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December 21, 2023

Escrow Agreements As Collateral Mechanisms In Share Purchase Agreements


Share purchase agreements concluded within the scope of merger and acquisition transactions are, in principle, legal transactions in which the seller undertakes to transfer the shares subject to the sale to the purchaser and the purchaser undertakes to pay the price in return. In this respect, share purchase agreements are synallagmatic contracts with immediate performance.

Escrow agreements concluded in connection with the share purchase agreements are collateral mechanisms applied with indemnification provisions in cases where the simultaneous performance of the parties’ obligations arising from the share purchase agreement is incompatible with the structure of the agreement, in other words, where one of the parties wants to eliminate a transaction risk that may arise from the breach of the representations and warranties. In practice, escrow agreements, which aim to make it feasible for the buyer to held the seller liable for defects against their representations and warranties, and which are used to create assurance for the compensation receivable arising from the realization of the foreseen risk in this context, are also used to secure the post-closing obligations of the parties.


2.1. Parties

Escrow agreements, by their structure, include at least three parties. Within the scope of the escrow transaction, a “thing” that can be preserved, generally the thing that constitutes the subject matter of the obligation undertaken by one of the parties to the share purchase agreement, is entrusted to a designated impartial third party (escrow agent) until certain conditions are met. The impartial third party is under an obligation to preserve the escrowed item and to deliver it to the relevant party upon the fulfillment of the specified conditions.

2.2. Legal Character

In practice, in order to ensure the security of the transaction and the applicability of the mechanism, it is seen that the price, the duration of the contract and the conditions under which the goods subject to escrow will be paid to whom constitute the essential elements of the escrow agreement. On the other hand, the doctrine states that the escrow agreements are innominate contracts that contain the elements of the general custodial agreements, trustee agreements and proxy agreements regulated in the Turkish Code of Obligations No. 6098 (“TCO”), but differs from these types of agreements in certain aspects.


3.1. General Custodial Agreement (TCO 561)

The general custodial agreement is defined in the first paragraph of Article 561 of the TCO as “../.. a contract whereby the custodian undertakes to take custody of a movable left to them by the depositor in a safe place.” One of the elements of this type of contract is the obligation of the depositor to keep the immovable property given to him by the depositor for safekeeping in a safe place. In this respect, the custody element in the escrow agreement is similar to the safekeeping obligation in the general custodial agreement. However, it is emphasized that safekeeping in these two agreements is needed for different purposes, since the collateral objective comes to the forefront in the escrow agreement.

Another important difference between a general custodial agreement and an escrow agreement is that, the escrow agent cannot deliver the escrowed property before the conditions in the agreement are fulfilled, as opposed to the custodian’s obligation to return the preserved property with all its accruements upon the request of the depositor, which may be asserted at any time, even if a period of time is specified in the custodial agreement. At this point, since the escrow agent is under the obligation to deliver the property to the relevant party according to the fulfillment of the conditions in the escrow agreement, it cannot be mentioned that the escrow agent has an absolute obligation to return the escrowed property to the person who delivered them.

3.2. Trustee Agreement (TCO 569)

The trustee agreement is regulated in the systematic of the TCO as a sub-type of the general custodial agreement. The main purpose of this agreement is to prevent the disposal of a property by entrusting it to a trustee. The property to be entrusted to the trustee is a property whose legal status is disputed or uncertain. There is no such requirement for the goods to be subject to escrow. 

In a trustee agreement, the trustee cannot return the property delivered to them without the consent of all the depositors or the decision of the judge. In this context, regarding the question of to whom the obligation to return will be fulfilled, as opposed to the obligation of the trustee to return the property to the person to be designated by the judge or to the person who has been notified that he has the right to take back the property with the consent of all depositor parties, in escrow agreements, the escrow agent delivers the property to one of the parties in accordance with the fulfillment of the condition.

3.3. Proxy Agreement (TCO 502)

The proxy agreement is defined in the first paragraph of Article 502 of the TCO as “../.. a contract whereby the proxy undertakes to perform an act or perform a transaction of the principal.” It can be concluded that escrow agreements contain certain acts of performance of work, and therefore, they are similar to proxy agreements; however, they differ in the aspect that they are based on collateral and custody purposes. In addition, the obligation of the proxy to comply with the instructions and the fact that the dismissal of the proxy is always possible are incompatible with the structure of escrow agreements.


The escrow method varies depending on which party to the share purchase agreement needs security and for what reason. In practice, it is usually practiced;

  • to provide collateral in favour of the purchaser, where arrangements are made for the delivery of a portion of the share purchase price to the seller after a certain period of time after the closing by subjecting it to an escrow agreement in order to create collateral for the damages that may occur in the event of the seller’s breach of their representations and warranties or post-closing obligations or to be kept until the final price is calculated in price adjustment mechanisms.
  • to provide collateral in favour of the seller, in cases where it is not possible to pay the share purchase price at the time of share transfer. For example, in transactions where the purchase price is to be paid in instalments, it is seen in practice that the parties deliver the share certificates with white endorsements by the purchaser to the escrow agent, together with the target company’s share ledger and the board of directors’ resolution book, in order for the share certificates to be returned to their former owners in case of late payment or non-payment of the instalments.


Although there are different opinions in the Turkish doctrine, escrow agreements, which are not regulated under the TCO or other legislation, are characterized in principle as innominate contracts that contain elements of custodial and proxy agreements. In order to eliminate the risks arising from mergers and acquisitions, these agreements are integrated into share purchase agreements instead of or in addition to standard collateral or indemnification provisions in order to secure the losses that both the purchaser and the seller may incur. Keeping in mind that financial institutions are generally preferred in practice, as objective and professional third parties become parties to the agreement as escrow agents, the purchaser and seller have another control mechanism that ensures the security of the transaction.



Att. Gökçe ERGÜN 

Att. Elif KALEBEK 



Gökçe Ergün

Gökçe Ergün


Elif Kalebek

Elif Kalebek