Escrow Agreement Implementation In The Legal System Of The Republic Of Kazakhstan

Introduction

The escrow agreement is widely used worldwide as a security measure for the protection of transacting parties' interests in the sphere of M&A. At present, a quasi-escrow mechanism (the so-called opening of an account for the benefit of a third party) is applied in Kazakhstan. This mechanism remotely has some characteristics of an escrow account and is applied by Kazakhstan banks in different ways by virtue of the absence of the legislative consolidation of the escrow term. The result is the triggering of some mistrust of this security on the part of the transacting parties. In this article, we will try to highlight the foreign practice of the legal regulation of escrow agreements, analyse the existing practice and the recent legislative initiatives in Kazakhstan, and make recommendations for improving Kazakhstan laws on escrow matters.

Traditional security measures in Kazakhstan

The practice of rendering services on merger and acquisition (M&A) transactions shows that, in transactions on the purchase and sale of participating interests and shares in Kazakhstan legal entities, the parties always experience some degree of mistrust—the seller cannot always be certain of the receipt of cash from the buyer, and the buyer, in turn, cannot be certain of the fulfilment of all required conditions on the part of the seller. In these cases, the applicable Kazakhstan legislation provides for the appropriate security measures: penalty, pledge, guarantee, etc. However, as practice shows, no such measures offer protection from the situation when a transacting party hides away with the transaction reward received or passes the buck, hiding property from seizure.

The analysis of judicial practice allows one to make the conclusion that the existing security measures are not effective. Thus, the court may invalidate warranty, a security measure if parties failed to comply with certain procedural requirements and formalities, or if the guarantees were issued by designated persons in excess of or in the absence of appropriate powers. As for the pledge agreement, the parties in merger and acquisition transactions do not always resort to such security for obligations by virtue of certain circumstances. First, pledges in merger and acquisition transactions mean the pledger's possession of large property, which is not always practical. Second, various procedures almost always accompany the implementation of the pledge agreement (for example, in the pledging of subsurface use rights). Third, the parties initially waive a pledge as a security in view of the possibility of the enforcement of the pledge only through the courts. In the light of the foregoing, escrow agreements are increasingly used in merger and acquisition transactions in Kazakhstan. This article is devoted to some legal and practical aspects of escrow agreements to consider in M&A deals.

The relevant legislation in the USA has been settled and the escrow agreement used mechanism for the protection of parties' interests in M&A transactions: the experience of foreign countries

А.N. Dontsov has delved sufficiently into the legal nature of the escrow institution: "Classical" escrow mechanism used in international M&A transactions provides that the purchase price is charged to a special...