When performing due diligence on a potential merger, it is easy to remember the big issues: review the financials with a fine tooth comb, perform a detailed tax analysis, meet with the leadership team to understand day-to-day operations. The checklist goes on and on. However, one area that is easily overlooked during this busy process is unclaimed property.
In a nutshell, unclaimed property is any tangible or intangible property of a person (or business) that is held by a business for a statutorily determined period of time without contact between the owner and the business holding the property. Once the statutorily determined period of time expires, the business holding the property has to make one final effort to contact the original owner before escheating the funds to the appropriate state. Common forms of property that become subject to state escheatment include, but are not limited to: uncashed checks, customer credit balances, accounts receivable credit balances, and gift cards.
Depending on how the acquisition is structured, the acquirer could inherit any potential unclaimed property held by the target. If the deal is a stock acquisition, then all liabilities, including unclaimed property reporting requirements, transfer to the new owner. There is also the possibility that an unclaimed property reporting requirement could transfer in an asset acquisition as well.
States have recently begun to perform unclaimed property audits with greater frequency, and public disclosure of M&A transactions could trigger an audit from the most aggressive states. As an acquiring business, it is important to know the target company’s unclaimed property filing history and accounting practices as it relates to uncashed checks, outstanding credit balances, and any other items that might become subject to state escheatment. It can save time and money in the future.