M&A and Private Equity Viewpoints : Private Equity Lawyer & Attorney : Perkins Coie Law Firm : Mergers & Acquisitions, Recapitalization

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JPMorgan Chase & Co. recently published its 2009 M&A Holdback Escrow Report. The study summarizes data points relating to holdback escrow accounts used in M&A transactions. The study defines "holdback escrow" as an escrow structure in which a portion of the deal consideration is placed into escrow as security for any post-closing purchase price adjustments or indemnification claims.  The sample size of the study is 443 transactions between January 2007 and June 2008 in which J.P. Morgan was engaged.

A few observations:

• Escrow Deposit Amount: The study reflects that 7 – 15% of the purchase price was deposited in 51% of deals reviewed in the study, with 10% of the purchase price as the median amount deposited. (See page 5 of the study).
• Escrow Lifespan: 50% of agreements reviewed in the study specified a termination date to disburse funds, and 50% provided that the escrow would terminate only upon written instruction of the parties to disburse funds. For deals with scheduled disbursement dates, the time periods for disbursements ranged from one month to 72 months. The most common scheduled disbursement dates were set at 12, 18 and 24 months from the closing date. (See page 6 of the study).
• Claims—Generally: Claims were made in 40% of the deals reviewed in the study. Of that 40%, 25% of such claims related to a working capital or other contemplated purchase price adjustment and the remaining 75% related to indemnification claims. Of 178 indemnification claims made by buyers, 176 received a recovery of some amount. The average recovery was 60% of the original claim. (See page 9 of the study).
• Types of Indemnification Claims: Of all indemnification claims made in the deals reviewed in the study, those claims were categorized as follows: (1) breach of representations and warranties (40%); (2) not specified or "other" (33%); (3) accounts receivable (11%); (4) tax (7%); (5) environmental (3%); and (6) litigation (2%). (See page 10 of the study). 

Thanks to Michael Balliet for sending us the study.