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1/13/22 7:39 AM

Mergers & Acquisitions: Consider Unclaimed Property

by Luke Sims and Heather Gabell

merger 2Merger and acquisition (“M&A”) activity is as dynamic as it ever has been even during the on-going global pandemic. The unclaimed property consequences of M&A transactions, however, tend to be an afterthought. Even when unclaimed property compliance is identified as a potential issue, it is most often only reviewed at a very high level, which may result in future problems.  There are generally two types of takeover activity – (i) an asset sale, and (ii) a stock sale. In an asset sale, the acquiring entity tends not to inherit the acquiree's historical unclaimed property obligation since only the assets are being acquired (though this is not always the case). Conversely, in a stock sale, the acquiring entity will likely inherit the acquiree's historical obligations, including any unclaimed property liability. To avoid uncertainty regarding historical amounts due and properly consider the unclaimed property risk of the acquisition, the purchase and sale agreement should include language that addresses these concerns.

Plan to Acquire?

The ideal way to minimize exposure related to inheriting an acquired entity’s unclaimed property liability is to conduct an unclaimed property assessment during the due diligence stage. Depending on the timing of the acquisition, this can either be assessed at a high-level with specific reserve language included in the purchase and sale agreement, or can be calculated with a more thorough review and any unclaimed property exposure identified can be considered within the purchase price.

The acquiring entity should identify whether any common risk indicators exist, with respect to the company being acquired, including:

• No or limited unclaimed property filing history

• No unclaimed property policy and procedures

• Previous mergers and acquisitions

• Changes in accounting systems

• Record retention issues

• Prior data clean-ups resulting in profit and loss profits impacts

• Stale credit balances present on the books and records in "traditional" unclaimed property areas (e.g. accounts payable, accounts receivables, gift cards, payroll, etc.)

• Large volumes of uncashed and/or voided checks

• Entities or locations operating or domiciled in more aggressive jurisdictions

If any of these risk factors exist, the acquiring entity should determine whether a high-level or comprehensive pre-merger unclaimed property assessment is merited. This provides the opportunity to dive into the accounting records of a potential acquisition target and determine liabilities that may not have been appropriately identified and resolved. A pre-merger review can also provide remediation and mitigation options to clean up the records and minimize unclaimed property liability (which may also be an opportunity to rekindle relationships with prior customers and vendors to drive opportunities for business expansion). Lastly, an assessment can hep you understand and prepare for the efforts to integrate the target into your current unclaimed property process and account for those costs in the transaction, integration budget, and any transition agreement discussions.

Acquisition Target?

If your company is not compliant with state unclaimed property laws and is the target of an acquisition, we recommend reviewing our first-time filers considerations blog. If your business has never filed an unclaimed report and you suddenly file one, if there is a gap in your reporting history, or if you are underreporting or excluding property types that are typically reported by other holders in your industry, you could be raising an audit red flag. Other red flags include filing unclaimed property reports solely to your business’s state of incorporation or if there are errors in the reports or the related remittances.

Undertaking a risk assessment to determine your business’s potential unclaimed property liability, and the risk of potential penalties and interest assessments, is a valuable tool in your holder toolbox – one that should be employed before filing reports, should you find yourself in any of the above situations.

A risk assessment allows the business to review the types of unclaimed property generated across all lines of business, including all related legal entities, such as subsidiaries. Your business’s unclaimed property processes should be reviewed from top to bottom, start to finish. This includes how unclaimed property is identified, the types of owner communication sent across the enterprise, the due diligence process, and whether appropriate supporting documentation is retained.

One significant factor to consider is whether there are policies and procedures in place that document each step in the unclaimed property cycle. Accounting methods and processes should also be reviewed for errors, gaps, and potential areas of exposure. For example, whether unapplied funds are written off or taken back into income and if a standard process exists for voided checks or the reporting of stale credits.

Audit Risk

Whether you are the acquiring entity, or the entity being acquired, an additional factor to consider is that in today’s unclaimed property environment, companies that have completed recent mergers or acquisitions often find themselves at greater risk of unclaimed property audits. Consequently, resolving any historical issues can significantly reduce the risk of an unclaimed property audit. Mergers and acquisitions involving publicly traded corporations are especially on the states’ radar and present unique issues. Public company mergers and acquisitions often involve individual shareholders with records generally maintained by third-party administrators (transfer agents). Specific programs are required to allow the shareholders of the company being acquired to exchange their shares. To ensure appropriate procedures are in place, the acquiring entity should consult with their outside advisors to determine the best way to resolve any unclaimed property issues that may result from any unexchanged shares.

Ultimately, if unclaimed property was not addressed prior to the merger/acquisition, it should be on the short list of processes to be reviewed as part of the integration. This will allow for the acquired entity’s unclaimed property processes, potential liabilities, and filing history to be evaluated to determine the most appropriate next steps for compliance. If the acquired entity is not compliant with unclaimed property laws, there is still the opportunity to mitigate risk by evaluating state amnesty (a.k.a, VDA) programs in an effort to mitigate audit risk and potential penalty and interest exposure.

In Summary...

Mergers and acquisitions present distinct unclaimed property challenges and opportunities. If your company is the acquiring entity, understanding the consequences of historical non-compliance of an entity being acquired can help to proactively mitigate inherited risk and provide an opportunity to integrate that risk into the transaction. If your company is a potential target for acquisition, compliance with unclaimed property laws can not only assist you with negotiations with the acquiring entity but can also make you a more attractive target for acquisition.

Contact MarketSphere to schedule a free consultation about making informed decisions and help you resolve any issues associated with mergers and acquisitions.

*Content contained in this article is considered accurate as of the publish date.

Topics: Compliance, Reporting, Best Practices