The following is a guest post from Kendall Houghton and Matt Hedstrom, partners at the law firm Alston & Bird. Opinions are the authors’ own.
Unclaimed property exposures can meaningfully impact the dynamics of mergers and acquisitions. Effective management of these issues during a deal and shortly thereafter is critical to effectively managing financial statements and financial reserves.
Often, they are an overlooked aspect of deals. And if addressed at all, they are typically lumped in with general tax provisions, which are insufficiently specific to adequately address these exposures.
The dollars at stake are often material and may affect a deal’s financial viability. We have been involved in several such deals, including one derailed by an unresolvable unclaimed property exposure exceeding $250 million.
Conducting proper due diligence for a deal enables buyers to negotiate favorable terms and appropriate remediation (if possible) that “right-size” the costs associated with the acquisition. Without the buyer considering the unclaimed property implications or otherwise conducting due diligence related to unclaimed property, targets that failed to quantify or reflect these exposures on their books may transfer both historical and future unclaimed property liability to the purchaser.
You can be sure that state compliance exams place a laser focus on this category of embedded liability.
One area that’s recently caught the attention of states is the healthcare sector, which — in addition to being an active M&A industry — faces an onslaught of multistate audits. The reviews frequently target overpayment balances (including both patient-pay and commercial-pay transactions) as well as unclaimed vendor payments and refunds.
The False Claims Act and whistleblower lawsuits are hidden risks for companies. These claims can meaningfully impact your financial statements, tripling the impact of missing these gaps. Two recent state FCA suits brought by New York and California based on whistleblower claims illustrate the exponential increase in stakes for any company holding unclaimed and unreported funds.
Role in company financial audits
State enforcement efforts have expanded and taken on a revenue-generation aspect that goes beyond the consumer protection policy underlying the state laws. States are increasingly imposing interest — as much as 12% a year in California, which estimates corporate compliance to be at only 15%, and up to 50% of property value in Delaware.
In the preceding 10-year period, such actions were rare and taken by only a handful of aggressive states. These dollars come out of your company’s own cash. Identifying these liabilities (often triggered by receipt of a multistate audit notice) may require financial statement disclosure or a reserve as it relates to potential interest.
Additionally, federal agencies have gotten into the investigation/enforcement game.
- In our experience, the Securities and Exchange Commission has for more than 15 years specifically tested SOX 404 controls that are designed to ensure a publicly traded company’s compliance with state unclaimed property laws.
- The Department of Justice has reviewed how corporations handle property titled to a U.S. agency or federal court, with an eye toward evaluating the potential to bring federal FCA claims which — like the state-adopted acts modeled on the FCA — up the ante to treble damages (tied to the value of property not returned directly to the federal agency or court rather than being reported to the states).
- The Office of the Controller of the Currency and the Financial Industry Regulatory Authority have focused on regulated companies’ unclaimed-property policy and procedures, evaluating their compliance with regulatory regimes and any adjunct consumer protection laws.
State financial services regulators, including in the context of money transmission licensure, are now asking for companies to provide unclaimed property policies and procedures.
The silver lining
CFOs who monitor this area of potential exposure can partner with their operations and compliance counterparts to score market gains that benefit a range of stakeholders.
- In one instance, we assisted a multinational company in resolving a complex regulatory challenge through the targeted escheat of inactive assets in the hundreds of millions.
- In the context of M&A, buyers should implement a due diligence process that expressly seeks information regarding unclaimed property.
- Many states provide for formal or informal voluntary disclosure programs that can mitigate the imposition of interest and penalties.
- Restructuring terms or operations can mitigate unclaimed property exposure.
The associated cost reductions of holder-designed and holder-implemented actions positively impact the audited financial statements and may enable a reserve to be reversed or reduced.
