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Generally, the buyer is the payor of merger consideration and also the withholding agent if any tax withholding is required. The buyer is also responsible for any related tax reporting. In many M&A deals, buyers hire paying agents or payments administrators to facilitate this process. Payments administrators will act as an exchange agent—verifying ownership, collecting shareholder payment instructions, and receiving W-9 and W-8 tax forms to determine if any tax withholding is required on the part of the buyer.
Issues can arise when the parties decide to use an escrow agent that is different from the M&A paying agent.
Historically, the escrow bank or one of its affiliates would typically act as the M&A paying agent. Increasingly, however, many of the major banks are either unwilling or reluctant to do so. If a bank is still willing to do this, a number of issues can arise. The escrow banking relationship is a separate legal relationship from the paying agent relationship even when the same bank is performing both roles. The paying agent agreement is typically only between the buyer and the paying agent. The escrow relationship is a three- or four-way relationship between the buyer, the shareholder representative, the escrow agent and, in some cases, a third-party escrow administrator. Unless otherwise instructed, banks do not share information between accounts, particularly when the account holders are not identical. Because of this, escrow agents and the payments department at major banks often each need to separately collect payment instructions from each securityholder and also independently collect and review W-9 and W-8 tax forms. Further, because the escrow agent typically does not serve as the exchange agent, it is likely unaware of whether all securityholders have submitted their security certificates, executed the letters of transmittal, and/or fully completed the exchange process. Having to re-verify and re-collect this information can delay payments at the end of escrow periods. There are some simple fixes, however, for avoiding these problems.
Best practice: The buyer engages an M&A paying agent or payments administrator (referred to below as a “paying entity”) for all payments—at closing and afterward—including the distribution of excess working capital, tax refunds, earnout consideration, escrow release payments and excess expense fund distributions. The paying entity will then know which shareholders have fully completed the exchange process and, if payments were successfully made at closing, they will have all the information to release deferred and contingent funds in the most timely way. With this structure, when any funds need to be distributed to securityholders, the funds are delivered to a paying account. This applies even in circumstances where the parties elect to use a separate escrow agreement. In those cases, the escrow agent safeguards the funds but does not process payments. They are simply instructed to deliver released funds to a paying account for further distribution to the buyer, selling securityholders or applicable third parties.
Sometimes, the parties elect to have an escrow agent act as a separate paying agent solely with respect to escrow release payments. This is less efficient than having a single paying entity, and the parties should ensure that all information provided to the paying entity at closing can be shared with the shareholder representative and escrow bank. This should be documented in the paying agreement by having the buyer provide explicit instruction that information under that agreement—including copies of payment instructions, status of exchanges, lists of unpresented shareholders and completed tax forms—shall be shared.