In the high-stakes world of M&A transactions, deal certainty is everything. Parties invest significant time, resources, and effort into negotiating agreements, yet even the most well-structured deals can fall apart due to logistical hurdles and trust issues.
This is where the documentary escrow (or documentary storage) agreement steps in – not as a mere administrative tool but as a powerful mechanism that safeguards documents, mitigates risks and ensures seamless completion of the deal. And it is no coincidence that an increasing number of clients are turning to reputable law firms as their trusted documentary escrow agent.
What is documentary escrow?
Under a documentary escrow agreement, the parties place one or several documents into the hands of an independent third party (a documentary escrow agent) – as a rule, a law firm – that holds them in a sealed envelope for a specified period or until a predetermined event occurs.
For instance, depending on the agreed arrangements, a documentary escrow agent may be instructed to release the documents once:
- the agreed escrow period has elapsed;
- the relevant parties have fulfilled their obligations under the transaction documents and provided confirmation regarding the same (for example, payment of the purchase price); or
- a specific event has occurred.
What are the benefits of documentary escrow?
In an M&A deal, after signing a share purchase agreement, parties have to exchange documents needed to register the share transfer, such as powers of attorney, corporate resolutions, and share transfer forms countersigned by the parties (for Ukrainian LLCs – acts of transfer and acceptance), as applicable.
Consider a scenario where the seller is reluctant to hand over share transfer documents until the purchase price is safely in their account, especially if there is likely to be a time gap between signing the share transfer documentation and payment of the purchase price. At the same time, the buyer hesitates to pay without having sufficient comfort that they will receive the documents required to finalise the share transfer. This standoff could delay or derail the deal.
However, both parties may gain some comfort if they decide to engage a documentary escrow agent. The process is very straightforward: after signing the share purchase agreement, the parties deposit the documents required for completion with a documentary escrow agent and instruct the agent to release the documents once the escrow agent receives evidence that the agreed purchase price has been paid to the seller. As a result:
- the seller is assured that the buyer will only be able to register ownership of the shares after the seller has received the purchase price; and
- the buyer does not depend on the seller’s good faith and has certainty that it will receive the documents immediately once their payment obligations are fulfilled.
Practical tips
To make the most of a documentary escrow arrangement, keep in mind the following points:
- choose a reputable documentary escrow agent – a trusted, neutral party, preferably with expertise in handling documentary escrow arrangements;
- identify the list of the documents which will be deposited into documentary escrow;
- clearly define conditions under which the documents must be released;
- if the escrow agreement includes time-based triggers, ensure that the timelines align with the broader transaction schedule; and
- outline what steps should be taken if a party fails to meet its obligations or breaches the transaction documents.
All in all, the documentary escrow mechanism is an effective tool for cases when neither party wants to take the first step without assurances that the other will reciprocate. By acting as a neutral intermediary, a documentary escrow agent ensures that all completion actions occur simultaneously, reducing risks and adding certainty to the transaction process.
By Oleksandr Kozhukhar, Managing Associate, and Olha Rudevych, Associate, Avellum
