Unclaimed Property Considerations in Energy Sector M&A

 
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Originally published in Transaction Advisors

Authored by Robert Tucci and Jim Weigand

Cost control initiatives and a general rebound within the energy industry has led to a significant uptick in M&A activity. This uptick in M&A has also increased the potential risk of these companies inadvertently acquiring significantly aged unclaimed property.

Unclaimed property is typically defined as any tangible or intangible property that is held, issued or owed by a company (the holder), in the course of its business that has remained unclaimed for a specific period of time (the dormancy period), by the rightful owner.

Once the dormancy period has passed without the company receiving any communication from the owner, the property may become subject to escheat and the holder may have a responsibility to report the property to the appropriate state.

Typical examples of unclaimed property for most companies include uncashed trade payable and payroll checks, unresolved customer credit balances, uncashed dividend checks and, for O&G companies, revenue suspense balances.

Companies are required to file unclaimed property reports annually in all jurisdictions where they have an obligation to do so, using a set of priority rules established by the Supreme Court years ago to determine which state has jurisdiction over items of unclaimed property.

In the oil & gas industry, liabilities are often unknowingly acquired in conjunction with revenue suspense balances. For example, in addition to acquiring wells, a company may “receive” past due revenue suspense balances that the seller may not have reviewed in some time.

Unfortunately, the changes within the oil & gas industry during its recovery have generated increased attention from state unclaimed property administrators and third-party auditor firms, leading to an increase in the risk of an unclaimed property audit.

In order to reduce the risk of acquiring unknown liabilities along with a target conducting exploration and production operations, it is important for acquirers to make sure the company’s due diligence process adequately assesses a target company’s level of compliance with its unclaimed property reporting responsibilities.

Some of the issues an acquirer should consider in its due diligence process specific to a target conducting exploration and production operations include how the target applied the various jurisdictions “pay to current” rules and how the target addressed and processed royalty-interest splits across many successive generations of heirs, among other considerations.

If any potential areas of exposure are uncovered, the acquirer should address them before the close of the transaction.

 

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