Escrow, holdbacks and the mechanics of completion.

An escrow is a holding arrangement. Money, documents or both are delivered to a third party who holds them and releases them only when defined conditions are met, so that neither principal has to trust the other to perform. In Australian private transactions the escrow holder is most commonly a law firm holding funds in its trust account, and on larger or cross-border deals a bank or a specialist escrow agent. The identity of the holder matters less than the terms of the escrow deed, because the deed, not the goodwill of the parties, governs what happens once funds are in: the precise conditions that trigger release, whose instructions the holder will act on, what the holder must do if the parties disagree, who earns the interest while funds sit, who pays the holder's fees, and where the money goes if completion never occurs.

Control is the question that deserves the most attention. A release requiring the joint written instruction of both parties is the most common structure and the safest for the holder, but it means any dispute freezes the funds until the parties agree or an expert or court determines the point, and a well drafted deed anticipates that by naming the determination path rather than leaving the deadlock open ended. Release against objective triggers, delivery of specified documents or a certified confirmation that conditions are satisfied, moves faster but shifts risk onto whoever certifies. Escrow holders are also regulated participants. Banks and other institutions holding escrow funds carry customer due diligence obligations under the AML/CTF Act 2006 (Cth), and the 2024 amendments extend the regime to lawyers, accountants and other professional service providers, with obligations phasing in through 2026. Source of funds questions asked when the escrow is established, rather than on completion morning, are the difference between funds landing on time and an escrow wedged at the exact moment it is needed.

Completion runs on a simple principle: nothing moves until everything moves. The closing memorandum converts that principle into an ordered list, every document, action and signatory required at completion, sequenced, with a responsible party named against each item. On the day, each deliverable is tabled and confirmed, and completion is then declared to occur, with all steps treated as simultaneous so that no party is exposed by having performed while another has not. Most Australian completions are now desktop exercises rather than physical meetings, with signature pages pre-positioned in escrow with each side's lawyers and released on confirmation once the funds flow is verified. The list varies by transaction, but a share sale of an Australian private company typically requires:

The warranties in a sale agreement are only worth what stands behind them. A vendor who receives the full price at completion may distribute the proceeds, wind up the selling entity or simply be difficult to pursue by the time a warranty claim crystallises, and a retention exists to answer that problem. Part of the purchase price is held back, almost always inside the same escrow architecture used at completion, for a defined period after completion. The amount is a negotiation, and it should be sized against the realistic warranty exposure in the particular deal rather than against a customary figure, because the retention is dead capital to the vendor for its entire life and an under-sized retention is false comfort to the buyer. The period is tied to the claim windows in the agreement, and releases are commonly staged, with a portion released at an early milestone such as finalisation of the completion accounts and the balance at the end of the relevant warranty period.

Release mechanics decide whether the retention actually protects anyone. The agreement needs a claim notice procedure specific enough that a vendor can assess what is being claimed, a rule that only the disputed portion of the retention is held past a release date rather than the whole balance, and a determination path for contested claims so that a disputed notice does not simply park the funds indefinitely. Retention also interacts with warranty and indemnity insurance. Where the parties take out a policy that responds to warranty claims, the retention typically shrinks or disappears and the negotiation moves to the policy's exclusions and excess, which is often the better trade for both sides in a competitive process. A retention should also be kept distinct from an earn-out. An earn-out is deferred consideration contingent on future performance, a retention is security for statements already made, and blending the two produces a number that does neither job well.

The price mechanism determines when the price stops moving. Under completion accounts, the headline price is adjusted after completion by reference to accounts drawn up as at the completion date, usually against a working capital target and a definition of net debt. The buyer pays for the balance sheet it actually receives, which is the mechanism's whole appeal, but the cost is a post-completion process: the accounts have to be prepared, reviewed and agreed, disagreements go to an independent expert whose determination the agreement makes final, and the vendor does not know its final proceeds on completion day. The drafting that matters is definitional. What counts as debt, what sits inside working capital, which accounting policies apply and in what order of precedence, and how the target was set are where completion accounts disputes are actually fought, and none of it can safely be left to be worked out after signing.

A locked box fixes the price off a historical balance sheet date. The equity value is agreed by reference to accounts at the locked box date, and the vendor covenants that no value has leaked to the sellers or their associates between that date and completion, other than permitted leakage the agreement itemises, salaries on existing terms, agreed dividends and the like. The buyer gets price certainty and no post-completion true-up, and in exchange takes the economics of the business, good or bad, from the locked box date, often compensating the vendor for the funding cost of the gap through an agreed uplift. The choice between the two mechanisms is a risk allocation rather than a convention. A locked box suits a clean business with reliable recent accounts and a competitive process where certainty is worth paying for. Completion accounts suit carve-outs, businesses with volatile working capital, and longer gaps between signing and completion. Either way the mechanism belongs in the term sheet, because retrofitting one mechanism onto documents drafted for the other is precisely how definitional gaps open.

Completion failures are rarely dramatic. The agreement is not reopened or torn up at the table. The problems are procedural, and almost every failure mode below is one that structuring weeks earlier would have removed:

A completion that runs smoothly was engineered, usually weeks earlier and mostly in documents nobody reads again afterwards. The escrow deed was drafted for disagreement as much as for the expected release. The deliverables were traced to named signatories and tracked against dates. The retention was sized against the actual warranty exposure and given release mechanics that still work once a claim is on foot. The price mechanism was chosen deliberately in the term sheet and drafted with the definitions that carry it. The funds flow was agreed as a single statement and the account details verified. None of this is visible in the headline terms of a deal, and all of it decides whether the value agreed at signing is the value actually received at settlement, which is why completion mechanics deserve the same attention during negotiation as the price itself.