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Mergers, Acquisitions and….Unclaimed Property?: Avoiding Unknown Liabilities in M&A Transactions

By: Matthew B. Chenowth |

While the duty of corporations and other business entities to report and remit unclaimed property to the states has long been established, there has been an increased focus on unclaimed property in recent years as states seek to escheat unclaimed property as a way of generating revenue without increasing taxes.  A variety of techniques have been employed by the states to do this, including new laws, shortened dormancy periods, the offering of formal and informal voluntary disclosure programs, and the more contentious use of third-party auditors conducting multi-state examinations.  State enforcement activities and audit targeting with respect to unclaimed property compliance take into account many different variables, not the least important of which is a company’s M&A activities spanning as far back as the 1980s.

Unclaimed Property:  A Brief Primer

While the exact parameters of what constitutes unclaimed property vary from state to state, unclaimed property generally consists of a wide range of both tangible and intangible property held by a business.  Once the business has held the property for a statutorily mandated holding period (the dormancy period) without communication from the true owner, it becomes subject to escheat.  Examples of unclaimed property may include uncashed rebate checks and other customer credits, unused gift certificates and gift cards, uncashed employee payroll checks, uncashed vendor checks, and uncashed dividend checks and the underlying stock or other evidence of an ownership interest in the business.

Companies are required to report unclaimed property in accordance with a set of priority rules established long ago by the Supreme Court.  The first-priority rule provides that unclaimed property escheats to the state of the apparent owner’s last known address, as shown on the company’s books and records.  The second-priority rule provides that the unclaimed property escheats to the state of the company’s incorporation if:  (1) the apparent owner’s address is unknown, (2) the last known address is in a foreign country, or (3) the last known address is in a state that does not provide for escheat of the property in question.[1]  States have the ability to audit companies to determine their compliance with unclaimed property reporting obligations and can assess penalties and interest, in addition to requiring payment of unreported amounts, for failure to comply.

M&A Transactions:  A Company’s Time in the Spotlight

M&A transactions are often well-publicized due to the transaction size, stock market activity following announcement of the transaction, and impacts on affected communities and levels of employment.  Such transactions do not, in and of themselves, create unclaimed property reporting obligations that do not already exist prior to the business combination.  However, a company’s time in the public eye can bring greater scrutiny from state unclaimed property administrators and third-party auditors, thus making it more likely that an acquirer will be selected for an unclaimed property audit following the closing of the transaction.  These administrators and auditors generally focus on items such as whether the predecessor company properly reported unclaimed property, whether it wrote off credit balances and other obligations, and whether shares or other equity interests were exchanged as part of the transaction consideration.

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