Explore the cautionary tale of an M&A case where the buyer’s failure to adhere to escrow agreement procedures resulted in the release of funds. Learn the importance of strict adherence to specified notice procedures to safeguard interests in M&A transactions.
M&A Stories
October 17, 2018
In this M&A case, the significance of adhering to procedures outlined in the escrow agreement becomes evident. The seller, dealing with consumer debt accounts in Puerto Rico, engaged with the buyer in 2013 for the potential sale of these accounts, leading to a transaction on May 30, 2014.
Key Agreements:
Purchase Agreement: Seller indemnifies the buyer for inaccuracies in representations or breaches of covenants, with indemnification surviving until May 30, 2017. No written indemnification request was made by the buyer before this deadline.
Escrow Agreement: $6 million held in escrow for claims related to the purchase agreement. Escrow funds to be released on May 31, 2017, in the absence of timely claims.
Buyer’s Misstep:
The buyer failed to follow escrow agreement procedures by not providing written notice of claims to both the escrow agent and the seller before May 30, 2017.
Timeline of Events:
May 26, 2017: The buyer faxed and sent by Fed Ex a letter to the escrow agent (but not the seller) identifying claims against the escrow, citing breaches by the seller.
May 30, 2017: The escrow agent informed the seller of the claims; buyer admitted human error in not notifying the seller as required by the escrow agreement.
June 7, 2017: The seller requested the release of escrow funds, disputing buyer’s claims.
June 21, 2017: The seller filed a complaint in a Delaware court seeking the release of escrow funds.
Court Decision:
The court upheld the escrow agreement’s plain language, emphasizing the necessity of adhering to specified notice procedures. The buyer’s argument that the seller received actual notice was dismissed; the court ordered the release of escrowed funds to the seller.
Lesson Learned:
Strict adherence to escrow agreement procedures is crucial for both buyers and sellers to safeguard their interests.
This case underscores the buyer’s failure to secure escrow funds, serving as a reminder for meticulous adherence to escrow agreement procedures in M&A transactions.
Case Reference
PR Acquisitions, LLC v. Midland Funding LLC, C.A. No. 2017-0465-TMR, Court of Chancery of Delaware (Decided: April 30, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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