Escrow and Indemnity Holdback Terms - Arizona

ESCROW AND INDEMNITY HOLDBACK TERMS

Jurisdiction: State of Arizona

Prepared for Transaction Between:

PART I: OVERVIEW AND PURPOSE

1.1 Purpose of Escrow and Holdback

These Escrow and Indemnity Holdback Terms ("Holdback Terms") establish the terms and conditions under which a portion of the Purchase Price paid in connection with the transaction contemplated by the [Stock/Asset] Purchase Agreement dated [__/__/____] (the "Purchase Agreement") shall be held in escrow or retained as a holdback to secure the indemnification obligations of the Seller to the Buyer as set forth in Article [____] of the Purchase Agreement.

1.2 Definitions

Unless otherwise defined herein, capitalized terms used in these Holdback Terms shall have the meanings ascribed to them in the Purchase Agreement. For purposes of these Holdback Terms:

1.3 Typical Escrow Structures in Arizona M&A Transactions

The following escrow structures are commonly used in Arizona-based transactions:

• General Indemnity Escrow: [5-15]% of Purchase Price held for [12-24] months to cover breaches of general representations and warranties
• Working Capital Adjustment Escrow: Separate escrow of $[________] or [____]% to backstop post-closing true-up; typically [90-180] day term
• Specific Indemnity Escrow: Tailored escrow for identified risks (environmental, tax, litigation); amount and duration matched to specific risk
• Holdback (Non-Escrow): Portion of Purchase Price retained by Buyer (not deposited with third-party escrow agent) as additional indemnification security
• Seller Note with Setoff: Seller financing with contractual right of offset for finally determined indemnification claims

[DRAFTING NOTE: Arizona has a robust escrow licensing regime under A.R.S. Title 6, Chapter 7. Verify that the escrow agent is licensed by DIFI or qualifies for a statutory exemption under A.R.S. § 6-811.]

PART II: ESCROW AGREEMENT TERMS

2.1 Escrow Amount

(a) General Indemnity Escrow. At Closing, Buyer shall deposit (or cause to be deposited) the Aggregate Escrow Amount of $[________________________________] into the Escrow Account by wire transfer of immediately available funds.

(b) Working Capital Adjustment Escrow (if applicable).

☐ A separate working capital escrow in the amount of $[________________________________] shall be deposited into a separate Escrow Account (the "WC Escrow Account") at Closing.

☐ Not applicable to this transaction.

(c) Specific Indemnity Escrow (if applicable).

☐ A specific indemnity escrow in the amount of $[________________________________] shall be deposited into a separate Escrow Account (the "Specific Escrow Account") at Closing to address the following identified risk(s): [________________________________].

☐ Not applicable to this transaction.

2.2 Escrow Agent

(a) Appointment. The parties hereby appoint [________________________________] as Escrow Agent to hold, invest, and disburse the Escrow Amount in accordance with these Holdback Terms and the Escrow Agreement.

(b) Qualification and Licensing. The Escrow Agent shall be one of the following:

☐ DIFI-Licensed Escrow Agent: An escrow agent licensed by the Arizona Department of Insurance and Financial Institutions pursuant to A.R.S. § 6-814. License No.: [________________________________].

☐ National Banking Association: A national banking association with trust powers (exempt under A.R.S. § 6-811).

☐ Arizona State-Chartered Bank or Trust Company: A bank or trust company chartered under Arizona law and authorized to conduct trust business (exempt under A.R.S. § 6-811).

☐ Licensed Attorney: An attorney licensed to practice law in Arizona who is not actively engaged in conducting an escrow business (exempt under A.R.S. § 6-811).

☐ Licensed Real Estate Broker: An Arizona-licensed real estate broker acting within the scope of the broker's license (exempt under A.R.S. § 6-811, for real property transactions only).

☐ Other Exempt Entity: [________________________________] (specify basis for exemption under A.R.S. § 6-811).

(c) Surety Bond. If the Escrow Agent is a DIFI-licensed escrow agent, it shall maintain a surety bond of not less than $100,000 in accordance with A.R.S. § 6-814.

(d) Escrow Agreement. The parties and the Escrow Agent shall enter into a separate Escrow Agreement substantially in the form attached as Exhibit [____] to the Purchase Agreement (the "Escrow Agreement"), which shall govern the duties and obligations of the Escrow Agent.

2.3 Escrow Period

(a) General Indemnity Escrow Period. The Escrow Period shall commence on the Closing Date and shall expire on the date that is [____] months after the Closing Date (the "Escrow Expiration Date"), unless extended with respect to Pending Claims as provided in Section 6.3.

(b) Working Capital Escrow Period. If a Working Capital Adjustment Escrow is established, the WC Escrow Period shall expire on the date that is [____] days after the Closing Date, or upon the final determination of the Closing Working Capital in accordance with Section [____] of the Purchase Agreement, whichever occurs later.

(c) Specific Indemnity Escrow Period. If a Specific Indemnity Escrow is established, the Specific Escrow Period shall expire on the date that is [____] months after the Closing Date or upon final resolution of the identified risk(s), whichever occurs later.

2.4 Release Conditions

The Escrow Amount (or any portion thereof) shall be released from the Escrow Account only upon:

(a) Joint Written Instruction from Buyer and Seller;

(b) A final, non-appealable order of a court of competent jurisdiction directing disbursement;

(c) An arbitration award rendered in accordance with Section [____] hereof, if applicable;

(d) The scheduled release dates set forth in Part VI hereof, subject to retention for Pending Claims; or

(e) As otherwise provided in these Holdback Terms or the Escrow Agreement.

PART III: INDEMNITY HOLDBACK TERMS

3.1 Holdback Amount

(a) At Closing, Buyer shall retain from the Purchase Price otherwise payable to Seller the Holdback Amount of $[________________________________] (representing [____]% of the Purchase Price).

(b) The Holdback Amount shall be held by Buyer in [a segregated account / Buyer's general funds] and shall serve as security for Seller's indemnification obligations under Article [____] of the Purchase Agreement.

[DRAFTING NOTE: Arizona law does not require holdback funds to be segregated in a separate account in the M&A context. However, Seller should negotiate for segregation to protect against Buyer insolvency. If funds are held in a segregated account, consider whether A.R.S. Title 6, Chapter 7 licensing requirements apply to the Buyer.]

3.2 Holdback Period

(a) General Holdback Period. The Holdback Period shall commence on the Closing Date and shall expire on the date that is [____] months after the Closing Date (the "Holdback Expiration Date").

(b) Extended Holdback Period for Fundamental Representations. With respect to claims arising from breaches of Fundamental Representations, the Holdback Period shall extend until the date that is [____] months after the Closing Date, or the expiration of the applicable statute of limitations plus [____] days, whichever is longer.

(c) Extended Holdback Period for Tax Matters. With respect to tax indemnification claims, the Holdback Period shall extend until [____] days after the expiration of the applicable statute of limitations for the assessment of the relevant tax (including any extensions thereof).

(d) Arizona Statute of Limitations Considerations. The general statute of limitations for breach of a written contract in Arizona is six (6) years (A.R.S. § 12-548). For fraud claims, the limitations period is three (3) years from discovery (A.R.S. § 12-543). The Survival Period and Holdback Period should be calibrated accordingly.

3.3 Holdback Claim Procedures

(a) Notice. Buyer shall deliver a Claim Notice to Seller specifying in reasonable detail:

• (i) The nature and basis of the claim;
• (ii) The specific representations, warranties, or covenants alleged to have been breached;
• (iii) The estimated amount of Losses (if then determinable); and
• (iv) The factual basis for the claim.

(b) Response Period. Seller shall have [____] Business Days after receipt of a Claim Notice to deliver a written response to Buyer indicating whether Seller disputes the claim in whole or in part.

(c) Undisputed Claims. If Seller does not timely dispute a claim (or the undisputed portion thereof), Buyer may apply the applicable portion of the Holdback Amount to satisfy such claim.

(d) Disputed Claims. If Seller timely disputes a claim, the disputed amount shall remain subject to the Holdback until the claim is Finally Resolved.

3.4 Baskets, Caps, and Limitations

(a) Basket (Deductible/Tipping).

☐ Deductible Basket: The Indemnifying Party shall not be liable for Losses until the aggregate amount of all Losses exceeds $[________________________________] (the "Basket Amount"), and then only for the amount in excess of the Basket Amount.

☐ Tipping Basket (First-Dollar): The Indemnifying Party shall not be liable for Losses until the aggregate amount of all Losses exceeds the Basket Amount, at which point the Indemnifying Party shall be liable for all Losses from the first dollar.

☐ Mini-Basket: Individual claims below $[________________________________] shall not count toward the Basket Amount.

(b) Cap on Liability.

• General Representations: Losses capped at $[________________________________] or [____]% of Purchase Price.
• Fundamental Representations: Losses capped at $[________________________________] or [____]% of Purchase Price (typically 100%).
• Special Indemnities: Losses capped at $[________________________________] or as separately negotiated.

(c) Materiality Scrape.

☐ Materiality qualifiers in representations and warranties shall be disregarded for purposes of determining whether a breach has occurred ("qualification scrape").

☐ Materiality qualifiers shall be disregarded for purposes of calculating the amount of Losses ("indemnity scrape").

☐ Materiality qualifiers shall apply for all purposes (no scrape).

3.5 Setoff Mechanics

(a) Setoff Against Escrow. Buyer's primary recourse for indemnification claims shall be against the Escrow Amount.

(b) Setoff Against Holdback. After exhaustion of the Escrow Amount (or if no Escrow is established), Buyer may setoff Finally Resolved indemnification claims against the Holdback Amount.

(c) Setoff Against Other Amounts (if applicable).

☐ Buyer may setoff Finally Resolved claims against unpaid Purchase Price installments.
☐ Buyer may setoff Finally Resolved claims against earnout payments, subject to [________________________________].
☐ Setoff against earnout limited to [____]% of any individual earnout payment.
☐ No setoff against amounts other than Escrow and Holdback.

3.6 Representations and Warranty Insurance (RWI) Interplay

(if applicable)

☐ RWI Policy in Place. A representations and warranty insurance policy has been obtained by [Buyer/Seller] (the "RWI Policy").

• The indemnity cap for general representations shall be reduced to $[________________________________] (the RWI retention amount).
• The Escrow Amount shall be sized at $[________________________________] to cover the RWI retention.
• Claim procedures shall comply with the RWI Policy's notice and cooperation requirements.
• Buyer shall not take any action that would prejudice the insurer's rights under the RWI Policy.
• The Survival Period for general representations shall match the RWI Policy period of [____] years.

☐ No RWI Policy. Not applicable.

PART IV: CLAIMS PROCESS

4.1 Notice of Claim

(a) Direct Claims. An Indemnified Party seeking indemnification for a Direct Claim (a claim that does not involve a Third-Party Claim) shall deliver a Claim Notice to the Indemnifying Party and the Escrow Agent, specifying:

• (i) The factual basis for the claim in reasonable detail;
• (ii) The sections of the Purchase Agreement alleged to have been breached;
• (iii) The estimated amount of Losses, to the extent then reasonably determinable; and
• (iv) Supporting documentation, to the extent reasonably available.

(b) Third-Party Claims. If an Indemnified Party receives notice of a claim or action by a third party that may give rise to an indemnification claim, the Indemnified Party shall:

• (i) Deliver a Claim Notice to the Indemnifying Party within [____] Business Days of receiving notice of such third-party claim;
• (ii) Provide copies of all material documents relating to the third-party claim; and
• (iii) Permit the Indemnifying Party to assume the defense of such third-party claim, subject to the conditions set forth in Section 4.4 below.

(c) Failure to Give Timely Notice. The failure of an Indemnified Party to deliver a timely Claim Notice shall not relieve the Indemnifying Party of its indemnification obligations except to the extent the Indemnifying Party is actually and materially prejudiced by such failure.

4.2 Response Period

(a) The Indemnifying Party shall have [____] Business Days (the "Response Period") after receipt of a Claim Notice to deliver a written response (the "Claim Response") to the Indemnified Party and the Escrow Agent.

(b) The Claim Response shall state whether the Indemnifying Party:

• (i) Accepts the claim in full;
• (ii) Accepts the claim in part and disputes the remainder (specifying the disputed amount and basis for dispute); or
• (iii) Disputes the claim in full (specifying the basis for dispute in reasonable detail).

(c) If the Indemnifying Party fails to deliver a timely Claim Response, the Indemnifying Party shall be deemed to have:

☐ Accepted the claim in full.
☐ Disputed the claim in full.
☐ [Other: ________________________________].

4.3 Dispute Resolution

If the Indemnifying Party disputes a claim in whole or in part, the parties shall attempt to resolve the dispute as follows:

(a) Negotiation. The parties shall negotiate in good faith for a period of [____] Business Days following delivery of the Claim Response.

(b) Mediation (if applicable).

☐ If negotiation is unsuccessful, the parties shall submit the dispute to non-binding mediation administered by [________________________________] in [________________________________], Arizona.

☐ Not applicable.

(c) Arbitration (if applicable).

☐ If mediation is unsuccessful (or not elected), the dispute shall be submitted to binding arbitration administered by [the American Arbitration Association (AAA) / JAMS / other: ________________________________] in accordance with its [Commercial Arbitration Rules / other: ________________________________]. The arbitration shall be conducted in [________________________________], Arizona, before [one / three] arbitrator(s).

☐ Not applicable.

(d) Litigation. If arbitration is not elected, the parties consent to the exclusive jurisdiction of the [Superior Court of [________________________________] County, Arizona / United States District Court for the District of Arizona], and waive any objection to venue or personal jurisdiction therein.

[DRAFTING NOTE: Maricopa County Superior Court (Phoenix) is the most common venue for complex commercial disputes in Arizona. The U.S. District Court for the District of Arizona sits in Phoenix, Tucson, Flagstaff, and Prescott.]

4.4 Defense of Third-Party Claims

(a) Assumption of Defense. The Indemnifying Party may assume the defense of a third-party claim by delivering written notice to the Indemnified Party within [____] Business Days of receiving the Claim Notice.

(b) Conditions to Assumption. The Indemnifying Party may assume the defense only if:

• (i) The Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party with respect to such claim (subject to any applicable limitations);
• (ii) The third-party claim seeks only monetary damages and does not seek an injunction or other equitable relief against the Indemnified Party;
• (iii) There is no conflict of interest that would make separate representation advisable; and
• (iv) The Indemnifying Party selects counsel reasonably satisfactory to the Indemnified Party.

(c) Settlement. The Indemnifying Party may not settle a third-party claim without the prior written consent of the Indemnified Party (not to be unreasonably withheld, conditioned, or delayed) unless the settlement:

• (i) Involves only the payment of money;
• (ii) Does not involve any admission of liability or wrongdoing by the Indemnified Party;
• (iii) Includes a complete release of the Indemnified Party; and
• (iv) Does not impose any restriction on the Indemnified Party's business.

4.5 Partial Releases During Escrow Period

(a) Scheduled Partial Releases. The parties may agree to the following partial release schedule:

☐ [____]% of the Escrow Amount released on the [____]-month anniversary of the Closing Date, less Pending Claims.
☐ [____]% of the Escrow Amount released on the [____]-month anniversary of the Closing Date, less Pending Claims.
☐ Remaining balance released on the Escrow Expiration Date, less Pending Claims.

(b) Early Release by Agreement. The parties may agree to an early release of all or a portion of the Escrow Amount by Joint Written Instruction at any time.

PART V: ESCROW AGENT PROVISIONS

5.1 Duties of Escrow Agent

(a) The Escrow Agent shall hold, safeguard, and disburse the Escrow Amount solely in accordance with the terms of the Escrow Agreement and these Holdback Terms.

(b) The Escrow Agent shall act in a ministerial capacity only and shall not be required to interpret or enforce the Purchase Agreement or make any determination as to whether a claim is valid.

(c) The Escrow Agent shall not be liable for any act or omission taken in good faith in reliance upon any Joint Written Instruction, court order, or arbitration award, except for acts or omissions constituting gross negligence, willful misconduct, or fraud.

(d) If the Escrow Agent is a DIFI-licensed escrow agent, it shall comply with all applicable requirements of A.R.S. Title 6, Chapter 7 and the rules and regulations promulgated thereunder (A.A.C. Title 20, Chapter 4).

5.2 Escrow Agent Fees

(a) The Escrow Agent's fees shall be as set forth in the Escrow Agreement and shall be paid:

☐ [50]% by Buyer and [50]% by Seller
☐ 100% by Buyer
☐ 100% by Seller
☐ Other: [________________________________]

(b) Fee Schedule (typical ranges):

[DRAFTING NOTE: DIFI-licensed escrow agents in Arizona must file their schedule of escrow fees and charges with the Department. See A.R.S. § 6-816. Fees cannot exceed the amounts filed with DIFI.]

5.3 Resignation and Removal

(a) Resignation. The Escrow Agent may resign upon [____] days' prior written notice to Buyer and Seller. The resignation shall not become effective until a successor Escrow Agent has been appointed.

(b) Removal. The Escrow Agent may be removed by Joint Written Instruction upon [____] days' prior written notice to the Escrow Agent.

(c) Successor Appointment. If a successor Escrow Agent is not appointed within [____] days of the effective date of resignation or removal, the Escrow Agent may petition a court of competent jurisdiction to appoint a successor or may interplead the Escrow Amount into court.

(d) DIFI Notification. If the Escrow Agent is a DIFI-licensed escrow agent, any resignation or removal shall be conducted in compliance with applicable DIFI requirements.

5.4 Investment of Escrow Funds

(a) The Escrow Agent shall invest the Escrow Amount as directed by Joint Written Instruction in one or more of the following:

☐ Money market deposit accounts at the Escrow Agent's institution
☐ United States Treasury obligations with maturities not exceeding [____] months
☐ Certificates of deposit issued by FDIC-insured institutions, not exceeding FDIC insurance limits
☐ Money market mutual funds investing exclusively in U.S. government obligations
☐ Other: [________________________________]

(b) In the absence of Joint Written Instruction, the Escrow Agent shall invest the Escrow Amount in [________________________________].

(c) Risk Allocation. All investment risk (including risk of loss of principal) shall be borne by [Buyer / Seller / shared equally / the party to whom the Escrow Amount is ultimately disbursed].

5.5 Tax Reporting

(a) For federal and state income tax purposes, the Escrow Amount (including all interest and income earned thereon) shall be treated as owned by [Seller / Buyer] and reported under Tax Identification Number [________________________________].

(b) The Escrow Agent shall issue IRS Form 1099 (or other applicable tax reporting forms) to [Seller / Buyer] with respect to all income earned on the Escrow Amount.

(c) [Seller / Buyer] shall be responsible for the payment of all taxes on income earned on the Escrow Amount, regardless of to whom the Escrow Amount is ultimately disbursed.

(d) Arizona State Tax Note. Arizona imposes a state income tax on interest and investment income. However, effective for tax years beginning on or after January 1, 2023, Arizona established a flat income tax rate of 2.5% (A.R.S. § 43-1011). The parties should coordinate with their tax advisors regarding Arizona income tax reporting for escrow income.

5.6 Indemnification of Escrow Agent

Buyer and Seller shall jointly and severally indemnify, defend, and hold harmless the Escrow Agent from and against any and all losses, liabilities, damages, claims, and expenses (including reasonable attorneys' fees) arising out of or in connection with the Escrow Agent's performance of its duties hereunder, except to the extent caused by the Escrow Agent's gross negligence, willful misconduct, or fraud.

5.7 Interpleader

If at any time the Escrow Agent receives conflicting instructions from Buyer and Seller, or if a dispute arises between the parties regarding the Escrow Amount, the Escrow Agent shall be entitled (but not obligated) to:

(a) Refuse to act until the dispute is resolved by agreement, arbitration, or court order;

(b) Interplead the Escrow Amount into the Superior Court of Maricopa County, Arizona, or the United States District Court for the District of Arizona; and

(c) Recover its costs and reasonable attorneys' fees incurred in connection with such interpleader action from the Escrow Amount.

PART VI: RELEASE MECHANICS

6.1 Scheduled Releases

(a) First Release (if applicable). On the date that is [____] months after the Closing Date (the "First Release Date"), the Escrow Agent shall release to Seller an amount equal to [____]% of the initial Escrow Amount, less the aggregate amount of all Pending Claims as of such date.

(b) Second Release (if applicable). On the date that is [____] months after the Closing Date (the "Second Release Date"), the Escrow Agent shall release to Seller an amount equal to [____]% of the initial Escrow Amount, less the aggregate amount of all Pending Claims as of such date.

(c) Final Release. On the Escrow Expiration Date, the Escrow Agent shall release to Seller the entire remaining balance of the Escrow Amount, less the aggregate amount of all Pending Claims as of such date.

6.2 Working Capital Adjustment Release

If a Working Capital Adjustment Escrow was established:

(a) Upon the final determination of the Closing Working Capital pursuant to Section [____] of the Purchase Agreement, the Escrow Agent shall disburse the WC Escrow Amount as follows:

• If the Closing Working Capital exceeds the Target Working Capital, the excess shall be paid to Seller, and the remainder shall be returned to Buyer; or
• If the Target Working Capital exceeds the Closing Working Capital, the deficiency shall be paid to Buyer, and the remainder shall be paid to Seller.

(b) If the entire WC Escrow Amount is insufficient to cover the working capital deficiency, Seller shall pay the shortfall to Buyer within [____] Business Days.

6.3 Holdback Release

(a) Scheduled Release. On the Holdback Expiration Date, Buyer shall pay to Seller the Holdback Amount (or the remaining balance thereof), less the aggregate amount of all Pending Claims as of such date.

(b) Pending Claims Reserve. Buyer may retain from the Holdback Amount an amount equal to [100 / 125 / 150]% of the aggregate claimed amount of all Pending Claims (the "Claims Reserve").

(c) Release of Claims Reserve. Upon final resolution of each Pending Claim, Buyer shall promptly pay to Seller the portion of the Claims Reserve attributable to such claim that is not required to satisfy the resolved claim.

6.4 Joint Instruction Requirements

(a) All releases from the Escrow Account (other than pursuant to a court order or arbitration award) shall require a Joint Written Instruction executed by authorized representatives of both Buyer and Seller.

(b) The Joint Written Instruction shall specify:

• (i) The amount to be released;
• (ii) The party to whom the release is to be made;
• (iii) Wire transfer instructions for the receiving party; and
• (iv) Any applicable withholding or tax reporting instructions.

(c) The Escrow Agent shall make the disbursement within [____] Business Days of receipt of a compliant Joint Written Instruction.

6.5 Final Accounting

Within [____] Business Days following the final disbursement of all amounts from the Escrow Account, the Escrow Agent shall deliver to Buyer and Seller a final accounting statement reflecting all deposits, investment income, disbursements, fees, and taxes relating to the Escrow Account.

PART VII: ARIZONA-SPECIFIC REQUIREMENTS

7.1 Arizona Escrow Agent Licensing (A.R.S. Title 6, Chapter 7)

(a) Licensing Requirement. Under A.R.S. § 6-814, any person engaged in the business of accepting escrows must be licensed by the Arizona Department of Insurance and Financial Institutions (DIFI). An "escrow" is defined under A.R.S. § 6-801 as any transaction in which escrow property is delivered to a person not otherwise having any right, title, or interest therein in connection with the sale, transfer, encumbrance, or lease of real or personal property, to be delivered or redelivered upon the contingent happening or nonhappening of a specified event or performance or nonperformance of a prescribed act.

(b) Application to M&A Escrow. The broad definition of "escrow" under A.R.S. § 6-801 encompasses M&A escrow arrangements involving the sale or transfer of personal property (including stock, membership interests, and business assets). Accordingly, if a non-exempt escrow agent is engaged, it must hold a valid DIFI license.

(c) Surety Bond. A.R.S. § 6-814 requires DIFI-licensed escrow agents to maintain a surety bond of not less than $100,000 to ensure restitution to any party damaged by the agent's failure to comply with escrow regulations.

(d) Exemptions (A.R.S. § 6-811). The following persons are exempt from the escrow licensing requirement:

• (i) Attorneys: Any person licensed to practice law in Arizona who is not actively engaged in conducting an escrow business;
• (ii) Banks and Credit Unions: Banks, savings banks, savings and loan associations, credit unions, and trust companies authorized to do business in Arizona;
• (iii) Title Insurance Companies: Title insurance companies and agents acting within the scope of their authority;
• (iv) Real Estate Brokers: Licensed real estate brokers handling escrow incidental to real estate transactions (limited scope);
• (v) Insurance Companies: Authorized insurance companies in certain limited circumstances;
• (vi) Receiver or Trustee: A receiver, trustee in bankruptcy, executor, administrator, or guardian acting under the authority of a court.

(e) DIFI Oversight. DIFI has regulatory authority over licensed escrow agents, including the power to examine books and records, conduct audits, and take enforcement action for violations of A.R.S. Title 6, Chapter 7.

(f) Fee Filing. Under A.R.S. § 6-816, licensed escrow agents must file their schedule of escrow fees and charges with DIFI and may not charge fees exceeding the filed schedule.

7.2 Arizona Unclaimed Property Act (A.R.S. Title 44, Chapter 3)

(a) Overview. Arizona's Revised Unclaimed Property Act is codified in A.R.S. Title 44, Chapter 3 (§§ 44-301 et seq.) and is administered by the Arizona Department of Revenue (ADOR).

(b) Dormancy Period. Under A.R.S. § 44-302, property is presumed abandoned based on the following dormancy periods:

(c) Applicability to Escrow Funds. Escrow funds that remain undisbursed after the expiration of the Escrow Period and resolution of all claims may be classified as unclaimed property under A.R.S. § 44-302. The parties should ensure timely disbursement of all funds upon final resolution of all claims.

(d) Reporting Requirements. Under A.R.S. Title 44, Chapter 3:

• Holders must file reports with ADOR annually
• Reports are due before November 1 for all holders (except life insurance companies, which report by April 30)
• Reports must be filed electronically
• Reports must include the name, last known address, Tax ID, and description of the property

(e) Due Diligence. Before reporting property as abandoned, the holder must exercise due diligence to locate the apparent owner, including mailing notice to the owner's last known address not less than 60 days before the filing deadline.

(f) Practical Escrow Provision. To mitigate unclaimed property risk, include the following in the Escrow Agreement:

"If any portion of the Escrow Amount remains undisbursed for a period of [____] months following the Escrow Expiration Date (or, with respect to Pending Claims, the final resolution thereof), the Escrow Agent shall provide written notice to Buyer and Seller at their respective notice addresses. If the Escrow Agent does not receive a Joint Written Instruction within [____] days of such notice, the Escrow Agent may take such actions as it deems necessary to comply with applicable unclaimed property laws, including the Arizona Revised Unclaimed Property Act (A.R.S. Title 44, Chapter 3)."

7.3 Trust Account Rules

(a) DIFI-Licensed Escrow Agents. Licensed escrow agents must comply with trust account requirements established by DIFI, including:

• Maintaining escrow funds in a separate trust account at an Arizona-based financial institution
• Not commingling escrow funds with the agent's own funds
• Maintaining accurate records of all escrow transactions
• Undergoing periodic DIFI audits and examinations

(b) Attorney Trust Accounts. If an Arizona attorney serves as escrow agent:

• The attorney must comply with Arizona Rules of Professional Conduct ER 1.15 (Safekeeping of Property)
• Escrow funds must be held in a trust account (IOLTA or separate interest-bearing account)
• Funds must not be commingled with the attorney's personal or operating accounts
• The attorney must maintain complete records of all escrow deposits and disbursements

(c) Banking Regulation. Arizona state-chartered banks acting as escrow agents must comply with Arizona banking laws (A.R.S. Title 6, Chapter 1) and applicable Arizona Department of Financial Institutions rules.

7.4 Choice of Law and Forum Considerations

(a) Governing Law. These Holdback Terms and the Escrow Agreement shall be governed by and construed in accordance with the laws of the State of Arizona, without regard to its conflict-of-laws principles.

(b) Forum Selection. Any dispute arising under or relating to these Holdback Terms or the Escrow Agreement shall be resolved exclusively in:

☐ The Superior Court of Maricopa County, Arizona
☐ The Superior Court of [________________________________] County, Arizona
☐ The United States District Court for the District of Arizona
☐ Either state or federal court, at the election of the filing party

(c) Waiver of Jury Trial (if applicable).

☐ The parties waive their right to a jury trial in any action arising under or relating to these Holdback Terms.

☐ Jury trial right preserved.

[DRAFTING NOTE: Arizona courts generally enforce jury trial waivers in commercial contracts between sophisticated parties. The Arizona Constitution, Art. II, § 23, preserves the right to trial by jury. Waivers must be knowing and voluntary.]

(d) Arizona Revised Uniform Arbitration Act. Arizona has adopted the Revised Uniform Arbitration Act (A.R.S. § 12-3001 et seq.). Arbitration agreements in commercial transactions are generally enforceable under both state and federal (FAA) law.

PART VIII: PRACTICE NOTES

8.1 Negotiation Tips for Arizona M&A Transactions

(a) Escrow Size. Market practice for general indemnity escrows is typically 5-15% of the purchase price. Arizona's active M&A market in technology, healthcare, real estate, and aerospace sectors supports standard market terms.

(b) Escrow Period. Standard escrow periods range from 12 to 24 months. Consider the specific risk profile of the target company, including regulatory approval timelines for Arizona-specific licenses.

(c) Escrow Agent Selection. For Arizona-based transactions, consider using a national bank with Arizona operations, a DIFI-licensed escrow agent, or an Arizona-based trust company. Verify the agent's DIFI license status or confirm the applicable exemption under A.R.S. § 6-811 before closing.

(d) Real Estate Components. Many Arizona M&A transactions involve significant real estate holdings. If the transaction includes real property, consider whether separate real estate escrow arrangements are needed under A.R.S. Title 6, Chapter 7 and whether a title insurance company should serve as escrow agent for the real property component.

(e) Environmental and Water Rights. For Arizona transactions involving real property, mining, or agricultural operations, consider separate escrow provisions addressing environmental remediation, water rights (A.R.S. Title 45), and Arizona Department of Environmental Quality (ADEQ) compliance.

(f) DIFI Licensing Verification. Before closing, verify the escrow agent's DIFI license status. Contact the DIFI Licensing Division at 602-771-2800 or email [email protected].

8.2 Market Terms Reference

8.3 Common Pitfalls

(a) Unlicensed Escrow Agent. Using an escrow agent that is neither licensed by DIFI nor exempt under A.R.S. § 6-811 may expose the parties to regulatory risk and potentially invalidate the escrow arrangement. Always verify the agent's license or exemption status.

(b) Misalignment Between Documents. Ensure that the Escrow Agreement, Purchase Agreement, and these Holdback Terms use consistent defined terms, survival periods, and claim procedures.

(c) Failure to Address Tax Reporting. The parties must agree on who bears the tax burden of income earned on escrow funds. Arizona's flat 2.5% income tax rate (A.R.S. § 43-1011) applies to interest and investment income.

(d) Inadequate Claims Reserve. When sizing the Claims Reserve for Pending Claims, consider using 125-150% of the claimed amount to account for cost escalation and attorneys' fees.

(e) Forgetting Unclaimed Property. Escrow funds left undisbursed may become subject to Arizona's unclaimed property reporting requirements (A.R.S. § 44-302). Build automatic release mechanisms into the Escrow Agreement.

(f) Fee Schedule Violations. DIFI-licensed escrow agents must file fee schedules and may not charge fees exceeding filed amounts (A.R.S. § 6-816). Verify the agent's filed fee schedule before closing.

(g) Ignoring Escrow Agent Limitations. Escrow agents act ministerially and will not adjudicate disputes. The Escrow Agreement must provide clear instructions for every foreseeable disbursement scenario.

(h) Failure to Coordinate with RWI Policy. If an RWI policy is in place, failure to comply with notice and cooperation requirements may void coverage.

8.4 Checklist for Counsel

☐ Verify Escrow Agent holds valid DIFI license or qualifies for exemption (A.R.S. § 6-811)
☐ Confirm surety bond in place (minimum $100,000 for DIFI-licensed agents)
☐ Confirm escrow amount, holdback amount, and percentage of Purchase Price
☐ Verify escrow period aligns with survival periods in Purchase Agreement
☐ Confirm basket type (deductible vs. tipping) and amount
☐ Confirm cap on liability for general and fundamental representations
☐ Address materiality scrape (qualification and/or indemnity)
☐ Review setoff provisions and priority of recovery
☐ Review investment instructions for escrow funds
☐ Address tax reporting and tax burden for escrow income (federal and Arizona)
☐ Include unclaimed property / escheat provisions (A.R.S. § 44-302)
☐ Confirm dispute resolution mechanism (negotiation, mediation, arbitration, litigation)
☐ Verify forum selection and governing law
☐ Address jury trial waiver (if desired)
☐ Coordinate with RWI policy (if applicable)
☐ Confirm Escrow Agreement form is consistent with Purchase Agreement
☐ Verify Escrow Agent's filed fee schedule with DIFI
☐ Review environmental and water rights indemnity provisions (if applicable)
☐ Address working capital adjustment mechanics (if applicable)
☐ Confirm notice provisions are consistent across all transaction documents
☐ Consider real estate escrow requirements for property components

SOURCES AND REFERENCES

1. Arizona Escrow Agent Statutes - A.R.S. Title 6, Chapter 7
   - § 6-801: Definitions (escrow, escrow agent)
   - § 6-811: Exemptions from licensing
   - § 6-814: License required; surety bond ($100,000 minimum)
   - § 6-816: Schedule of fees and charges
   - https://az.elaws.us/ars/title6_chapter7

2. Arizona Department of Insurance and Financial Institutions (DIFI)
   - Escrow Agent Licensing: https://difi.az.gov/escrow-agents-dfi
   - Licensing Division: 602-771-2800; [email protected]

3. Arizona Revised Unclaimed Property Act - A.R.S. Title 44, Chapter 3
   - § 44-301: Definitions
   - § 44-302: Presumptions of abandonment (3-year general dormancy)
   - https://az.elaws.us/ars/title44_chapter3

4. Arizona Department of Revenue - Unclaimed Property Program
   - https://azdor.gov/unclaimed-property

5. Arizona Statute of Limitations
   - A.R.S. § 12-548: Written contracts (6 years)
   - A.R.S. § 12-543: Fraud (3 years from discovery)

6. Arizona Revised Uniform Arbitration Act - A.R.S. § 12-3001 et seq.

7. Arizona Income Tax - A.R.S. § 43-1011 (flat 2.5% rate effective 2023)

8. ABA Model Asset Purchase Agreement (reference for M&A indemnity market terms)

9. American Bar Association, Private Target Mergers & Acquisitions Deal Points Study (reference for market escrow and indemnity terms)

This template is provided by ezel.ai for informational purposes only and does not constitute legal advice. It must be reviewed and customized by a qualified attorney licensed in Arizona before use. Laws and regulations change frequently; verify all citations and amounts before relying on this document.

Last Updated: 2026-02-26