Unclaimed Property: The Best Forgotten Topic during M&A Due Diligence

Blog post by Moyer & Osibodu

The M&A Outlook Survey Results conducted by one of the Global Accounting firms expect 2013 to be a strong year for M&A activity, after coming off a rocky 2012.  Mergers and acquisitions (“M&A”) is an aspect of corporate strategy dealing with the buying, selling, and combining of similar or different companies that can help an enterprise grow rapidly or improve financial performance.  In most M&A transactions, a due diligence review is usually performed by the buyer once the buyer and seller have an initial agreement outlining the economic and general terms of the deal.  During the due diligence review, which serves to confirm all material facts with respect to the deal, the seller works exclusively with the buyer to complete an audit or review of the target company within a specified period of time – about 90 days or less. 

The period of time granted by a seller to complete the due diligence review usually varies based on the size and complexity of the target company and the involvement of third parties in the transaction.  Based on the time constraints and competing pressures, it is not uncommon to have due diligence omissions and mistakes, which could result in future headaches and costs after closing for the buyer.  Overpaying for a business is always of paramount concern for a buyer, however there are many other less obvious implications tied to due diligence omissions and mistakes that can be costly as well.

One costly due diligence omission is the seller’s potential unclaimed property exposure that the buyer inherits (i.e. successor liability doctrine), especially if the deal was a stock acquisition.  In general, unclaimed property are those outstanding obligations and transactions due to the seller’s customers, vendors, employees and shareholders (if publicly owned) that have gone unclaimed by their rightful owners after a specified period of time. When the owners cannot be located, states’ unclaimed property laws require companies to report the unclaimed property to the state of owner’s last known address or, if there is no last known address, to the company’s state of incorporation.  Some examples of unclaimed property are uncashed checks, outstanding credits, unapplied deposits, insurance proceeds, unexchanged shares, unredeemed gift cards, etc.

 Many states have not aggressively pursued the collection of unreported unclaimed property until recently, and as a result, companies that have failed to comply are now faced with unexpected compliance responsibilities.  With the increase enforcement and the potential for multimillion dollar audit assessments, it behooves a buyer to review the target’s unclaimed property historical compliance and potential exposure as part of the overall acquisition due diligence review.  Before closing the deal, the buyer should ensure that there is adequate indemnification protection to address any potential unclaimed property exposure, especially if the target is incorporated in states such as Delaware.

 M&A due diligence should be conducted properly to provide buyers with a validation of purchase price and to identify potential deal risks, which could include the target’s unclaimed property exposure.  In addition, sellers that are not in compliance with the unclaimed property laws should consider participating in the states’ voluntary disclosure or amnesty programs.

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