Escrowed Securities - Explained
What are Escrowed Shares?
Written by Jason Gordon
Updated at July 8th, 2021
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Table of Contents
What are Escrowed Shares?When are Escrowed Securities Used?Merger or Acquisition Bankruptcy Stock Offerings Academic Research on Escrowed SecuritiesWhat are Escrowed Shares?
Escrowed Share or Escrowed Security is a financial term used to describe shares held in an escrow account with a third party, pending completion of a business transaction. An escrow agent is a third party who holds the security on behalf of both parties until instructions are received for further action.
Back To: BUSINESS TRANSACTIONS, ANTITRUST, & SECURITIES LAW
When are Escrowed Securities Used?
Shares are often escrowed when a firm is in the following positions:
Merger or Acquisition
The buyer requests to escrow 10-15% of the financial assets being purchased in an escrow account to protect the buyer or acquirer from the breaches by the seller concerning working capital, inventory, warranties and other items of the firm which may adversely affect the firms value. The seller may also request to escrow financial assets of the acquirer to protect it against non-performance by the buyer (backing out of the deal).
Bankruptcy
In the case of bankruptcy or reorganization of a firm, the companys share stopped trading until corporate actions are taken to resolve the crisis or reorganize the company. Also, the company's reserve shares are deposited in escrow accounts and later on they are reverted to the company's control if the equity remains in the company after bankruptcy or restructuring, and
Stock Offerings
A company may offer restricted shares to their employees who meet certain threshold set by the company. In cases of shares subject to vesting, the shares are escrowed until the vesting date and then shares are released to employees. The term escrow agreement is a legal document that outlines the requirements of the escrow arrangement between the two parties. As discussed, pursuant to the agreement, one party deposits financial instruments or assets with third party (escrow agent) who in turn, delivers these assets to another party to the agreement if certain conditions are fulfilled.
Academic Research on Escrowed Securities
- Application of Merit Requirements in StateSecuritiesRegulation, Hueni, J. F. (1968).Wayne L. Rev.,15, 1417. This study discusses the relevance of the additional application of merit standards to be met prior to the registration and sale of securities, as required by most of the state securities regulatory acts.
- California Measures the UniformSecuritiesAct Against Its CorporateSecuritiesLaw, Edwards, R. H. (1959). Bus. Law,15, 814. This article compares the California Securities law with Federal Securities law.
- Regulation in Western States of Issuance of MiningSecurities, Lohf, E. W. (1954). Wyo. LJ,9, 170. This article address the issuance of securities in mining projects.
- Escrows--Burden or Boon, Pearce, D. A. (1962). Hastings LJ,14, 124. This article examines the effect of escrows and whether these are subject to securities laws.
- Influence ofSecuritiesRegulation Upon Standards of Corporation Financing, Ashby, F. B. (1927). Mich. L. Rev.,26, 880. This article examines the effect of securities laws on the practice of corporate finance.
- Refunding tax exempt bonds, Dyl, E. A., & Joehnk, M. D. (1976). Financial Management, 59-66. This article addresses the issue of refunding tax exempt bonds and how it is affected by securities regulation.
- Should Utah Adopt the New UniformSecuritiesAct, Bennett, W. R. (1956). Utah L. Rev.,5, 471. This article addresses whether the Uniforms securities Act is appropriate in the state of Utah.
- GeorgiaSecuritiesAct of 1974: A Survey of the 1974 Amendments, The, Trotter, M. H., & Poe, H. S. (1973).Ga. St. BJ,10, 547. This article addresses the provisions and anticipated effect of the Georgia Securities Act of 1974.
- Corporate Law andSecuritiesRegulation, Bell, J., & Goodman, C. G. (1973). U. Miami L. Rev.,28, 922. This article examines the intersection of Corporate laws and Securities laws.
- The FederalSecuritiesAct of 1933: Revised Regulation A, Hertz, S. B. (1956). InDicta(Vol. 33, p. 307).
- Constructive Receipt of Income Baxter v. Commissioner, Ekonomon, A. M. (1988). Akron Tax J.,5, 241.