when shares are escrowed
oftentimes companies issue shares of stock as a bonus or as part of the company s compensation program for executive employees in these scenarios the employees are typically required to wait a specified period of time before selling their shares these shares are called restricted shares as the employee must wait until the vesting period has elapsed to own the shares between the grant date and vesting date the shares are held in escrow upon the vesting date the shares are released to the employee the reason companies hold their stock in escrow is that it provides an extra incentive for the employees to remain with the company for the long term shares of stock can be held in escrow for anywhere between one to three years before an employee or executive can cash them out for example funds for an acquisition can be held in escrow until government regulatory authorities approve the transaction other times the purchase price might need to be adjusted at some point during the process and as a result funds are placed in escrow to cover for the variance a targeted company may also request that a holdback in the form of acquirer shares be held in escrow to protect against non performance by the acquirer in a business combination however the holdback can be in the form of escrow shares cash or a combination of both the practice of placing shares in escrow for a specified period is common for non public companies as well as public ones a company s shares may be suspended from trading during a bankruptcy filing or a company reorganization pending the resolution of the corporate action in this case a shareholder s holding will be converted to escrow shares and then converted back to their original form if any equity remains in the company after the completion of the bankruptcy or reorganization process a merger or acquisition can result in the buyer acquirer requesting a portion of the deal in consideration typically 10 to 15 to be held in escrow typically shares of the seller or target company would be held the escrowed shares protect the buyer from potential breaches in seller representation and warranties covenants contingencies and working capital adjustments among other material adverse items that may affect the valuation of deal or the closing itself benefits of escrowed sharesescrowed shares are designed to protect both parties to a transaction the escrow agent ensures that shares are protected while the agreement is being executed and that all parties fulfill their contractual obligations holding shares in escrow can also prevent losses from market fluctuations in mergers and acquisitions m a if the seller breaches the agreement the buyer may recover the escrowed shares to mitigate losses 2 if the buyer breaches the agreement the seller may retain the escrowed shares also if the buyer needs more money to fulfill the agreement the escrowed shares are available to facilitate the transaction this access prevents the buyer from disturbing operations and adversely affecting shareholders real world examplesin 2009 adventrix pharmaceuticals seeking to gain fda approval for its chemotherapy agent sold 5 of its series b convertible preferred stock to an institutional investor 3 twenty five percent of the gross proceeds or approximately 340 000 was put into an escrow account to be released over time under certain circumstances in the same year dax partners lp entered into a share purchase agreement with selectica inc as part of its acquisition of the company 4 dax partners agreed to buy 3 22 million in shares of which 1 million worth was held in escrow the escrow funds were released to the seller upon the full execution of the agreement 