Perfected Security Interest in Escrow Funds

SRS Acquiom has seen a handful of escrow agreements in which one of the parties wants to have a perfected, first priority security interest in the escrow funds. This presents an inherent conflict with the purpose of an escrow.

First, if the definition of merger consideration is properly drafted, arguably the escrow funds should not be subject to any party’s bankruptcy proceedings should that happen during the escrow period. Second, the escrow money is supposed to be in a neutral fund that no single party to the merger can control. This is inconsistent with granting a perfected security interest in cash, since that generally requires one of the parties to be granted a control account agreement or to have possession of the cash. SRS Acquiom is not sure how to reconcile those conflicting objectives.

As a general rule SRS Acquiom does not believe it is best practice for a party to be granted a security interest in the escrow. In SRS Acquiom’s view, this is unusual, cumbersome and probably unnecessary.