protection that you seek in your transactions.
For more information, do not hesitate to visit our landing page and speak to one of our experts!