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 the mergers and acquisitions process between offshore international companies and onshore entities comes with special considerations, however, some of which can lead to unnecessary delays if not addressed at the outset of the dealmaking process.

Escrow agents not only help mitigate risk for two parties operate at arm’s length, they also play a key role in ensuring that transactions proceed on schedule and in compliance with local regulations.

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What is an escrow agent?

In complex financial transactions, an escrow agent acts as a trusted third party responsible for holding assets related to the transaction. In the classic example, an interested property buyer will transfer some or all of the agreed purchase price to an escrow agent to hold until the completion of the sale. The buyer has the right to confirm the existence of the funds but cannot access them prior to actually transferring the property to the buyer.

For more complex transactions, such as an international consolidation of companies, the parties to the deal may wish to set aside certain funds or assets during the negotiations to ensure that everyone involved acts in good faith. In this case, the escrow agent typically acts as a financial services provider subject to heightened regulatory oversight.

M&A in the UAE

Mergers and acquisitions (M&A) refers to the process of two or more parties working together to create value by combining business units, making strategic purchases or reorganizing an existing entity. The parties will work with legal counsel to negotiate and finalize the terms of the transaction, as well as investment banks, private equity firms and other liquidity and debt providers to arrange financing. Depending on the size of the deal or the industry, the parties may need to receive permission from local regulators, such as the competition authority, before proceeding.

While many companies can and do seek to partner primarily with organizations in their own jurisdiction, many high-value transactions will involve parties from two different countries. These types of deals, which necessarily entail navigating two sets of rules and regulations, are known as cross-border transactions.

Within the UAE, cross-border transactions also occur when international companies operating pursuant to a license from a financial free zone engage in M&A activities with onshore companies. The same also applies when two offshore international companies licensed by the free zones wish to merge or sell.

What is the role of an escrow agent in M&A?

In complex M&A transactions, particularly cross-border transactions, the escrow agent will partner with the parties to lessen transaction costs associated with due diligence and mitigate perceived risk.

How is escrow used in M&A?

Beyond simply holding funds in a designated bank account, the escrow agent in a complex financial transaction will have a working understanding of key phases in the dealmaking process and be prepared to move quickly to facilitate the parties’ needs.

Strategic uses of escrow in the M&A process can include:

Indemnities and Warranties.

Funds held in escrow provide assurance to both parties that sufficient funds are available to fulfil the agreed-upon covenants. This streamlines the due diligence phase, as the escrow funds provide representations, warranties and indemnities on behalf of the target entity.

Adjustment of Term.

In the event that the parties need to make changes to the final terms of the deal, an escrow agent can take custody of the funds until the parties finalize their agreement.

Working Capital Reserves.

While the parties work to complete the M&A process, it may be necessary to set aside funds to cover operating expenses. Placing the working capital required to keep the target entity up and running in escrow ensures that the acquirer receives a healthy business and that post-merger activities get off on the right foot.

Stockholder Expense Reserves.

Similar to working capital reserves, stockholder expense reserves cover expenses related to the acquisition that would otherwise be borne by the shareholders. Qualifying expenses might include legal fees for obtaining shareholder approvals or the cost of board meetings.

Are escrow agents licensed?

Escrow agents facilitating cross-border transactions in the UAE should hold a license from the Financial Services Regulatory Authority of either the Dubai International Financial Center or the Abu Dhabi Global Market. To verify the status of your escrow provider, search the publicly available FSRA registry.

Titanium Escrow - Your M&A Partner

If you’re considering a cross-border transaction in the UAE, please don’t hesitate to contact us. The first fully licensed and regulated provider of escrow services in the region, we regularly collaborate with international law firms and financial institutions to facilitate complex, multi-phase transactions.