The National Law Forum

Unclaimed Property in M&A Transactions: The Potential for an Unwelcome Surprise

The National Law Review recently published an article written by Jonathan I. Lessner, Marc J. Musyl, and Sarah Niemiec Seedig of Greenberg Traurig, LLP regarding M&A Transactions:

As the economy continues to recover, an increase in M&A activity is expected. A target company’s historical compliance with unclaimed property laws is an important, but often overlooked, area for due diligence in M&A transactions. A target company’s failure to comply with unclaimed property laws can potentially create multi-million dollar exposure for the buyer. The transaction itself may have the effect of drawing the attention of state unclaimed property regulators and third party contingency fee auditors. There are various ways, as discussed below, for the buyer to control or limit its potential exposure.

A Brief Introduction to Unclaimed Property

While the exact parameters of what constitutes “unclaimed property” vary from state to state, unclaimed property generally consists of a wide range of both tangible and intangible property held by a business. Once the business has held the property for a statutorily mandated holding period without communication with the owner, it becomes unclaimed property subject to escheat. Some examples of unclaimed property include: un-cashed rebate checks and other customer credits; unused gift certificates and gift cards; un-cashed vendor checks; un-cashed dividend checks; insurance proceeds; and the underlying stock or other evidence of an ownership interest in a business.

Businesses are responsible for reporting unclaimed property to the states on an annual basis in accordance with priority rules established by the U.S. Supreme Court. The first-priority rule is that unclaimed property escheats to the state of the apparent owner’s last known address, as shown on the company’s books and records. The second-priority rule provides that the unclaimed property escheats to the state of the company’s incorporation if: (1) the apparent owner’s address is unknown, (2) the last known address is in a foreign country, or (3) the last known address is in a state that does not provide for escheat of the property in question. As the unclaimed property laws vary from state to state, the outcome of this jurisdictional priority analysis can have a meaningful impact on the property required to be escheated. Some states even require negative reports to be filed, stating that no unclaimed property is due and owing to the state.

The Importance of the Transaction’s Structure

A transaction’s structure can significantly impact the unclaimed property exposure that a buyer may inherit from the target. In an asset purchase, the buyer acquires only those liabilities specifically identified in the purchase document. While it is still possible for the buyer to acquire certain unclaimed property liabilities in an asset purchase (such as those associated with bank accounts, accounts receivable, or gift cards), the buyer’s potential exposure for the target’s failure to comply with unclaimed property laws will typically be less than in a stock purchase where the buyer generally acquires all of the target’s disclosed and undisclosed liabilities, including its unclaimed property liabilities.

In addition, unclaimed property can arise in the context of a merger involving a share exchange, where the former stockholders (who now cannot be located) fail to receive the shares issuable to them in the merger. At least one SEC reporting company recently entered into a settlement with the State of Delaware as a result of more than four million shares which were reserved for issuance in the merger, but which were not claimed by former stockholders. The settlement resulted in the SEC reporting company making a $20,000,000 cash payment to the State of Delaware.

The Impact of a Target’s Failure to Comply with Unclaimed Property Laws

There are a number of factors that can make a target’s failure to comply with the unclaimed property laws very costly for a buyer. In many states, there is no statute of limitations on unclaimed property. As a result, even voluntary compliance arrangements with the states can result in a look-back period of five to ten years or even longer. Audit look-back periods can be significantly longer. Oftentimes, the buyer will not have complete records from the target. In such situations, state regulators in a post acquisition audit have been known to use various formula to estimate the liability. The target may have made acquisitions itself prior to being acquired, further compounding the potential for non-compliance. Once interest (and potentially even penalties) is added to the equation, a potential multi-million dollar exposure can be created — definitely an unwelcome surprise for the buyer.

Methods for Avoiding an Unwelcome Surprise

Prospective buyers can take proactive steps to manage and minimize potential exposure. Below are a few such steps:

Structure of Transaction. If possible, buyers should consider structuring a transaction as an asset purchase to minimize the unclaimed property liabilities inherited from the target. The purchase document should be carefully drafted and negotiated to leave any unclaimed property liabilities out of those liabilities acquired by the buyer.

Due Diligence. Oftentimes, unclaimed property compliance is overlooked in the due diligence process. As a starting point, buyers should request copies of the target’s unclaimed property policies and procedures, a description of the target’s unclaimed property due diligence process, copies of historical unclaimed property reports filed by the target, correspondence with state unclaimed property regulators, and any unclaimed property audit notifications. Given the current interest, especially in Delaware, in equity property (e.g., stock, dividends, etc.), buyers should make sure the target’s response includes materials that permit the buyer to determine the target’s compliance for this property type, especially because this information may be in possession of the target’s transfer agent or other third party. Depending on the materials provided, additional due diligence may be warranted.

Representations and Warranties. Unclaimed property is not a tax and thus is typically not covered by the tax representations and warranties. The purchase document should include specific representations and warranties of the target, backed by an indemnity and an escrow if possible, regarding the target’s historical unclaimed property compliance. The target’s indemnity obligations should be excluded from any basket and cap exceptions applicable to indemnities. Most representations and warranties only survive for a specified period following the closing of the transaction. However, as discussed above, oftentimes there is no statute of limitations with respect to unclaimed property compliance. If possible, the target’s representations and warranties regarding unclaimed property compliance should survive closing indefinitely. Additionally, even if the target is current in its compliance, provision should be made for property still in its dormancy period, i.e., property that may be abandoned but not yet subject to escheat.

Voluntary Compliance Initiatives. If it is determined that the target is not in compliance with the unclaimed property laws, the buyer should consider whether voluntary compliance is a viable option. Many states offer voluntary compliance programs with limited look-back periods.

5th Product and Pipeline Enhancement for Generics Conference, July 17-19, 2012

The National Law Review is pleased to bring you information about an upcoming conference:

5^th Product and Pipeline Enhancement for Generics Conference, July 17-19, 2012 in Washington, DC

The marcus evans 5th Product and Pipeline Enhancement for Generics Conference will host industry leaders within the Generic Pharmaceutical, Branded Pharmaceutical and API industries operating globally as they share best practices, strategies and tools on portfolio management and business strategy, as well as legal, intellectual property and patent issues.

Featuring case studies from leading generics experts, including:

Richard Dicicco, Chairman at Harvest Moon Pharmaceutical
Dr. Vijay Soni, Executive Vice President, IP, BD and Product Portfolio at Glenmark Pharmceuticals
Candis Edwards, Senior Vice President, Regulatory Affairs & Compliance at Amneal Pharmaceuticals
Gregory Fernengel, Senior Intellectual Property Counsel at Ben Venue Laboratories, Inc.
Markus H. Meier, Assistant Director, Health Care Division, Bureau of Compensation at Federal Trade Commission
Vishal K. Gupta, Chief Scientific Officer, Vice President, Research & Development at CorePharmaLLC
Sherri Leonard, VP, Business Development and Portfolio Management at OrchidPharma, Inc.

Attendees will leave this conference with a better understanding of:
1. Current and upcoming FDA proposals and regulations to ensure compliance
2. Innovation in the drug pipeline
3. Portfolio management and business development
4. How to protect the company’s patents’ and intellectual property
5. Expanding the commercial reach through biosimilars
6. Market changes and future industry developments

Testimonials:

“Great in-depth coverage of hot topics in an intimate setting that lent itself to excellent discussions.” – Novartis

”Terrific chance to connect with other industry traders to exchange ideas and explore solutions to the challenges we all face.” – OrchidPharma

E-Verify: North Carolina and Federal Requirements

An article by Jennifer G. Parser of Poyner Spruill LLP regarding E-Verify appeared recently in The National Law Review:

North Carolina’s Rule

Last June, 2011, North Carolina joined the ranks of an increasing number of states requiring the use of E-Verify. E-Verify is a free internet-based system that allows employers to determine employment authorization by checking an employee’s documentation against Department of Homeland Security (DHS) and Social Security Administration (SSA) databases. It applies to certain federal contractors, but also is being adopted by states, regardless of federal contracts being involved.

North Carolina counties, cities and public universities were required to register and participate in E-Verify by October 1, 2011. Private sector employers’ participation in E-Verify is phased in more slowly, according to the employer’s size:

Employers with 500 or more employees will be required to participate by October 1, 2012;
Employers with 100 or more employees will be required to participate by January 1, 2013; and
Employers with 25 or more employees will be required to participate by July 1, 2013.

Federal E-Verify Rule

Private businesses in North Carolina are required to verify the employment eligibility of current employees regardless of the above phased-in legislation if the employer has been awarded a federal contract on or after September 8, 2009 that contains the Federal Acquisition Regulation (FAR) E-Verify clause. Such federal contractors must enroll in E-Verify within 30 days of the contract award date regardless of the business’ size. After enrollment, the federal contractor has 90 days to use E-Verify. The federal contractor must then use E-Verify for new hires within 3 business days of the employee’s start date.

E-Verify must also used for existing employees assigned to work on the federal contract within 90 days of the federal contract being awarded or within 30 days of the employee’s assignment to work on the federal contract, whichever is later. For existing employees to be required to be run through E-Verify, the employee must perform substantial work under the federal contract which does not include administrative or clerical functions. E-Verify does not apply to work that is performed outside the US, if the term of the federal contract lasts less 120 days, or if the federal contract pertains to commercially available off the shelf items. A “commercially available off the shelf item”, known COTS, is something generally sold in substantial quantities in the open market. A few examples are computer software, computer hardware and construction materials. Also, industries that hire agricultural workers for 90 days or less in a 12 month period are exempt from enrolling in Federal E-Verify.

Unless the subcontractor is a supplier and not subject to the E-Verify federal contractor rule, a federal contractor must also ensure that its subcontractors enroll in and use E-Verify if:

The prime contract includes the Far E-Verify clause,
The subcontract is for commercial or noncommercial services or construction,
The subcontract has a value of more than $3,000, or
The subcontract includes work performed in the United States.

A Few Important Rules for Any Business Enrolled in E-Verify

Post the notices that the business is now enrolled in E-Verify alongside antidiscrimination notices by the Office of Special Counsel for Immigration-Related Unfair Employment Practices
When completing the I-9 form, the employee’s choice of a List B document must contain a photograph in order to be run through E-Verify
Do not use E-Verify selectively
Do not use E-Verify to pre-screen job applicants; it is used post-hiring
Do not ask for additional documentation in the event of a “Tentative Nonconfirmation” by E-Verify: allow the employee time to correct any error by visiting the local SSA office
Do not terminate or take adverse action against an employee who receives a tentative nonconfirmation: allow them time to correct the error

Penalties, Federal- and State-Imposed

There have been substantial fines levied for immigration-related offenses by Immigration and Customs Enforcement (ICE) against employers enrolled in E-Verify, proving enrollment in E-Verify will not save an employer from potential violations.

Civil penalties for violations of North Carolina’s E-Verify law are assessed by the NC Commissioner of Labor and range from $1,000 to $10,000.

E-Verify Link

Unless already enrolled in E-Verify as a federal contractor or subcontractor or having elected to do so on a voluntary basis, North Carolina employers with 25 or more employees would do well to visit the E-Verify website. Click here. At this point, there is time to become acquainted with E-Verify and its enrollment procedures before registration becomes mandatory.

NY City Bar White Collar Crime Institute

The National Law Review is pleased to bring you information about the inaugural White Collar Crime Institute, on Monday, May 14, 2012 from 9 a.m. to 5 p.m. in New York City, NY.

This excellent review of developments in criminal and regulatory enforcement has been organized by our White Collar Criminal Law Committee, chaired John F. Savarese of Wachtell Lipton Rosen & Katz. Our program will feature keynote addresses by Preet Bharara, United States Attorney for the Southern District of New York, and Eric Schneiderman, Attorney General of the State of New York. The panels on key legal and strategic issues will include senior government officials, federal judges, academics, general counsel of leading New York based corporations and financial institutions, and top practitioners in the field. We have crafted the program to maximize their value for white collar practitioners and corporate counsel.

Plenary sessions will focus on:

Providing perspectives of top general counsel concerning the challenges they confront in this new era of expanded corporate prosecutions
Discussions of the increasing importance of media coverage in these cases and its impact on prosecutorial decision-making.

Break-out sessions will address:

Techniques for winning trials
Ethical issues presented by white-collar corporate investigations
Trends in white-collar sentencing, and
The special challenges of handling cross-border investigations.

Keep a Close Eye on Your Competition- Intellectual Property Law

Richard S. Dellinger and Jason Miller of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. recently had an article regarding Intellectual Property Law published in The National Law Review:

Do you know of a competitor trying to imitate your product? Rip-It Sporting Goods developed an in-fielder’s mask for baseball and softball. The mask, which is marketed at trade shows, on the internet and nationally through distributors, was allegedly copied by competitor Champro Sports who attempted to sell two versions of a competing mask at a lower price. Champro displayed their masks at trade shows and on its website. Champro also sold and took orders for their masks.

Luckily, Rip-It held a design patent on its mask. On April 19, 2012, the United States District Court for the Middle District of Florida executed a Consented to Permanent Injunction Order prohibiting Champro Sports from making, using, selling or offering for sale the accused mask designs.

Lessons learned:

Protect your assets – whether your products, your name, your brand identity, even your customer lists.
Keep an eye on your competition.
Contact an attorney before the competition tries to copy you, to find out how to protect your assets.

Retail Law Conference 2012

The National Law Review is pleased to bring you information about the upcoming Retail Law Conference:

at the Westin Galleria in Dallas, Texas

November 7-9, 2012

This event is the perfect opportunity to discuss the latest issues affecting the retail industry while obtaining important continuing legal education (CLE) credits.

Open to retail and consumer product general counsel, senior legal executives and in-house attorneys and their teams, the exceptional dialogue presented at this conference will help your organization navigate the current legal landscape of the industry.

New York Attorney General Files First Tax Enforcement Complaint Under New York’s Trailblazing False Claims Act Statute

The National Law Review recently published an article about New York’s Tax Enforcement written by Michael A. Berlin, David W. Bunning, Mark F. Glaser, and Barbara T. Kaplan of Greenberg Traurig, LLP:

On April 19, 2012, New York’s attorney general filed the first tax enforcement complaint under New York’s novel False Claims Act (“Act”), alleging that Sprint-Nextel Corp. had deliberately understated sales tax payments to New York by over $100 million since July, 2005. Under the Act, the defendant could be held liable for three times the amount of these damages, plus penalties of $6,000 to $12,000 per violation, plus attorneys’ fees.

The Act, like its counterparts in federal law and the laws of 28 other states, permits a whistleblower to bring an action for false claims against the government. In New York, whistleblowers can be paid from 15-30 percent of the proceeds recovered. In 2010, New York amended its false claims act statute to become the first state to expressly permit recovery for tax fraud.¹

In 2011, the Taxpayer Protection Bureau was created to work with whistleblowers and enforce the Act. Complaints by whistleblowers are filed under seal pending government investigation. According to a press release issued by the attorney general, the original whistleblower action was filed in March of 2011, just after the Taxpayer Protection Bureau was created. The Bureau conducted “an extensive investigation and determined the extent of Sprint’s illegal conduct.” By filing the superseding complaint on April 19, the attorney general took over that law suit.

The complaint alleges that Sprint-Nextel deliberately understated sales tax to be collected from its customers and paid to New York by arbitrarily treating part of monthly access charges to cell phone subscribers as non-taxable interstate calls rather than as taxable access charges. It further alleges that to carry out this plan false records and statements were submitted to New York tax authorities, and the practice was concealed from the taxing authorities, competitors and customers. According to the complaint, approximately 25 percent of the monthly access charges were arbitrarily designated as non-taxable, resulting in a loss to New York of more than $100 million in tax revenue.

The press release states that this produced a competitive advantage by making Sprint-Nextel’s plans “cheaper than competitors’ plans by $4.6 million per month, collectively, because of sales tax not collected and paid.” In addition to triple damages, penalties, and attorney’s fees, the complaint seeks to ensure that Sprint-Nextel’s customers are insulated from any liability for the unpaid sales tax² and seeks to prevent early termination fees from being enforced against any customers who terminate their contract before the end of the contract term.

The attorney general’s press release notes that the Act “is one of the state’s most powerful civil enforcement tools.” Indeed it is, for at least three reasons. First, the State can recover from acts reported by whistleblowers, which may otherwise be unknown to the State and undiscoverable through audit or other means. Second, New York can recover significantly more money in an action under the False Claims Act than it otherwise could using the tax statutes. Triple damages plus penalties and attorneys’ fees minus the amount paid to a whistleblower is far more than the sales tax plus 14 percent interest and the 30 percent penalty that could otherwise be recovered. Third, the filing of the complaint is public, in contrast to a tax audit, which must remain undisclosed because of taxpayer secrecy laws.

_{1 The 2010 legislation was spearheaded by Eric Schneiderman, then a state senator, who became attorney general in January, 2011.}

_{2 If a seller does not collect sales tax from a buyer, either the seller or the buyer can be held liable for the tax.}

8th Annual FCPA & Anti-Corruption Compliance Conference

The National Law Review is pleased to bring you information about the upcoming 8th FCPA & Anti-Corruption Compliance Conference:

8th FCPA and Anti-Corruption Compliance Conference
Identifying Changes to the Global Anti-Corruption Compliance Landscape to Maintain and Upgrade Your Existing Compliance Program

Event Date: 12-14 Jun 2012
Location: Washington, DC, USA

Beyond dealing with the FCPA and UK Bribery Act, there are upcoming changes to global Anti-Compliance initiatives being enacted by other major countries. It is imperative that organizations are made aware of these new rules and regulations to be able to meld them all into their organization’s anti-corruption compliance program. Maintaining a robust global compliance program along with performing proper and detailed 3^rd party due diligence is of the upmost importance.

Marcus Evans invites you to attend our 8^th Annual Anti-Corruption & FCPA Conference. Hear from leading executives within various industries on how to identify new areas of concern when dealing with bribery or working within a company to update an anti-corruption compliance program.

Attending this event will allow you to learn how to mitigate the effects of any possible instances of corruption and bribery both at home and abroad. Discuss solutions and best practices that companies have found when dealing with their anti-corruption compliance programs. This conference will not only review the newest enforcement cases, but also highlight practical solutions to problems dealing with FCPA and global anti-corruption measures.

Attending this conference will allow you to:

-Overcome the issues in dealing and conducting an internal investigation with Dell
-Identify anti-corruption liability concerns for US companies when engaging in Joint Ventures and Mergers and Acquisitions with Crane Co.
-Perform anti-corruption audits to better identify gaps in the compliance program with SojitzCorporation of America
-Promote a culture of ethics within an organization to combat non-compliance with Morgan Stanley
-Assess the continued challenges in conducting a 3^rd party due diligence program with Parker Drilling

The marcus evans 8^th Annual Anti-Corruption & FCPA Conference is a highly intensive, content-driven event that includes, workshops, presentations and panel discussions, over three days. This conference aims to bring together heads, VP’s, directors, chief compliance officers, and in-house counsel in order to provide an intimate atmosphere for both delegates and speakers.

This is not a trade show; our 8^th Annual Anti-Corruption & FCPA Conference is targeted at a focused group of senior level executives to maintain an intimate atmosphere for the delegates and speakers. Since we are not a vendor driven conference, the higher level focus allows delegates to network with their industry peers.

Nothing Revealed on “Reveal Day”: New gTLD Application System Remains Suspended

Recently an article by Geri L. Haight of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding The NEw gTLDs was published in The National Law Review:

The much anticipated “Reveal Day” — so dubbed by ICANN itself — has now come and gone without fanfare. May 1st was to be the day when ICANN was scheduled to publish the list of all applied-for new generic top level domains (gTLDs) as part of the roll-out of the new Internet era. Instead, all that was revealed today was that ICANN remains mired in technical glitches.

ICANN announced last Friday that, though it had hoped to re-open the online application system on April 27th, the system would remain shut down. ICANN now plans to notify all applicants within the next seven business days (by May 8th) as to whether their applications were affected by the “technical glitch” in the TLD application system. The “technical glitch” at issue is that ICANN’s application system allowed a limited number of users to view some other users’ file names and user names. For the past two and a half weeks, ICANN has been (and continues to be) reviewing its internal system logs and full packet-level capture of all traffic to and from the application system from when it opened the application system on January 12th until it was shut down on April 12th. After it notifies all applicants, ICANN will announce a new schedule for reopening the system and allowing applicants to confirm the completeness of their applications. At the time the application system was shut down, the number of registrants in the system was 1,268. According to ICANN, this number could change (for example, for applicants that might withdraw or were in the process of submitting their $5000 deposit when the system was taken offline). Many business (and their trademark counsel) are anxious to review the list of which .BRANDS and .GENERICS have been applied-for.

But, alas, it seems that nothing will be revealed anytime soon.

Upcoming Spring 2012 CLE National Institutes

The National Law Review is pleased to bring you information about the ABA’s Upcoming Spring 2012 CLE National Institutes:

Learn and network at these in-person,full-day or multi-day seminars held live in various locations across the country that draw lawyers from across the nation.