With the publication of the Legal Framework for Warrantees (Law No. 14,711 of October 30, 2023), the Notary’s Law (Law No. 8,935 of November 18, 1994) was amended in order to allow the administration of a linked bank account, the so called “Escrow account”, before the notary’s office.
Often used in M&A transactions, Escrow accounts, by definition, serve as a warranty for the fulfillment of a certain financial obligation conditioned on a future event, for example, the obligation to pay the price or indemnification for losses. This type of bank account is managed by a neutral and impartial third party, usually a financial institution, which acts as its manager, responsible for the investment and release of the funds deposited in it.
The Legal Framework for Warranties, with this change in the Notary’s Law, seeks to reduce the costs of hiring and managing an Escrow account and ensure that its management is carried out by an impartial legal professional, endowed with public bona fide and whose legal obligations are supervised by the Judiciary.
If the notary fee for managing an Escrow account is in fact less expensive than values that have been practiced in the market, the regulatory change could be interesting for those involved in M&A transactions.
The parties in transactions that are interested in contracting this type of warranty are usually prevented from doing so due to the high cost of hiring and managing the Escrow account. The financial institutions hired to manage the Escrow accounts often link their fees to a percentage of the amount deposited in the account, which usually represents a significant amount.
Less common, but still present, there are transactions in which the parties are at stalemate in the choice of the escrow agent and the account depository institution, due to potential conflicts of interest.
Due to these factors, the parties end up opting for less liquid guarantees, such as the fiduciary sale of shares or properties, or the retention, by the buyer, of the acquisition price, which is detrimental to the seller who finds itself subject to the purchaser’s credit risk.
On the other hand, as the changes brought about by the Legal Framework for Warranties are recent, the procedure for opening an Escrow account with notary offices has not yet been defined. This is because the National Council of Justice has not yet regulated the matter to standardize procedures among the public registry offices.
It is also worth remembering the general rule for publicity of notarial acts. In other words, relying on a notary to manage an Escrow account, in the context of an M&A, may represent the loss of confidentiality of certain information that, in the understanding of the parties, should be confidential.
It is not yet possible to say whether opening an Escrow account at notary offices will be able to keep up with the dynamics of M&A transactions and the wide range of possibilities and complexities of their use. However, those involved in these transactions that seek a liquid warranty and (as proposed in the regulatory change) with a lower maintenance cost, should be aware of this new possibility, consulting professionals in the area about the procedures that will be adopted by notary offices as a result of the innovations brought by the Legal Framework for Warranties.