DEFINITION of Escrowed Shares
Escrowed shares are shares held in an escrow account, secured by a third party, pending completion of a corporate action or elapse of a time period leading to an event. Shares are escrowed in three common cases: merger and acquisition transactions; bankruptcy or reorganization of a company; and granting of restricted shares to an employee of a firm.
BREAKING DOWN Escrowed Shares
Three instances in which escrow shares are created are:
- An M&A deal in which the buyer (acquirer) requests a portion of the deal consideration - typically 10-15% - to be held in escrow (in the form of shares of the seller, or target) to 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. A targeted company may also request that a holdback in the form of acquirer shares be held in escrow to protect against non-performance of the acquirer in a business combination. Note that the holdback can be in the form of escrow shares, cash or a combination of both. Also, the practice of placing shares in escrow for a specified period of time as parties work to close a deal is common for non-public companies in addition to public ones.
- A bankruptcy or reorganization during which a company's shares are suspended from trading 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.
- The granting of restricted shares to a company employee who must wait until the elapse of the vesting period to own the shares. Between the grant date and vesting date, the shares are held in escrow. Upon vesting date, the shares are released to the employee.