While mergers and acquisitions occur on a regular basis, the unclaimed property consequences of these transactions 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.
Types of Mergers and Acquisitions
There are generally two types of takeover activity – (i) an asset sale, and (ii) a stock sale. In general for an asset sale, the acquiring company tends not to acquire any historical unclaimed property obligation as it is only acquiring assets. However, in a stock sale, the acquiring company generally become responsible for any historical obligation. To avoid uncertainty regarding historical amounts due, the sale document should include language that specifically addresses this issue.
While the above approach has been the general position taken for merger and acquisition activity, it should be noted that Delaware has recently codified its position that the holder’s successor who has acquired “all or substantially all of the holder’s capital stock or assets, shall be responsible for fulfilling the holder’s obligation to hold for or pay or deliver property.”
The optimal way to avoid unclaimed property issues during a merger or acquisition is to conduct a thorough assessment of the current and historical unclaimed property processes, liabilities, and potential exposure of the company being acquired.
In general, the acquiring entity should identify whether any common risk indicators such as the following exist, with respect to the company being acquired:
- No filing history
- No unclaimed property policies and procedures
- Previous mergers and acquisitions
- Changes in accounting systems
- Record retention issues
- Record access issues
- Incomplete data issues
- Prior data clean-ups resulting in profit and loss impacts
- Unsupported write-offs
- Large credit balances in “traditional” unclaimed property accounts (e.g., accounts receivables, deposits, rebates, unmatched remittances, etc.)
- Large volumes of uncashed and/or voided checks
Should any of these risk factors exist, the acquiring entity should conduct a comprehensive pre-merger unclaimed property review. This will provide the opportunity to dive into the accounting records of a potential acquisition, and determine liabilities that may not have been appropriately identified and resolved. A pre-merger review should also provide remediation and mitigation options to clean up the records and minimize unclaimed property liability.
One additional factor to consider is that in today’s unclaimed property world, companies that have completed recent mergers or acquisitions often find themselves at greater risk of unclaimed property audits. Consequently, resolving any historical issues before an audit notice is received, can significantly reduce audit risk.
If unclaimed property was not addressed prior to the merger/acquisition, it should be on the list of processes to be reviewed as part of the integration of the two companies. This will allow for the acquired company’s unclaimed property policies and procedures and filing history to be evaluated for appropriate compliance.
Transactions Involving Publicly Traded Entities
Mergers and acquisitions involving publicly traded corporations present other issues as they 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 un-exchanged shares.
Mergers and acquisitions present their own unique unclaimed property challenges. By understanding the potential consequences of historical non-compliance of a company being acquired, the acquiring company can proactively determine the best steps to address this “hidden” problem. Engaging with an unclaimed property professional can assist you with making informed decisions and help you resolve any issues associated with mergers and acquisitions.