1. Why M&A Needs Escrow - The Core Problem

At closing, buyer pays 100% but discovers later that seller's warranties were false - e.g., hidden tax liability, customer churn, IP infringement.

Suing a dispersed shareholder group post-closing is impractical. So buyer holds back 5-15% of consideration in escrow.

Three Types:

A. Indemnification Escrow: Most common. Secures breach of reps & warranties and covenants. 10-15% of deal value, 12-24 months duration.

"At the Closing, Parent shall withhold from the Merger Consideration $3,350,000 in cash... for the purpose of satisfying the indemnification obligations" - Standard Law Insider clause.

B. Purchase Price Adjustment Escrow: Secures working capital / net debt adjustment. 60-120 days post-closing.

C. Regulatory / SEBI Escrow: In India, under SEBI SAST Reg 17, acquirer must create escrow 2 working days prior to Detailed Public Statement. 25% of first 500 cr + 10% rest. Forfeitable for default.

2. Structure

Code

SPA / Merger Agreement  -> Article VII: Indemnification + Survival  -> Article: Escrow Amount, Escrow Agent, Escrow PeriodSeparate Escrow Agreement (Tripartite: Buyer, Seller Rep, Escrow Agent - JP Morgan, 【entity-Citi¦canonical_name=Citi】, Computershare)

3 lines hidden

Funding: From buyer's purchase price. Not seller's money - hence buyer has leverage.

3. Key Management Standards

a) Exclusive Remedy vs. Non-Exclusive: 55% of private deals say escrow is sole remedy for breach of general reps, except fraud and fundamental reps. Delaware upholds this.

b) Notice Requirements are Sacred: Must describe claim in reasonable detail, include justification, copies of evidence, estimated amount. Failure = forfeiture.

c) Tax Claim Timing Trap: Lower middle market trap noted by M&A lawyers: Buyer has unlimited time to sue sellers personally for tax, but only 12-18 months to claim against escrow. If buyer waits for tax assessment (which takes years), escrow is gone.

4. Leading Case Laws

Case 1: Thompson Street Capital Partners IV, L.P. v. Sonova US Hearing Instruments LLC - Delaware Supreme Court, April 28, 2025 - THE Current Law on Escrow Notice

Most important M&A escrow case in 2025.

Facts: Sonova bought Hearing Instruments business for $130M+. Merger Agreement provided $7.75 million indemnity escrow designated as the exclusive post-closing remedy. Buyer must deliver notice of claim with:
(1) describe claim in reasonable detail,
(2) include justification with reasonable specificity,
(3) include copies of all available material written evidence,
(4) indicate estimated amount.

Sonova sent notice for $16.5M before survival date but without all evidence.

Chancery Court said notice sufficient. Delaware Supreme Court reversed.

Holding: Clause stating buyer "shall have no right to indemnification unless buyer notifies seller in writing of such Claim" creates a condition precedent that can create a forfeiture. Court remanded to determine if notice requirements were material and if forfeiture was disproportionate.

Doctrine: Law's abhorrence of forfeitures - if condition is immaterial technicality, it may be excused. If material, buyer loses escrow.

Takeaway: Draft notice provisions with exact compliance language at your peril. Buyers must attach everything. Sellers should draft: "Buyer shall have no right unless..." to create condition precedent.

Case 2: Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del. Ch. Oct 1, 2018) - Escrow Failed to Save Seller

First Delaware case to find Material Adverse Effect.

Fresenius agreed to buy Akorn for $4.75B. Akorn's business fell off cliff post-signing, plus whistleblower revealed Akorn faked FDA quality data - all data sent to FDA was fraudulent.

Fresenius terminated. Akorn sued to close.

Vice Chancellor Laster held: Material Adverse Effect occurred + breach of regulatory compliance reps. Buyer entitled to walk. $443M escrow / reverse termination fee not payable.

Lesson: Escrow secures post-closing claims, but cannot cure pre-closing MAE or intentional fraud. R&W insurance now covers this, but escrow alone insufficient.

Case 3: Jeweltouch (India) Pvt. Ltd. v. Naheed Hafeez Quraishi & Ors. - Indian Escrow Agent Role

Bombay High Court held concerned parties could appoint escrow agent to determine whether a promise or precondition has been met to warrant release of documents from escrow. Escrow agent is not just postbox - can be adjudicator if agreement says so. This is used in India for share transfers.

Case 4: SEBI SAST Escrow Forfeiture - India

Regulation 17 & 21 SEBI SAST 2011: Funds in escrow not released until 30 days after payment to shareholders. SEBI can direct escrow agent to forfeit partially or entirely for non-compliance with open offer obligations. Several SAT orders upheld forfeiture for delayed open offers - e.g., SEBI orders in Essar Oil delisting where Rs 1292.46 cr parked in Special Escrow Account.

Case 5: Supreme Court of India - Vedanta / Cairn India Buyback Case 2026

Supreme Court held release of cash escrow deposited under share buyback regulations does not automatically shield from fraud investigations under SEBI PFUTP Regulations. Company sought release of 2.5% cash escrow after buyback, SEBI released, then SEBI started fraud probe. Court: inquiry governing escrow forfeiture operates in entirely separate domain from fraud proceedings under PFUTP. Fulfillment of escrow release conditions does not preclude independent finding of fraud.

Same principle as US: escrow release is not clean chit.

5. Modern Market Shift: Escrow vs R&W Insurance

Pre-2015: 80% deals had 10% escrow.
Post-2020: With Representation & Warranty Insurance, escrow dropped to 0.5-1% for purchase price adjustment only. But in India, SEBI mandatory escrow remains non-insurable.

Best Practice Drafting Post-Thompson Street:

1. Separate survival periods: General reps 12-18 months, Fundamental reps 6 years, Tax 7 years.
2. Escrow amount: 1% if R&W insured, 10% if not.
3. Claim notice: Avoid "shall have no right unless" if you are buyer. Use "shall use reasonable efforts to include".
4. Tax claims: Add clause: "Claim for pre-closing taxes deemed made against escrow if notice filed before assessment becomes final, with estimate to be updated".
5. Escrow agent: Use independent bank, not seller's counsel.