Although expense escrow funds have become increasingly popular south of the border, they still remain relatively uncommon in Canada. An expense escrow account is a separate fund created to pay the legal fees or other expenses of the former shareholders that may arise in defending against claims post-closing. Expense escrows benefit sellers, shareholders and buyers as follows:

• Sellers – by discouraging buyers from bringing a weak or frivolous claim, with the aim of tying-up funds in escrow indefinitely, knowing that the former shareholders will not have the means to fight it;
• Large shareholders – by providing funds to represent the selling shareholders without forcing large shareholders to contribute more than their pro-rata portion of expenses; and
• Buyers – by providing access to funds in the event that the terms of the merger obligate the parties to split costs for items such as audits and arbitration.

Shareholder Representative Services (SRS), a United States based shareholder representative company, recommends a minimum escrow expense fund of $100,000, increasing depending on the size, complexity and earn-out potential of the transaction. According to the 2011 SRS M&A Deal Terms Study, available at the SRS website, the average size of an expense fund for deals with and without earn-out provisions was 0.51% and 0.4%, respectively, in 2011.