Many corporate mergers include a frozen account with part of the sale proceeds held in escrow, so the buyer has a way to take care of any previously hidden claims that arise later against the seller.
In a recent Massachusetts Appeals Court case, the Court had to interpret the rules governing the payouts from one such escrow. Bailey v Astra Tech Inc. 84 Mass App Ct 590 (2013)
FACTS – Astra Tech acquired the stock of Atlantis but held back some 10% of the purchase price for a year in an escrow account to protect the buyer against post-closing claims against the acquired company. Stockholders of Atlantis included one major stockholder and lots of parties owning smaller portions of the company’s shares. The major stockholder was the escrow agent.
The escrow agreement rules required any that payouts to be approved jointly by the escrow agent and Astra Tech (the acquiring company). Without mutual agreement, the escrow could be allocated according to court order – the escrow rules said. The escrow agent could resist claims but attorney’s fees would drain the escrow fund.
A claim arose. The escrow agent (and major shareholder of Atlantis the acquired company) fought the claim and paid out “rapidly dwindling” escrow funds to lawyers to resist the claim. Atlantis’ minority shareholders (and the acquiring company Astra Tech) wanted to settle the claim- to end it. They made a deal with the claimant and a court approved it.
ISSUE – If the escrow did not grant the escrow agent exclusive rights to settle, could others agree to escrow payouts over the objection of the named escrow agent?
HOLDING– Yes – the settlement by those with a minority stake in the escrow was upheld.
REASONS – The agreement could have, but did not, give the escrow agent exclusive rights. Instead it provided that settlement agreements could be approved by the court, which this one was.
COBB COMMENTARY –Unless there is a lot of money at stake – litigation, jokingly called ‘the sport of kings’, is too expensive a way to get legal questions answered. Many insurance policies provide that the costs of defense against claims erode the amount available for final payouts. This situation creates conflicts between the urge to settle and the will to fight.