16.4 Remedies (Indemnities) 477after a certain period of time. Second, part of the purchase price can be held in es-
crow pending due diligence. Third, some agreements create an escrow account in
which part of the consideration is held back and forfeited if a representation or
warranty turns out to be false.^60 An escrow account is an account held in a bank by
a reliable party on behalf of third-party assets.^61
For example, a stock exchange release of TeliaSonera, a Nordic telecommunications group,
described the use of the following escrow arrangement: “The main shareholders of Vollvik
Gruppen have irrevocably committed themselves to sell their shareholdings to TeliaSonera
at a price of NOK 11.15 per share in cash. NOK 10.50 of the purchase price per share will
be paid in cash at closing, and NOK 0.65 will be held in escrow for 365 days following
closing as collateral for the representations and warranties made to the buyer.”^62
Mitigation of counterparty commercial risk: alignment of interests. Indemnities
help to mitigate risk by aligning the interests of the parties. In addition to tradi-
tional indemnities, there can be alternative ways to align the interests of the par-
ties.
For example, when Cerberus bought Chrysler from Daimler in 2007, Daimler retained a
19.9% stake in Chrysler. In addition, Daimler undertake to lend $1.5 billion to the target
company. For Cerberus, this was also a way to reduce other risks (such as credit, replace-
ment, refinancing, and operational risks).
Mitigation of counterparty commercial risk: information intermediaries. The
buyer can to some extent transfer risk by turning to external information interme-
diaries. For example, the buyer can require that the target’s lawyers and account-
ants verify the the contents of representations and warranties and give an opinion
that the contents of representations and warranties are true. This can make them
potentially liable for negligence (see Volume I).^63 An M&A insurance can enable
the acquirer and the vendor to agree on a lower cap on the liability of the vendor.
Mitigation of counterparty commercial risk: M&A insurance. Insurance allows
a policyholder to exchange the risk of a contingent liability for the certainty of a
current premium payment.
Business acquisitions give rise to both potential and present liabilities. Potential
liabilities of the target may arise out of its past activities (ranging from environ-
mental liability and product safety to tax). Alternatively, the liability of the target
(^60) Bainbridge SM, Mergers and Acquisitions. Foundation Press, New York (2003) pp 175–
- For Swiss law, see Groner R, Private Equity – Recht. Stämpfli Verlag AG, Bern
(2007) pp 195–197.
(^61) Escrow services provided by law firms or audit firms do not fall within the scope of the
MiFID. See Article 2(1)(c) of Directive 2004/39/EC (MiFID). However, they can fall
within the scope of anti-money laundering obligations. See Article Article 2(1), recital
20, and Article 42 of Directive 2005/60/EC (prevention of the use of the financial sys-
tem for the purpose of money laundering and terrorist financing).
(^62) TeliaSonera, stock exchange release dated 6 July 2005.
(^63) Bainbridge SM, Mergers and Acquisitions. Foundation Press, New York (2003) pp 175–
177.