Entities that engage in merger and acquisition — or M&A — activity must consider what their unclaimed property risk and obligations will be after the purchase. During these transactions, unclaimed property responsibilities are too often overlooked, especially by those rarely completing such deals. However, considering the implications of the transaction and which party holds historical and ongoing unclaimed property liability can significantly reduce unexpected compliance issues in the future.
The following are several questions companies should ask during their M&A transaction to better understand potential problems stemming from the consolidation.
How Is the Deal Structured?
For equity and stock purchases, the acquirer typically assumes the historical and ongoing liability of the target. For asset acquisitions, they generally inherit unclaimed property liability only related to the assets pertaining to the transaction. The terms of the purchase agreement outline which pieces of the business are included.
Unclaimed property will rarely drive the deal’s structure and is often overlooked during the transaction’s due diligence phase. However, understanding the nature and structure of M&As help unclaimed property professionals identify the implications.
Is the Company to Be Acquired in Compliance?
Myriad companies simply do not understand their unclaimed property responsibilities — and are out of compliance as a result. Acquiring a company that has not properly reported unclaimed property to the states increases exposure for the purchaser and must be considered during the due diligence process.
What Records Will Be Available After the Deal Closes?
Access to records needed to establish unclaimed property liability could be limited following a deal’s closure. Even if these records were transferred, they might be poorly organized, making specific information all but impossible to locate. Verifying what records will be available — and in what format they’ll be in — helps anticipate unclaimed property issues likely to occur after the completion of an M&A transaction.
Are Procedures Documented and Adhered to?
It’s not particularly uncommon for an acquired company’s employees to be terminated or seek employment elsewhere upon their employer changing hands. If employees who were overseeing unclaimed property leave, the lack of continuity and loss of that knowledge increases the burden on whoever inherits their responsibilities — especially if procedures were not established or followed.
Are There Potential Penalties and Interest?
Penalties and interest can exceed liability if a company is not in compliance with unclaimed property or they cannot demonstrate as such. Some states are fairly aggressive in assessing interest and penalties in light of late filings. The significance of these potential costs should be considered during mergers and acquisitions.
How Significant Is the Risk of an Unclaimed Property Audit?
Unclaimed property auditors keep their fingers on the pulse of M&A news — and acquisitions can trigger an audit. If the target is a public or high-profile private company, risk can be especially high. Revenue data being readily available, heavy publication of the M&A transaction, and any of the transaction parties having a track record of not submitting unclaimed property reports to the states can also push them under the microscope. Ensuring all parties are in compliance is the optimal way to reduce the risk of an unclaimed property audit.
The best way to avoid issues pertaining to unclaimed property during a merger or acquisition is to conduct an assessment of the current and historical unclaimed property processes and potential exposure of the target.
Generally, the acquiring entity ought to identify whether common risk indicators exist:
- No or poor filing history
- Lack of or substandard unclaimed property policies and procedures
- Changes in accounting systems
- Record retention or access issues
- Prior data clean-ups that impacted profit or resulted in loss
- Unsupported write-offs
- Substantial credit balances in traditional unclaimed property accounts, such as accounts receivables, deposits, and unmatched remittances
- High volume of uncashed or voided checks
Stay Compliant With Help From Experts in Unclaimed Property Law
Mergers and acquisitions bring their own unique unclaimed property considerations to the table. By understanding the consequences of a company’s historical failure to comply, the acquiring entity can proactively determine the best steps to address the issue — and they don’t have to do it alone.
Partnering with an unclaimed property professional can help you make informed decisions, stay compliant, and reap the benefits of your M&A transaction — not suffer the consequences of hidden problems. For more information about our unclaimed property consulting and advisory services, get in touch with us today.