The role of Escrow agreement regulation in M&A transactions

In mergers and acquisitions (M&A) transactions, escrow agreements are an important tool to manage financial risks, ensure transparency and protect the interests of the parties involved. Escrow agreements establish a neutral mechanism in which a third party (usually a bank or law firm) holds and manages a sum of money or assets until specific conditions are met.

 

 

1. What is a escrow agreement?

An escrow agreement is a legal contract between the parties to an M&A transaction, including the buyer, the seller, and a neutral escrow agent. The escrow agent is responsible for holding a sum of money or assets and only disburses them when the conditions are met, such as completing the purchase price adjustment, handling breach of commitment, or settling financial obligations after closing the transaction[1]. In M&A, escrow agreements typically serve the following main purposes:

Bid price adjustments: Ensure that purchase price adjustments after closing a trade are handled fairly.

Protection against breach of commitment: Provide financial resources to compensate the buyer if there is a breach of commitment or guarantee from the seller.

Management of specific financial obligations: Includes expenses related to taxes, litigation, or other specific matters.

2. The role of escrow agreements in M&A

First, minimizing financial risks

M&A transactions often involve many potential financial risks, such as uncertainty in the valuation of the target company or costs incurred after closing the transaction. Escrow agreements help mitigate risk by keeping a portion of the purchase price in a third-party managed account, ensuring that the necessary funds are always available to solve financial problems.

In complex M&A transactions, the final purchase price may depend on factors such as cash, debt, or transaction costs, which require adjustments after closing the deal. Escrow agreements provide a mechanism to handle these adjustments without renegotiation between the parties.

Second, enhance transparency and fairness

Escrow agreements ensure transparency by requiring parties to agree on clear disbursement guidelines. In the event of a dispute, an independent third party, such as an accounting firm, may be appointed to make an objective decision. This helps to minimize conflicts and ensure that financial decisions are made fairly.

The dispute process typically includes a specific deadline for the parties to object to the calculations or requests, along with steps to resolve through a neutral party. This not only protects the interests of the parties but also strengthens confidence in the transaction process.

Thirdly, managing post-closing obligations

Many M&A deals do not end completely when the deal is closed. Issues such as purchase price adjustments, litigation costs, or taxes may arise later. Escrow agreements ensure that a sum of money is retained to settle these obligations, avoiding a party having to pursue compensation through complex legal channels.

Typically, costs related to matters such as pending litigation or investment liquidity transactions, which can be processed through a escrow account, ensuring that the buyer is compensated without initiating a lawsuit.

Fourth, protect both buyers and sellers

Escrow agreements not only protect the buyer from financial risks, but also protect the seller from unreasonable demands. By limiting the amount of the deposit and clearly defining the disbursement conditions, the agreement ensures that the seller does not withhold a larger amount than necessary. At the same time, the buyer is assured that the deposits will be used to resolve valid issues.

Fifth, facilitate the process of closing transactions

Escrow agreements help simplify trade closure by providing a clear mechanism for handling complex financial matters. This is especially important in high-value transactions, where financial calculations can take a long time to complete. Keeping a sum of money in a escrow account allows parties to close a trade without immediately settling any financial details.

3. Challenges of escrow agreements

Despite its many benefits, escrow agreements also come with some challenges:

Administrative costs: The use of escrow dealers and independent third parties can increase transaction costs.

Processing time: The dispute process or review of financial calculations can extend the disbursement time.

Risk of insufficient deposit: If the costs incurred exceed the escrow amount, the buyer may have to pursue legal remedies to claim additional compensation.

 

Zebra Technologies Corporation. Source: The Epoch Times

 

4. Escrow agreement in Zebra Technologies share purchase agreement[2]

The share purchase agreement between Zebra Technologies Corporation (the Buyer), Elo Investors, L.P. (the Seller), and Elo Holdings, Inc. (the Company), announced in August 2025, is a prime example of the use of escrow agreements in a complex M&A transaction[3]. Below is our detailed analysis of the escrow agreement in this transaction to clarify the role of the escrow agreement in M&A.

4.1 Trading background

Zebra Technologies, a leader in mobility, observation and automation solutions, has signed an agreement to purchase an entire stake in Elo Holdings, Inc., a company that provides touchscreen solutions for self-service, point-of-sale and factory automation. The transaction is expected to close by the end of 2025, with the purchase price adjusted based on factors such as cash, debt, and transaction costs.

4.2 Main escrow of trades

The escrow agreement in this transaction consists of two main items:

Firstly, the adjustment escrow amount (US$15,000,000)

• Purpose: Used to process purchase price adjustments after closing a trade, ensuring that the difference between the Estimated Purchase Price and the Final Purchase Price is treated fairly.
• Mechanism: At the time of closing, Zebra deposits $15,000,000 into a escrow account managed by a escrow dealer. Upon completion of the Proposed Closing Date Calculations, the Adjustment Shortfall Amount will be withdrawn from this account to be reimbursed to Zebra. If there is a balance, the remaining amount will be disbursed to Elo Investors.
• Dispute process: The Seller has 45 days to submit a Dispute Notice if it does not agree with the calculations. If an agreement is not reached, an independent accounting firm will be appointed to resolve the dispute, ensuring objectivity.

Second, a transition matter escrow amount of 3 million USD (3,000,000 USD)

• Purpose: Dedicated to dealing with Increased Costs related to Specified Matters or Specified Investment Liquidity Transactions stated in the Share Purchase Agreement.
• Mechanism: Zebra deposits $3,000,000 into a separate escrow account at the time of closing. If costs are incurred, Zebra must submit a Notice of Claim within 5 business days, accompanied by supporting documentation. If there is no dispute, the amount will be disbursed to Zebra within 5 business days after receiving general instructions from both parties.
• Dispute process: Elo Investors may dispute a Notice of Demand if it considers the costs to be invalid, but the dispute must be made in good faith.

4.3 Role of escrow agent

The escrow agent acts neutrally, being responsible for holding and disbursing funds in accordance with written instructions from Zebra and Elo Investors. This ensures that funds are only disbursed when the conditions in the Escrow Agreement are met, minimizing the risk of abuse or improper disbursement.

4.4 Disbursement process

For adjustment escrow amount: Disbursement is based on the results of the Actual Adjustment. If there is a shortfall, the amount will be transferred to Zebra; if there is a balance, the remaining amount will be transferred to Elo Investors.

For transition matter escrow amount: Disbursement when there is a valid expense confirmed via the Notice of Demand and is not disputed. The parties must send general instructions to the Escrow Agent to make the disbursement.

4.5 Meaning of escrow agreement in trading

Zebra Technologies' trading escrow agreement clearly illustrates how the instrument supports a complex M&A transaction. These regulations help to trade:

Flexibility: Allows parties to close trades without immediately completing final bid price calculations.

Financial protection: Ensures that Zebra is compensated for shortfalls or expenses incurred, while Elo Investors is protected from unreasonable demands.

Minimize disputes: A clear dispute process involving an independent accounting firm ensures fairness and transparency.

Escrow agreements are an indispensable tool in M&A transactions, helping to manage financial risk, enhance transparency, and protect the interests of both buyers and sellers. The case of the Share Purchase Agreement between Zebra Technologies and Elo Investors shows how the escrow agreement is carefully designed to handle purchase price adjustments and costs incurred, with specific deposits of tens of millions of dollars and a clear dispute resolution process. By using neutral escrow dealers and tight regulatory mechanisms, this agreement ensures that the transaction is carried out smoothly and fairly, providing peace of mind to the parties involved. Escrow agreements, therefore, are not only a technical tool but also a foundation for the success of complex M&A transactions.