Escrow arrangements have increasingly become one of the most essential aspects of M&A transactions. Many deals require a security assurance for the buy side and/or the sell side and parties tend to rely on independent escrow agents to satisfy this need. Escrow arrangements and the qualifications of an escrow agent are not specifically governed under Turkish law. For this reason, escrow structures create only a contractual liability under the Code of Obligations.

The purpose of an escrow may vary depending on the nature and requirements of the transaction. An escrow mechanism may be structured for the sell side to secure payment of the consideration or earn-out, whereby a certain part of the cash consideration or earn-out component is deposited into an escrow account to be released after a definite period of time or the satisfaction of a condition. Similarly, the buy side may request an escrow to secure the indemnification obligation of the seller, due to a breach of representations and warranties provided to the buyer. Escrow accounts are commonly used in Turkish M&A practice, but banks tend not to act as independent escrow agents because the law does not govern the specifics of this structure.

To overcome this lack of legislation in Turkish banking practice, banks use alternatives that serve the same purpose of establishing escrow accounts. Parties to an escrow arrangement mostly prefer opening a joint bank account in the name of both the buyer and the seller in a bank that acts as the escrow agent. Escrow agents may further hold shares, licences, certificates representing IP rights or any other securities or documents on behalf of the parties for a certain period of time. That said, issuing guarantee letters or establishing bank account pledges for the purposes of an escrow structure are also used in Turkish M&A practice.

An escrow arrangement is established through an escrow agreement to be executed between the seller, the purchaser and the escrow agent. Depending on the nature of the escrow structure, a bank, a lawyer or an independent third party may be appointed as the escrow agent. The escrow agent is responsible for maintaining and safeguarding the securities put into its possession subject to the escrow agreement for a period of time and to release or return them in accordance with the structure to be defined in the agreement. The parties may draft the escrow agreement as they see fit, within the scope of freedom of contract. Parties should carefully draft and negotiate the escrow agreement, particularly the release mechanics, to avoid causing any unwanted delays or disputes among the parties at the end of the transaction. The liabilities of the escrow agent towards the parties should also be determined in the escrow agreement.

For further information on this topic please contact Bihter Bozbay or Nil Sonat Gürdal at Kolcuoglu Demirkan Koçakli by telephone (+90 212 355 9900) or email (bbozbay@kolcuoglu.av.tr or sgurdal@kolcuoglu.av.tr). The Kolcuoglu Demirkan Koçakli website can be accessed at www.kolcuoglu.av.tr.

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