Mergers & Acquisitions, Exposing the Unexposed Risk

By Gary Joseph – Senior Manager, Consulting & Advisory Services Team, and Cornel Lupul – Senior Manager, Consulting & Advisory Services Team

March 24, 2020


The inherent unclaimed property exposure associated with mergers and acquisitions (“M&A”) is nothing to ignore. Many companies have found themselves the unfortunate inheritors of past due unclaimed property obligations that were not accounted for throughout purchase negotiations. For those process owners who are tasked with maintaining unclaimed property compliance, the mere mention of their company undergoing an M&A transaction may trigger stress- induced panic attacks.

Whether you’re a domestic energy company preparing to acquire the assets from the competitor across the street, or an international company considering a gargantuan merger with a US based company, the materiality of unclaimed property exposure should definitely be on your radar. The predominate M&A transactions are stock or asset acquisition. The acquired company may live on or merge into the acquiring entity.

Each M&A transaction has its own manner in which unclaimed property liabilities can be inherited.

Stock Acquisitions

When companies acquire an entity in its entirety, the acquired entity’s assets and liabilities are wholly absorbed. With the absorption of the acquired entity comes inheritance of the entity’s historic obligations to payees – many of which may be unclaimed property. As the date of acquisition does not restart the dormancy period, the dormancy clock continues forward until the property is ultimately reported to the correct jurisdiction. It may take a significant amount of time to consolidate the general ledgers of the entities, and familiarize the applicable process owners with the acquired entities’ procedures and practices. Because of this, the challenge of achieving compliance with each applicable jurisdiction’s unclaimed property statute may seem insurmountable.

Many companies inherit unclaimed property exposure that they weren’t aware of due to the acquired entity’s practices, such as voiding liabilities and crediting to miscellaneous/ other income. In such instances, whether the liability was justifiably voided or not, the risk of exposure increases as this could be flagged as unclaimed property should the entity be audited.

Asset Acquisitions

Asset acquisitions occur more frequently than any other M&A transaction types. This is due to the fact that this transaction type’s impact is limited to a component or variable of an entity rather than an entire business. For instance, companies in the energy sector purchase or sell leased assets at a very high rate. In this type of transaction, a portion of the entity’s entire lease portfolio is sold rather than the entire portfolio. Additionally, the terms of sale may provide for the transfer of historic liabilities between the entities.

Another form of this acquisition type comes through the sale or purchase of a business subsidiary. Under this transaction type, the assets and/or liabilities accompanying the divested subsidiary may be limited depending on the terms of sale. For instance, a company may divest a subsidiary and include all rights and obligations to assets and liabilities in the sale, with the exception of its operating (“cash”) accounts. In such a transaction, the subsidiaries’ accounts receivable and prepayments (“deferrals”), may transfer over to the acquiring entity. The acquiring entity may be liable for any unclaimed accounts receivable overpayments or unapplied deferrals.

Identifying and Mitigating the Risks

All acquiring companies perform a certain level of due diligence prior to signing the purchase agreement. Thorough pre-acquisition due diligence can help identify unclaimed property compliance risks. One of the items on the due- diligence checklist should include an evaluation of how unclaimed property compliance is governed by the company to be acquired. If you’ve already signed the purchase agreement and the deal is closed, it may not be too late.

Why is this so important?

  • There may be hidden/unknown past due liabilities that are not evident by just reviewing the balance sheet. Liabilities may have been written off in prior years and may resurface during an unclaimed property
  • There could be an inventory of old outstanding checks and credits due to customers. Old liabilities could result in interest and penalties due to various

So how can you identify these potential risks? Here’s what can be done…

  • Review the unclaimed property reporting history of the entity you are acquiring. If there is no history or if it’s limited to one state or property type, there’s a strong chance of unclaimed property risks.
  • Determine if there have been any prior unclaimed property audits
    • What states were involved?
    • What were the results?
    • Maintain copies for future
    • Past audits could indicate stronger
  • Were any voluntary disclosure agreements filed and completed with any states?
    • How long ago?
    • Which years were included?
    • Which property types were included?
    • How much was reported?
    • Maintain copies for future
    • Past voluntary disclosures could also indicate stronger compliance
  • Determine what unclaimed property policies and procedures were in place prior to and up to the time of
    • Robust procedures or a lack there of are a good indication of whether there might be some hidden
  • Review current outstanding checks and void check registers to identify checks outstanding greater than one year and patterns for voiding checks aged after a certain period outstanding.
    • For example, are outstanding checks aged greater than three years from the date issued still being carried? Are they voiding checks after they remain outstanding greater than 180 days?
    • If either answer is yes, there could be an indication of potential unclaimed property
  • Review accounts receivable aged trial balances to see how credit balances are
    • For example, are credit balances allowed to ride on customer accounts indefinitely? Are they used to offset future activity of the customer? Or are they written-off against the allowance for bad debt?
    • Answers to these questions can indicate additional potential unclaimed property

In order to effectively perform all of the above, it is crucial that these due diligence efforts be completed by individuals with knowledge of unclaimed property compliance. This way, accommodations can be proactively included within M&A agreements to protect the acquiring company and address potential unclaimed property risks before they become material issues.

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