ESCROW AND INDEMNITY HOLDBACK TERMS

Jurisdiction: State of Texas

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 Texas M&A Transactions

The following escrow structures are commonly used in Texas-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 (tax, litigation, environmental, oil and gas); 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: Texas does not have a standalone commercial escrow licensing statute for M&A transactions. Texas Ins. Code Ch. 2652 governs escrow officers appointed by title insurance agents or direct operations, primarily for real estate closings. For M&A escrow, banks, trust companies, and attorneys are the most common escrow agents.]

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. The Escrow Agent shall be one of the following:

☐ National Banking Association: A national banking association with trust powers.

☐ Texas State-Chartered Bank or Trust Company: A bank or trust company chartered under Texas law and authorized to exercise fiduciary powers (regulated by the Texas Department of Banking under Tex. Fin. Code Ch. 31 et seq. and Ch. 182).

☐ Texas-Licensed Attorney: A Texas-licensed attorney holding funds in an attorney trust account (IOLTA) in compliance with Texas Disciplinary Rules of Professional Conduct Rule 1.14.

☐ Title Insurance Company or Agent: A title insurance company or agent authorized to conduct business in Texas (regulated by TDI; escrow officers licensed under Tex. Ins. Code Ch. 2652).

☐ Other FDIC-Insured Financial Institution: [________________________________], with assets exceeding $[________________________________].

(c) Escrow Officer Licensing (Title Companies). If the Escrow Agent is a title insurance company or agent, it must employ a licensed escrow officer under Tex. Ins. Code Ch. 2652. Key requirements include:

• TDI license required (Tex. Ins. Code § 2652.001)
• Surety bond of $5,000 for Texas residents or $10,000 for residents of adjacent states (Tex. Ins. Code § 2652.101)
• Fingerprint background check through IdentoGO
• Appointment by a title insurance agent or direct operation (Tex. Ins. Code § 2652.1511)

(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.

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) Texas Statute of Limitations Considerations. The general statute of limitations for breach of a written contract in Texas is four (4) years (Tex. Civ. Prac. & Rem. Code § 16.004). For fraud, the limitations period is four (4) years from discovery (Tex. Civ. Prac. & Rem. Code § 16.004(a)(4)). The Survival Period and Holdback Period should be calibrated accordingly.

[DRAFTING NOTE: Texas courts generally enforce contractual provisions that shorten the statutory limitations period, provided the shortened period is reasonable. However, Texas courts have held that a limitations period of less than two years in a commercial transaction may be unreasonable. See Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. 2009).]

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 [________________________________], Texas.

☐ 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 [________________________________], Texas, before [one / three] arbitrator(s).

☐ Not applicable.

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

[DRAFTING NOTE: Texas has four federal judicial districts. The Northern District (Dallas) and Southern District (Houston) are the most common venues for M&A disputes. Harris County (Houston) and Dallas County district courts also handle significant commercial litigation. Consider the Texas Business Court, established in 2024, for complex business disputes (Tex. Gov't Code Ch. 25A).]

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.

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):

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.

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) Texas State Tax Note. Texas does not impose a personal state income tax (Tex. Const. Art. VIII, § 24-a). However, Texas imposes a franchise tax (also known as the "margin tax") on business entities (Tex. Tax Code Ch. 171). The franchise tax rate is 0.375% for qualifying wholesalers and retailers and 0.75% for other entities on taxable margin. Entities with total revenue at or below the no-tax-due threshold ($2,470,000 for the 2024 report year) owe no franchise tax. The parties should coordinate with their tax advisors regarding any Texas franchise tax implications of 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 District Court of [________________________________] County, Texas, or the United States District Court for the [Northern / Southern / Eastern / Western] District of Texas; 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: TEXAS-SPECIFIC REQUIREMENTS

7.1 Texas Escrow Regulation

(a) Escrow Officers (Tex. Ins. Code Ch. 2652). Texas regulates escrow officers who are employed by title insurance agents and direct operations. Under Tex. Ins. Code § 2652.001, an individual may not act as an escrow officer unless licensed by the Texas Department of Insurance (TDI). Key requirements include:

• License: Application to TDI with nonrefundable fee; no exam required
• Surety Bond: The title insurance agent or direct operation must provide a surety bond of $5,000 for escrow officers who are Texas residents and $10,000 for escrow officers who reside in adjacent states (Louisiana, New Mexico, Arkansas, or Oklahoma) (Tex. Ins. Code § 2652.101)
• Background Check: Fingerprint background check through IdentoGO required
• Appointment: Must be appointed by a title insurance agent or direct operation under Tex. Ins. Code § 2652.1511
• Residency: Primary residence must be in Texas, Louisiana, New Mexico, Arkansas, or Oklahoma

(b) Application to M&A Transactions. Tex. Ins. Code Ch. 2652 primarily applies to escrow officers handling real estate closings through title companies. For M&A escrow arrangements not involving title insurance, the licensing requirement generally does not apply. Banks, trust companies, and attorneys serving as escrow agents in M&A transactions are not subject to Ch. 2652.

(c) Permitted M&A Escrow Agents. For commercial M&A transactions in Texas, the following entities commonly serve as escrow agents:

• National banking associations with trust powers
• Texas state-chartered banks and trust companies (regulated by the Texas Department of Banking under Tex. Fin. Code Ch. 31 and Ch. 182)
• Attorneys licensed in Texas (subject to Texas Disciplinary Rules of Professional Conduct Rule 1.14)
• Title companies (if the transaction involves real property; subject to Tex. Ins. Code Ch. 2652)

7.2 Texas Unclaimed Property Law (Tex. Prop. Code Title 6, Chapters 72-77)

(a) Overview. Texas' unclaimed property laws are codified in Title 6 of the Texas Property Code (Chapters 72 through 77) and are administered by the Texas Comptroller of Public Accounts.

(b) Dormancy Periods. Under Tex. Prop. Code Ch. 72 and Ch. 73, property is presumed abandoned based on the following dormancy periods:

(c) Conditions for Presumption. Under Tex. Prop. Code § 72.101, personal property is presumed abandoned if, for longer than three years:

• (i) The location of the owner is unknown to the holder; and
• (ii) According to the knowledge and records of the holder, a claim to the property has not been asserted or an act of ownership has not been exercised.

(d) Property Preservation. Under Tex. Prop. Code § 72.101, a holder of abandoned property shall preserve the property and may not, at any time, by any procedure (including deduction for service, maintenance, or other charge), transfer or convert to the profits or assets of the holder, or otherwise reduce the value of the property.

(e) Reporting Requirements. Under Tex. Prop. Code Ch. 74:

• Each holder who on March 1 holds property presumed abandoned must file a report
• Reports must be filed with the Texas Comptroller of Public Accounts
• Reports are due by July 1 of each year
• Reports must include the owner's name, last known address, Social Security number or Tax ID (if available), and a description of the property
• Property must be delivered to the Comptroller by August 1 of each year

(f) Due Diligence. Before reporting property as abandoned:

• The holder must send notice to the apparent owner at the owner's last known address
• Notice must be mailed not later than the 60th day before the report filing deadline
• For property valued at $250 or more, notice by first-class or certified mail is required

(g) 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 Texas Unclaimed Property provisions of the Texas Property Code, Title 6, Chapters 72-77."

7.3 Trust Account Rules

(a) Texas Banks and Trust Companies. Texas state-chartered banks and trust companies acting as escrow agents are regulated by the Texas Department of Banking under:

• Tex. Fin. Code Ch. 31 (Texas Finance Code, Banks)
• Tex. Fin. Code Ch. 182 (Trust Companies)
• 7 Tex. Admin. Code (Department of Banking rules)

Requirements include:
- Maintaining escrow funds in segregated trust accounts
- Not commingling escrow funds with the institution's own assets
- Compliance with Department of Banking examination requirements
- Maintaining appropriate fidelity bond coverage

(b) Attorney Trust Accounts. Under Texas Disciplinary Rules of Professional Conduct Rule 1.14 (Safekeeping of Property):

• Trust account funds must be held in a financial institution authorized to do business in Texas
• Attorneys must maintain IOLTA accounts for client funds that cannot earn net interest (small amounts or short duration)
• Funds must not be commingled with the attorney's personal or operating accounts
• Complete records must be maintained
• The State Bar of Texas has authority to audit attorney trust accounts

(c) Title Company Trust Accounts. Title companies holding escrow funds are subject to:

• Tex. Ins. Code Title 11 (Title Insurance)
• TDI examination and oversight
• Title Insurance Basic Manual requirements (Section VI, L-2)

7.4 Texas Business Court

(a) Overview. Texas established specialized Business Courts effective September 1, 2024, under Tex. Gov't Code Ch. 25A. These courts have jurisdiction over complex commercial disputes, including certain M&A-related claims.

(b) Jurisdiction. The Texas Business Court has jurisdiction over disputes involving:

• Derivative proceedings on behalf of an organization under Tex. Bus. Orgs. Code
• Certain transactions involving $5 million or more
• Qualified transactions (as defined) involving internal affairs of organizations

(c) Consideration for Escrow Disputes. For large M&A transactions, the Texas Business Court may provide a more specialized forum for escrow and indemnity disputes.

7.5 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 Texas, 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 District Court of [________________________________] County, Texas
☐ The Texas Business Court (if jurisdictional requirements are met)
☐ The United States District Court for the [Northern / Southern / Eastern / Western] District of Texas
☐ 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: Texas courts have upheld contractual jury trial waivers in commercial disputes. See In re Prudential Ins. Co. of America, 148 S.W.3d 124 (Tex. 2004). The Texas Constitution, Art. I, § 15, preserves the right to trial by jury, but waiver is permitted in civil cases. The waiver should be conspicuous and voluntary.]

(d) Texas General Arbitration Act. Texas has adopted the Texas General Arbitration Act (Tex. Civ. Prac. & Rem. Code Ch. 171). Arbitration agreements in commercial transactions are enforceable under both state and federal (FAA) law.

PART VIII: PRACTICE NOTES

8.1 Negotiation Tips for Texas M&A Transactions

(a) Escrow Size. Market practice for general indemnity escrows is typically 5-15% of the purchase price. Texas' active M&A market in energy, technology, healthcare, financial services, and real estate generally follows national market trends.

(b) Escrow Period. Standard escrow periods range from 12 to 24 months. Texas' four-year contract limitations period is in line with the typical escrow period.

(c) Escrow Agent Selection. For Texas-based transactions, consider using a major national bank with Texas operations (e.g., JPMorgan Chase, Bank of America, Comerica, Frost Bank) or a Texas-based trust company. For transactions with real property, a title company with a licensed escrow officer may be appropriate.

(d) No State Income Tax Advantage. Like Florida, Texas does not impose a personal income tax. This is a significant factor in deal structuring, especially for sellers. However, the Texas franchise tax (margin tax) applies to business entities.

(e) Energy Sector Considerations. For Texas transactions involving oil and gas assets, mineral rights, or energy companies, consider:

• Separate escrow for environmental liabilities (TCEQ compliance under Tex. Health & Safety Code Ch. 361)
• Extended holdback periods for title defect claims
• Specific indemnity provisions for plugging and abandonment obligations
• Working interest and royalty true-up escrows

(f) Texas Business Court. For large M&A disputes, consider designating the Texas Business Court (effective September 2024) as the forum for escrow and indemnity disputes.

(g) Non-Compete Enforceability. Unlike California, Texas permits reasonable non-competition covenants (Tex. Bus. & Com. Code § 15.50 et seq.). Holdback provisions tied to non-compete compliance are generally enforceable if the underlying covenant is reasonable.

8.2 Market Terms Reference

8.3 Common Pitfalls

(a) Escrow Officer Licensing Confusion. Tex. Ins. Code Ch. 2652 applies to escrow officers at title companies, not to banks or attorneys serving as M&A escrow agents. Do not confuse the two regulatory frameworks.

(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) Franchise Tax Oversight. While Texas has no personal income tax, the franchise tax (margin tax) may apply to escrow income earned by business entities. The rates are 0.375% (wholesalers/retailers) and 0.75% (other entities) on taxable margin.

(d) Forgetting Unclaimed Property. Texas' three-year dormancy period (Tex. Prop. Code § 72.101) means escrow funds can become subject to reporting relatively quickly. The Texas Comptroller actively enforces unclaimed property reporting. Build automatic release mechanisms into the Escrow Agreement.

(e) Inadequate Claims Reserve. When sizing the Claims Reserve for Pending Claims, consider using 125-150% of the claimed amount.

(f) Energy Sector Specific Issues. For oil and gas transactions, failing to address plugging and abandonment obligations, title defects, and environmental liabilities in the escrow structure can lead to significant post-closing disputes.

(g) Ignoring Escrow Agent Limitations. Escrow agents act ministerially. 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.

(i) Texas Business Court Jurisdictional Requirements. The Texas Business Court has specific jurisdictional thresholds. Verify that the transaction meets the requirements before designating the Business Court as the forum.

8.4 Checklist for Counsel

☐ Confirm escrow amount, holdback amount, and percentage of Purchase Price
☐ Verify Escrow Agent is qualified (bank, trust company, attorney, or title company)
☐ If title company, confirm escrow officer holds TDI license (Ins. Code Ch. 2652)
☐ 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 (federal and Texas franchise tax, if applicable)
☐ Include unclaimed property / escheat provisions (Prop. Code Ch. 72-77; 3-year dormancy)
☐ Confirm dispute resolution mechanism (negotiation, mediation, arbitration, litigation)
☐ Verify forum selection (consider Texas Business Court for large disputes)
☐ Address jury trial waiver (if desired)
☐ Coordinate with RWI policy (if applicable)
☐ Confirm Escrow Agreement form is consistent with Purchase Agreement
☐ Address energy sector considerations (P&A, title defects, environmental)
☐ Address non-compete holdback provisions (Tex. Bus. & Com. Code § 15.50)
☐ Address working capital adjustment mechanics (if applicable)
☐ Confirm notice provisions are consistent across all transaction documents
☐ Consider Texas Business Court jurisdictional requirements

SOURCES AND REFERENCES

1. Texas Unclaimed Property Law - Tex. Prop. Code Title 6, Chapters 72-77
   - § 72.101: Personal property presumed abandoned (3-year dormancy)
   - § 72.102: Traveler's checks and money orders
   - Ch. 73: Property held by financial institutions
   - Ch. 74: Report, delivery, and claims process (March 1 / July 1 / August 1 deadlines)
   - https://statutes.capitol.texas.gov/Docs/PR/htm/PR.72.htm

2. Texas Comptroller of Public Accounts - Unclaimed Property
   - https://www.claimittexas.gov/

3. Texas Escrow Officer Licensing - Tex. Ins. Code Ch. 2652
   - § 2652.001: License required
   - § 2652.101: Surety bond ($5,000 Texas residents; $10,000 adjacent state residents)
   - § 2652.1511: Appointment by title insurance agent
   - https://www.tdi.texas.gov/agent/escrow-officer-apply.html

4. Texas Department of Insurance (TDI)
   - Escrow officer licensing: https://www.tdi.texas.gov/agent/escrow-officer-apply.html

5. Texas Banking and Trust Companies
   - Tex. Fin. Code Ch. 31 (Banks)
   - Tex. Fin. Code Ch. 182 (Trust Companies)
   - Texas Department of Banking

6. Texas Statute of Limitations
   - Tex. Civ. Prac. & Rem. Code § 16.004: Breach of contract (4 years)

7. Texas Franchise Tax (Margin Tax)
   - Tex. Tax Code Ch. 171 (0.375% wholesalers/retailers; 0.75% other entities)

8. Texas Business Court - Tex. Gov't Code Ch. 25A (effective September 1, 2024)

9. Texas Non-Compete Law - Tex. Bus. & Com. Code § 15.50 et seq.

10. Texas General Arbitration Act - Tex. Civ. Prac. & Rem. Code Ch. 171

11. Texas Disciplinary Rules of Professional Conduct - Rule 1.14 (Safekeeping of Property)

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

13. American Bar Association, Private Target Mergers & Acquisitions Deal Points Study

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 Texas before use. Laws and regulations change frequently; verify all citations and amounts before relying on this document.

Last Updated: 2026-02-26