In South African private M&A acquisition agreements, it's not unusual to encounter escrow/holdback/retention arrangements.
Typically, where the parties to an M&A transaction agree to such an arrangement –
• the funds retained will be placed in a separate escrow interest bearing bank account (escrow account), under the stewardship of an impartial third party, often a law firm;
• the agreement will outline a specific procedure and the conditions that must be met before releasing funds from this escrow account;
• the retention period will usually mirror the duration of the warranty period;
• the parties will normally agree that the purchaser will not only lodge a claim against the seller, but also, if the seller disputes the claim's validity, initiate legal proceedings before the retention period's expiration;
• the funds will remain in the escrow account until legal proceedings are finally adjudicated. However, the seller may make provision for the uncontested portion of the retention amount to be released from the escrow account.
In order to mitigate the parties’ risks, it is important to clearly define the triggers for releasing the funds held in the escrow account and for the funds to be held in a separate interest bearing bank account with a reputable bank.