Unclaimed property reporting for newly acquired companies

The increase in merger and acquisition (M&A) activity in the past few years has increased the risk that an acquisitive company may have inadvertently inherited unclaimed property liabilities along with an acquired entity. Whether or not an acquiring company was able to complete a thorough review of a target’s unclaimed property liabilities during the due diligence process, the new parent company is now responsible for ensuring that the acquired entity remains in or gets into compliance with state unclaimed property reporting requirements.

The fall unclaimed property filing season is around the corner and now is a good time for companies with an acquisition history to review the records of their acquisitions and determine the best method and timing to include newly acquired entities into their existing unclaimed property compliance process.

What is unclaimed property?

Unclaimed property is usually defined as any tangible or intangible property that is held, issued or owed by a company, known as the “holder,” in the normal course of business that has remained unclaimed for a specific period of time (the dormancy period), by the owner of the property. All U.S. states, several U.S. territories and certain Canadian provinces have established unclaimed property reporting requirements.

Typical examples of unclaimed property include uncashed payroll, vendor and dividend checks; accounts receivable net credit balances; unused stored value cards; and royalty suspense balances. Even the underlying stock of a company can be deemed unclaimed property if it looks like the owner has abandoned the shares (e.g., undeliverable mail, failure to exchange or redeem shares after a merger or acquisition). In addition, a company’s unclaimed property liability is not limited to balances reflected on its current books and records but may also include items that were previously voided, written off, and/or taken into income in error (e.g., uncashed checks, small dollar credit balances).

Once the dormancy period has passed without a holder receiving any contact from the owner, it becomes subject to escheat and the company may have an obligation to report the property to the appropriate jurisdiction as established by the Supreme Court: (1) the first priority rule provides that unclaimed property should be reported to the state of the owner’s last known address, as shown on the holder’s books and records; or (2) the second priority rule provides that if the apparent owner’s address is unknown, the last known address is in a foreign country, or if the last known address is in a state that does not provide for escheat of the type of property in question, then property should be reported to the holder’s state of domicile, typically the state of incorporation/formation.