An M&A deal holds VND 15 billion in escrow for R&W duties. Post-closing tax issues surface — VND 40 billion in losses; escrow covers 15, leaving 25 short. Can the buyer claim the shortfall from the seller? Entirely dependent on SPA and escrow-agreement drafting.
Legal basis
- Civil Code 2015, Articles 385, 401: contract content is party-agreed — escrow is a self-designed security measure; its scope turns on agreement.
- Law on Credit Institutions 2024 (32/2024/QH15, effective 01/7/2024): bank custody and account-management operations — legal basis for bank escrow services.
What escrow is — and isn’t
Escrow is an account held by an independent third party (usually a bank) retaining part of deal value, released only on escrow-agreement conditions (expiry without claims, or to pay R&W compensation). Escrow is a payment security measure — not a liability cap — unless the SPA expressly makes escrow the exclusive remedy.
The oft-missed crux: exhausted escrow doesn’t mean exhausted liability — unless the SPA says otherwise.
Claiming more — 3 scenarios
Scenario 1 — SPA makes escrow the exclusive remedy: buyers recover only within escrow; exhausted escrow ends rights. Seller-friendly — strong buyers should never accept exclusive remedies for fundamental warranties, tax, or fraud.
Scenario 2 — SPA unlimited (more common): escrow is merely the first payment source; above-escrow portions are claimed directly from sellers under SPA indemnities, within caps (if any). The most buyer-protective structure.
Scenario 3 — SPA silent: unclear whether escrow is the exclusive remedy. General-principle interpretation: escrow secures, doesn’t cap — buyers may claim more. But interpretive disputes are costly; best to state clearly in the SPA upfront.
Claiming in practice — 4 steps
1. Exhaust escrow first: follow escrow-agreement withdrawal procedures to pay within-escrow compensation — documenting escrow depletion. 2. Claim-notice the shortfall: per SPA R&W procedures (see EXP-6211), stating total losses, escrow-paid portions, and direct-payment demands for the remainder. 3. Negotiate: sellers usually want to “close” at escrow levels; buyers wield caps and SPA indemnity duties. 4. Arbitrate/litigate: if sellers refuse, sue for the remainder — with interim urgent measures against dissipation (see EXP-6212).
Protective escrow structuring — 5 negotiation points
1. Large enough escrow: practice 10–20% of deal value; higher for tax/legal-risk deals, or separate escrows for identified risks. 2. Never accept exclusive remedy for fundamental warranties, tax, and fraud. 3. Long enough escrow term: at least matching general-warranty survival (12–24 months); tax escrows longer (36 months). 4. Clear release mechanics: who decides releases, how fast, how release disputes resolve — avoiding bank “freezes” during party fights. 5. Escrow interest ownership: specify who gets custody-period interest — avoiding petty disputes.
Bank refuses escrow release?
Escrow agents are typically neutral — holding funds during disputes until agreement or award. To avoid “stuck” money, escrow agreements should provide: releasing undisputed portions, or referring release disputes to independent experts/emergency arbitration.
Non-cash escrow alternatives?
Available — parties may hold back shares or take seller asset mortgages. But cash escrow at banks is simplest and most effective; alternatives complicate valuation and liquidation when needed.
Foreign-bank escrow?
Available, but consider: higher costs, more complex releases, cross-border enforcement in disputes. For Vietnam deals, Vietnamese banks (or foreign-bank branches in Vietnam) are usually more convenient.
Seller wants lower escrow claiming a “clean company”?
Trust diligence and mechanics, not words. With thorough diligence and low risk, lower escrow may be acceptable — but never exclusive remedies for tax and fraud. Today’s “clean company” doesn’t guarantee no reassessments in 3 years.
Who bears escrow fees?
Agreed — practice splits or buyer-bears (as buyer-protection tool). Fees are small versus deal value; don’t let fee fights delay closing.
Contact FLAT Law Firm
FLAT Law Firm advises M&A escrow structuring: negotiating escrow terms, drafting bank escrow agreements, and acting when escrow runs short. Engage from SPA negotiation — well-designed escrow is the buyer’s most reliable “reserve purse”.
This article has been quality-reviewed by the FLAW AI Legal Council