How escrow accounts function in mergers and acquisitions

In conventional M&A transactions, the utilization of escrow accounts is considerably less frequent compared to transactions that involve the National Depository of Ukraine (NDU). Nonetheless, even in the absence of NDU involvement, escrow remains a valuable tool for enhancing transaction security. In such scenarios, a bank acts as a neutral intermediary, holding the funds or assets until all conditions of the agreement are fulfilled. The participation of the NDU, however, offers heightened legal guarantees and instills greater certainty within the transaction.

Escrow through the National Depository of Ukraine (NDU)

Engaging escrow services through the NDU entails the establishment of a specialized conditional custody account with the NDU, to which shares of the company’s charter capital are transferred. Throughout the fulfillment of the contractual conditions, these shares remain under the control of the NDU, which serves as the escrow agent. The NDU’s responsibility is to hold the corporate rights in the depository account until all agreed-upon conditions are satisfactorily met, thereby ensuring that the transfer of ownership of the shares occurs only after the financial settlements between the parties have been completed.

It is essential to acknowledge that this service is exclusively available to companies that are registered with the NDU and maintain their share accounting through this system. In order to utilize escrow services, a company shall be duly registered with the NDU and conduct its share accounting via this platform.

In this arrangement, the NDU functions as a neutral intermediary, ensuring compliance with the terms of the agreement. This role is consistent with the fundamental concept of escrow, whereby an independent third party temporarily holds an asset until specific conditions are fulfilled. The NDU’s position as impartial custodian fosters trust between the parties involved; neither party can unilaterally affect the asset’s disposition prior to the fulfillment of agreed conditions.

What are the stages of a merger and acquisition transaction using escrow through NDU?

The stages of a merger and acquisition (M&A) transaction utilizing escrow through the NDU commence with the execution of a share purchase agreement between the buyer and the seller. This agreement should be comprehensive, detailing the conditions for the transfer of shares, the rights and obligations of the parties, and, crucially, the involvement of the NDU in the execution of the agreement. The agreement shall also delineate terms regarding ownership transfer, dispute resolution clauses, and other pertinent provisions.

Concurrently, a contract is established with the NDU to oversee the transaction pertaining to the transfer of corporate rights. Typically, this agreement involves the seller and the NDU, although a tripartite agreement including the buyer is also feasible. This contract, developed in conjunction with legal representatives from the NDU, outlines the procedures for blocking shares in the depository account, transferring assets and funds contingent upon the fulfillment of transaction conditions, and unblocking assets in the event of non-fulfillment.

Furthermore, the agreement may stipulate that the NDU is responsible for verifying the basis for implementing changes in the share accounting system related to the transfer of ownership to another individual identified by the escrow account holder, or for terminating the accounting of the share on the escrow account by reverting it to the original owner.

Upon reaching an agreement with the NDU, the seller transfers shares to the depository account maintained by the NDU. Subsequently, the NDU opens a special account into which the corporate rights, represented by the company shares, are recorded. These shares remain blocked by the NDU until all stipulated conditions of the agreement have been fulfilled.

The buyer then deposits the agreed-upon amount into an escrow account under the control of the NDU. The funds within this account are frozen until all conditions of the agreement are satisfied.

Once all conditions have been met, the NDU conducts simultaneous transactions: it releases the shares and transfers them to the buyer’s account while concurrently transferring the funds to the seller’s account.

In the event that the agreement conditions are not met, the escrow obligations are deemed terminated. In this scenario, the NDU returns the assets to their original owner and reimburses the buyer.

It is noteworthy that in this arrangement, a transfer-acceptance act is not required, which is typically necessary in conventional M&A transactions that facilitate ownership transfer and the state registration of changes in company participants. In contrast, through the utilization of escrow with NDU support, the share transfer occurs automatically upon the fulfillment of the agreement’s conditions, thereby obviating the need for involvement from the state registrar.

Advantages of using an escrow account with NDU support

The escrow account facilitated by NDU support presents several significant advantages that enhance transactional security and control. First, the reliability and security of the transaction are assured by the NDU, which safeguards the assets and executes transactions strictly in accordance with the agreed terms. The process adheres to a transparent and comprehensible protocol, thereby minimizing the potential for fraud and unauthorized manipulation within a secure infrastructure.

As a neutral third party, the NDU provides impartial oversight over the execution of the agreement. The NDU possesses no vested interest in either the sale or purchase of the company shares, which ensures fair and unbiased execution of all agreement terms by both parties.

The escrow mechanism guarantees that assets or funds will not be transferred until the agreement’s conditions have been comprehensively met. This framework ensures that the obligations of both parties are fulfilled synchronously, facilitating the proper and timely transfer of rights and financial transactions.

In cases of contractual breach, the escrow mechanism prevents the automatic transfer of assets or funds until all conditions are met. This safeguard protects the rights of participants in the transaction, as the NDU operates solely based on clearly defined instructions and supporting documentation, eliminating the risk of unlawful asset seizure.

Additionally, shares held within an escrow account cannot be subject to seizure or foreclosure, thus further mitigating legal risks associated with the asset. This condition enhances protection, ensuring that the asset remains secure until the contractual terms are met. Nevertheless, enforcement may apply only to the claim right that arises from the escrow agreement, not to corporate rights themselves.

In conclusion, the using of escrow accounts supported by the NDU during the acquisition and disposition of LLC shares introduces an elevated level of safety and transparency in corporate transactions. The NDU, serving as an independent intermediary, ensures that the conditions of the agreement are executed without subjective influence, thereby decreasing risks for both parties. This model is especially pertinent for enterprises amid the shift to depository accounting of shares, as traditional mechanisms for the transfer of corporate rights through the Unified State Register are progressively being supplanted by more secure processes.

Moreover, the escrow mechanism remains relevant beyond the scope of depository accounting, including applications in real estate transactions, intellectual property rights, and complex financial instruments. In any situation where the simultaneous fulfillment of obligations is critical, an escrow account serves as a reliable tool for protecting the interests of all involved parties. Thus, the NDU-supported escrow mechanism is emerging as a promising solution for secure and controlled circulation of corporate rights within Ukraine.