Streamlining M&A transactions: how escrow agents help

As an international financial hub with a fast-growing innovation economy, the UAE is no stranger to complex cross-border transactions. Navigating an M&A process between offshore international companies and onshore entities carries particular considerations, some of which cause avoidable delay if they are not addressed at the outset.

An escrow agent helps two parties transact at arm’s length. It also has a practical role in keeping a transaction on its timetable.

What is an escrow agent

In a complex financial transaction, an escrow agent is a third party responsible for holding assets related to the transaction. In the classic example, a property buyer transfers some or all of the agreed purchase price to an escrow agent to hold until completion of the sale. The buyer can confirm the funds exist but cannot access them before the property transfers.

On more complex transactions, such as an international consolidation of companies, the parties may set aside funds or assets during negotiations. In that case the escrow agent is typically a financial services provider subject to regulatory oversight.

M&A in the UAE

Mergers and acquisitions describe two or more parties combining business units, making strategic purchases or reorganising an existing entity. The parties work with legal counsel to negotiate and finalise terms, and with investment banks, private equity firms and other capital providers to arrange financing. Depending on size and sector, permission may be required from a local regulator, such as the competition authority, before proceeding.

Many high-value transactions involve parties from two different countries, and those cross-border deals mean navigating two sets of rules. Within the UAE, a cross-border element also arises when a company operating under a financial free zone license transacts with an onshore company, and when two free zone entities merge or sell.

How escrow is used in M&A

Beyond holding funds in a designated account, an escrow agent on a complex transaction needs a working understanding of the phases of the deal and the ability to move at the pace of the closing.

Indemnities and warranties. Funds held in escrow give both parties comfort that an agreed amount is available if a claim arises under the indemnity or warranty provisions, on the terms the agreement sets out.

Adjustment of terms. Where the parties need to change the final terms of the deal, an escrow agent can hold the funds while that is settled.

Working capital reserves. It may be necessary to set aside funds to cover operating expenses while the process completes, so that the acquirer receives a business that has kept running.

Stockholder expense reserves. These cover acquisition related expenses that would otherwise fall on the shareholders, such as the cost of obtaining shareholder approvals.

Is the escrow agent regulated

An escrow agent operating in the UAE’s financial free zones should hold the relevant authorisation from the applicable regulator: the Financial Services Regulatory Authority in Abu Dhabi Global Market, or the Dubai Financial Services Authority in the Dubai International Financial Centre. Both maintain a public register. It is worth checking the register rather than the marketing.

Speak to us

If you are considering a cross-border transaction in the UAE, contact us to discuss the structure and how the release mechanics would be documented.