Delaware has been under heavy criticism and pressure for its unclaimed property program. To counteract some of the pressure, the Secretary of State, with the blessing of the state legislature, introduced a limited time voluntary disclosure program with shortened look-back periods. The program was intended to provide a more efficient method of bringing companies into ongoing compliance. It also served as an alternative to the Department of Finance's generally disfavored voluntary disclosure program and much criticized contingent fee audits.
In exchange for voluntarily coming forward and continuing to report on an annual basis, a company would be contractually relieved of historical liabilities, would receive a waiver of penalties and interest, and would not be audited for those time periods. Companies had until September 30, 2014, to join the Secretary of State program, and until June 30, 2016, to complete the process.
Last week, the Secretary of State announced its intention to seek legislation to make the program a permanent offering. At this time, it is unclear how any potential legislation could affect a company currently in the process of completing a Secretary of State VDA. Discussions indicate that it may provide an extension of time for companies already in the process of completing the VDA. Since the program is still subject to legislative action, companies already in the program should continue as if there will be no extension or changes to the program.
In addition to possible changes that new legislation would bring to the program, companies currently in the program should consider how the Temple Inland and Osram Sylvania suits will impact Delaware law. Both cases challenge the state's ability to perform extrapolations for prior periods with no or limited records. So far, Temple Inland has survived a motion to dismiss and the case continues to proceed with what appears to be favorable language going forward. A recent email to those currently involved in the process from Secretary of State Jeffrey Bullock said:
"As Delaware law remains unchanged, Holders enrolled in the VDA program will be required to estimate liability for the periods that they do not have available records during the statutory look-back period, or such VDAs will not close. In addition, pursuant to the terms of each company’s enrollment in the Delaware VDA program, there is a deadline for holders to complete their VDA. Yesterday’s opinion [in Temple Inland] does not alter those statutory deadlines nor does it alter my expectation that all companies enrolled in the VDA program will abide by those deadlines."
The Delaware Department of Finance continues to aggressively audit companies to determine their compliance with the unclaimed property laws. In recent years, Delaware has issued hundreds of audit notices with more coming every month. Companies that have previously been audited or have filed Department of Finance VDAs are now being audited. Even with the new cases threatening Delaware's ability to estimate liability and lower revenue forecasts, unclaimed property remains a large revenue driver for the state. Compliance remains a top priority and the best defense during an audit.