Escrowed Shares Defined
“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.
A little more on Escrowed Securities
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 firm’s 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 company’s 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.