Jon D’Amato is the Managing Partner at MarketSphere. He is a sought-after subject matter expert and guest speaker at conferences nationwide.
U.S. merger and acquisition activity has historically followed market cycles, with periods of renewed confidence often driving significant rebounds and increased consolidation. As companies find themselves involved in M&A activity, considering the unclaimed property consequences can help avoid surprises after the deal closes.
Common Unclaimed Property-Related Risks
If the deal is an asset sale, the acquiring entity will not likely inherit the acquired organization’s unclaimed obligations. However, if it is structured as a stock sale, such liabilities typically transfer to the new or acquiring company. Including language in the purchase agreement that addresses these concerns can avoid uncertainty regarding unclaimed property risk. Organizations considering M&A transactions should also evaluate common unclaimed property-related risks, such as:
• Historical noncompliance: If the company being acquired has either failed to consistently or fully report unclaimed property, the acquiring company may be responsible for past unreported property, along with potentially substantial interest and penalties.
• Lost records, staff and reporting history: Even if the acquisition target has a sterling unclaimed property compliance history, that track record is only as good as the acquiring company’s ability to prove it. Have records been retained, and will they be available, accessible and searchable after the M&A transaction?
• Maintaining compliance and transitioning unclaimed property functions: It is unlikely that both the acquired and acquiring companies have identical systems and processes. When the transaction closes, those differences can make it especially challenging to ensure unclaimed property compliance functions continue seamlessly.
• Audit risk: Companies involved in M&A transactions often become audit targets. States monitor such activity and may be inclined to scrutinize the entities’ compliance with unclaimed property requirements. Audits can span several years and are resource-intensive and costly.
The Importance Of Taking Proactive Measures
During due diligence, it is helpful to have a standard process in place to review and address unclaimed property issues. Including a knowledgeable unclaimed property professional in the M&A process can help anticipate and work through solutions to head off potential problems (full disclosure: MarketSphere offers this service).
Conducting a pre-acquisition risk assessment can be especially beneficial. This process gives the acquiring company the opportunity to understand the risk and identify unresolved unclaimed property liabilities by gathering readily available demographic information, including:
- Industry
- Legal entity structure (state of formation, dates of formation, operational entities)
- Prior M&A history
- States with operations or business activity (retail locations, customers, vendors, employees, etc.)
- Entity size (revenue, number of customers, etc.)
The risk profile can be refined by gathering information about key accounting policies and procedures, as well as the current and historical unclaimed property process.
Once the risk profile is understood, the acquiring company’s key accounting records should be reviewed to quantify the potential unclaimed property liability. Additional analysis should be completed to account for penalties and interest, and if applicable, estimations for historical periods where required records are not available.
The Strategic Value Of Unclaimed Property Assessments
Getting a thorough picture of the acquisition target’s unclaimed property compliance via a risk assessment helps the acquiring company:
1. Account for noncompliance costs in the purchase price and purchase agreement. It’s best to know up front that the acquisition is likely to result in costs to correct insufficient unclaimed property practices, penalty and interest assessments, or estimated liability due to unavailable documentation.
2. Identify data issues and establish resolution efforts before the deal closes. Finding sources of unclaimed property liability before the transaction is complete provides an opportunity to perform outreach, resolve past liabilities, and fix data and accounting errors.
3. Plan for post-transition efforts. It is helpful to plan for how the transition will affect the unclaimed property team and processes, the cost and effort of integration, and any audit risk mitigation work resulting from the transaction. The assessment also offers a chance to consider the need for transaction service agreements.
The Potential Liability Of Employee Retirement Plans
Employee retirement accounts are a noteworthy source of potential unclaimed property liability. When going through an M&A transaction, companies must establish how they will handle the plans for the company being acquired. Plans can be merged or managed separately, or the acquired company’s plan can be terminated.
When the choice is made to terminate a plan, the administrator must contact plan participants with instructions for rolling over their account balance to another plan or taking a distribution. When participants fail to respond, the administrator faces a dilemma of how to properly handle their accounts.
The Department of Labor offers guidance for such scenarios. Depending on circumstances, plan fiduciaries may consider escheating missing participants’ retirement balances. However, such decisions should not be taken lightly, as compliance with the Employee Retirement Income Security Act of 1974 requirements must be maintained.
Unclaimed Property Post-Acquisition Considerations
Post-acquisition, start by reviewing the acquired company’s compliance history, existing liabilities and internal processes to identify gaps and determine next steps. Even if the acquired entity is not in compliance with unclaimed property laws, there’s still time to take corrective action.
Some states offer amnesty programs, often called voluntary disclosure agreements, to encourage property holder compliance. As an incentive to participate, states usually offer penalty and interest assessment waivers.
Even with thorough pre-acquisition planning, much work remains once the deal has closed. Post-acquisition tasks include:
• Identifying and maintaining records and systems needed for future reporting and mitigation efforts
• Determining whether future unclaimed property report filings will be separate or consolidated
• Training the unclaimed property team
• Meeting with third-party administrators to confirm an understanding of processes and contracts
• Performing advanced outreach campaigns to reconnect with vendors and/or customers
• Updating policies and procedures to close gaps
• Beginning risk and exposure mitigation efforts
• Offsetting costs with corporate asset recovery efforts or clawback of overreporting
Protecting Your Investment In M&A Deals
Mergers and acquisitions are fraught with unclaimed property risk. Understanding the potential sources of this risk, conducting a thorough pre-acquisition assessment to identify potential issues in advance, and incorporating this knowledge into negotiations can mitigate the likelihood of costly surprises after the deal closes.
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