Escrowed shares are shares which are secured by a third party on account of a pending completion of a corporate action including bankruptcy or reorganization of a company, merger and acquisition transactions, granting of restricted shares to the management of a firm, etc. They might also be held by the third party on account of the passage of a time period leading to an event. These shares are kept in an escrow account.
Securities of public companies are often issued in escrow to its management, i.e., although the shareholder is the real owner of the security, she/he is limited to perform his rights over the security. Sometimes an employee is granted restricted shares of a company. These shares are also kept in escrow till the elapse of the vesting period, after which the shares are released to the employee. As an example, an executive receives security as a bonus to his/her compensation, these securities are kept in the escrow account for a particular time period, and the executives are not allowed to sell those securities during that time. A company usually do this to retain its top executives.
For example: In December 2006, Gage Roads Brewing Company Limited (ASX: GRB) before being listed on the ASX announced that it had issued 3,850,000 options and 8,901,474 shares to the directors of GRB. GRB had put these shares and options under escrow for a period of 24 months from the date of official listing of the securities.
Smartgroup Corporation Ltd (ASX: SIQ) stated today (1 January 2019) that 49,618 paid ordinary shares will be released from escrow account upon the release of company’s annual results on 18 February 2019. The company stated 50% of the shares issued to the Fleet West vendors (as partial purchase consideration) will be released from voluntary escrow.
If a firm or a company has filed for bankruptcy or has declared some sort of reorganizations, its shares are put on trading halt or suspended from trading until the company passes the resolution of the corporate action. In this case, all the shares of the shareholders are converted to escrow shares which are later converted to its original form after the completion of the reorganization or bankruptcy process depending on whether any equity remains in the company after the event.
If a company enters a merger and acquisition (M&A) deal, the buyer (acquirer) usually requests a portion of the deal consideration to be held in the escrow account to protect himself/herself from the breach by the seller, contingencies, working capital adjustments, covenants and other materials that might affect the valuation of the deal. Even the target company may request the acquirer to keep his shares or cash or a combination of both in the escrow account to protect it against non-performance of the acquirer in the deal. This is common for public companies as well as non-public companies.
For example, Lithium Australia NL (ASX: LIT) acquired Very Small Particle Company Limited (VSPC) for which LIT had put about 61.13 million shares in escrow which are being released in 4 equal tranches of which three have already been released, and the final instalment is due in February 2019.
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