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Understanding Stock Pledges And Escrow Agreements

By:David Gass

Stock pledges and Escrow agreements are quickly becoming the foundation on which some industries operate. Below are explanations of how these contracts are carried out and what they entail.

Stock Pledges:
A Stock Pledge is the transfer of stocks against a debt. It is an agreement. The debtor pledges the stocks as an asset against the amount of money taken from a lender and promises to return the amount. The debtor pledges the stocks as a security against the debt. According to the law, after the payment of the obligation the lender must return the stocks to the debtor and the agreement stands void.

In the condition of a default on the debt, the lender is authorized under the law to auction the stocks or sell simply sell them to retrieve the due. The precondition to the agreement is that stocks pledged must be valid and free from liens and encumbrances. Also the debtor holds all the rights to the stocks until the default or the expiration of the deadline. Under the agreement, the debtor cannot assign the pledged share to any other party.

Escrow Agreements:
An Escrow Agreement is a legal term, which can be understood by dividing it into two separate terms, Escrow and Agreement. Escrow can be goods, money, or a written document, held by a third party, pending the fulfillment of certain conditions. Under the Escrow Agreement the owner of the goods or a written document provides the Escrow agent with a copy of the material that he intends to protect. In the event of a default or any other failure of the owner to meet the contractual agreement, the Escrow agent releases the material to the licensee.

The Importance Of An Escrow Agreement:
The importance of an escrow agreement is more pronounced in the case of the IT industry where it is the most in context in today’s society. The Escrow Agreement is a common practice in outsourcing industries such as software, where the research or the development work is outsourced to the third party. In this case the Escrow Agreement facilitates the business transaction. An Escrow agreement enables the licensee to continue with normal business even though the obligation wrests with the third party. In case of an event triggering the Escrow Agreement into action, the Escrow agent releases the deposited material to the licensee in accordance with the agreement for minimizing the loss caused due to the breach of the agreement or the inability to fulfill the obligation

The implementation of the Escrow Agreement with regards to the software industry provides an opportunity for the third party to gain access to the source codes of the software in case the licensor is churned out of business. The Escrow Agreement is the foundation upon which the software industry is working on. The Escrow Agreement between the software company and the vendor facilitates the business transactions and provides a security to both the parties.

Article Source: http://www.redsofts.com/articles/

David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com

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