What is escrow?
Escrow is an arrangement where money, shares, documents or code are held by a neutral third party and released only when agreed conditions are met. It solves the sequencing problem in transactions: neither side has to trust the other to perform first, because performance runs through the agent.
Where escrow is used
In M&A, part of the purchase price sits in escrow to secure warranty and indemnity claims, typically alongside or instead of a direct holdback. In venture rounds, escrow can bridge signing and closing conditions. In commercial contexts, software source code escrow protects customers against vendor failure, and real-estate and cross-border trade escrows manage delivery-against-payment. Crypto markets rebuilt the same function with multisig wallets and smart contract escrows, where the release condition is code rather than an agent’s judgment.
The escrow agreement, and Turkish practice
The escrow agreement is a three-party contract and its quality decides everything: precise release conditions and required evidence, the objection and dispute procedure, what the agent does when instructions conflict (usually deposit with a court or hold until joint instruction), fees, interest and tax on the escrowed amount. In Türkiye, escrow services are provided by banks within their custody business; there is no standalone escrow-agent licence regime, so the contractual framework and the agent’s institutional quality carry the load. In cross-border deals the escrow typically follows the SPA‘s governing law with an international bank or agent, and Turkish enforcement questions are handled at the drafting stage.
Common escrow types in M&A
- Indemnity escrow: typically 10-20% of the purchase price, held for 12-24 months to back claims for breach of representations.
- Working capital adjustment escrow: a smaller, short-term holdback (30-90 days) covering post-closing true-up calculations.
- Tax escrow: covers specifically identified tax exposures (transfer taxes, withholding obligations, pre-closing tax accruals).
- Specific indemnity escrow: covers identified risks (anticipated litigation, environmental remediation, IP infringement claims) with amounts proportionate to the expected exposure.
Escrow design parameters
- Escrow agent: typically a bank, a trust company or a specialised escrow service such as SRS Acquiom or Wilmington Trust.
- Release schedule: a single release at maturity or partial releases at interim milestones.
- Claims procedure: notice requirements, response windows and dispute escalation.
- Final release: automatic at maturity, or only upon affirmative release authorisation.
Market trends: R&W insurance and alternatives
Representation and warranty (R&W) insurance, increasingly common in deals above USD 50 million, has replaced or significantly reduced traditional indemnity escrows: for a premium of 2-4% of the coverage amount, breach-of-warranty risk is transferred to insurers. Other structures include holdbacks (escrow-like retention without a separate agent, simpler but with reduced seller protection against buyer claims) and buyer-side escrows (rare structures in which the buyer deposits funds to back specific buyer obligations).
Points for Turkish founders selling to international acquirers
- Currency translation risk during the escrow period.
- Turkish tax treatment of escrow releases (recognition of deferred consideration).
- Banking law restrictions on cross-border escrow.
- The practical difficulty Turkish counterparties may face when asserting claims against escrow funds held in the US.
What makes a release condition well drafted?
It is objectively verifiable by the agent from defined documents: a closing certificate, a court decision, a joint written instruction. Conditions that require the agent to judge whether a warranty was breached create deadlock by design.
Who gets the interest on escrowed money?
Whatever the agreement says; silence produces disputes. Market practice credits interest to the party that ultimately receives the principal, with the agent’s fees carved out first.
Is smart contract escrow legally an escrow?
Functionally yes, legally it is a contract like any other; the difference is that release runs on code. The drafting focus shifts to what happens when the code and the parties’ intent diverge, which is exactly when you discover whether there is a fallback governed by ordinary contract law.