Escrow Accounts and Indemnity Caps in UK M&A

The 30-Second Definition

An Escrow Account is a secure, ring-fenced bank account managed by an independent third party (typically a bank or solicitor) where a portion of your purchase price (usually 5% to 15%) is held for a specified timeframe (typically 12 to 24 months) after completion. This cash acts as a security deposit for the buyer. If the buyer uncovers an undisclosed liability, breach of warranty, or tax issue post-sale, they can claim financial compensation directly from this fund.

Protecting Your Cash After the Deal is Done

Many owners believe that once the money lands in their bank account on completion day, the deal is final. In reality, your financial liability continues long after you sign the contract. The warranties you sign in the Share Purchase Agreement (SPA) mean you are legally responsible if any part of your company history was misrepresented.

To limit this exposure, your corporate finance team must negotiate clear legal boundaries: an Indemnity Cap and an Escrow Release Schedule.

The Strategic Battleground: Caps, Baskets, and De Minimis

During the legal drafting of the SPA inside the deal room, the buyer’s solicitors will push for wide-reaching indemnities, meaning they want the right to claim back as much money as possible if anything goes wrong. Your defense rests on setting up three specific legal filters:

- The Indemnity Cap: This is the absolute ceiling on what the buyer can sue you for. While a buyer will initially demand that the cap equal 100% of the purchase price, corporate finance standard practice in the UK usually pushes the cap down to between 10% and 20% for standard warranties, ensuring the majority of your wealth is permanently locked away.

- The De Minimis Threshold: This rule blocks the buyer from making trivial, small-scale claims against your escrow fund. It states that an individual claim must exceed a specific value (e.g., £5,000) to even be considered.

- The Aggregate Basket / Threshold: This states that the buyer cannot make a claim against the escrow until all combined, valid de minimis claims pass a certain total baseline amount (e.g., £50,000). Once that basket is full, the buyer can claim for the total amount.

Defending Your Payout

An escrow account shouldn't be an open-ended piggy bank for the buyer to fix minor operational issues post-completion. It must be governed by strict mechanics: the money must release automatically in tiers (e.g., 50% at month 12, and the remaining 50% at month 24) unless a formal, legally verified claim has been brought against it.