More Emphasis on Delaware Incorporated Entities to File Unclaimed Property

The Delaware Secretary of State has been sending letters to companies to make them aware of the voluntary compliance program Department of State is administering. According to the letter the VDA program offers companies "a unique, but narrow opportunity to "catch up" on past due unclaimed property obligations, and more importantly, receive a broad release of all historic unclaimed property liability in order to avoid an unclaimed property audit." The letter goes on to discuss the company's reporting obligations in all 50 states, comparing Delaware's statutes to the other states. Then the letter addresses the possibility and risk of Delaware audits:

"Historically, Delaware, like many states, has enforced its right to collect this property through audits performed by the Delaware Department of Finance. Because there is no statute of limitations on a company's legal obligation to report and remit unclaimed property, these audits examined hte books and records of a company for any past due unclaimed property beginning in 1981, a process that has often been long and expensive, and the source of some controversy. Besides taking several years to complete, the Department of Finance has the right to assess interest and penalties of up to 100% of a company's total liability."

As expected, the letter then touts the benefits of the new Delaware Secretary of State VDA program: a release of all liabilities, the shortened look-back period, and the short time-frame to finish the process. In closing the letter states that the Secretary believes the program can "save your company time and money, which is why I urge you to take advantage of this new initiative."

As of mid-February, "80 or so" companies had enrolled in the Secretary of State program, according to one of the recent letters Barganier has seen.

So why is the Secretary of State sending these letters to companies that have a long-term history of compliance with Delaware?

Where are your records?Presumably, these companies have already reported the significant portions of potential unclaimed property that the company would want a release for as a result of participating. Further, the stated goal of the Secretary of State is to bring more companies into compliance, thus providing a more stable source of revenue for the state. Contacting companies that are already reporting unclaimed property is probably not the best way to accomplish the goal of new ongoing revenue for the state.

A Delaware incorporated company recently received one of these letters from the Secretary of State/ This company has been filing Delaware reports for years now, including properties with unknown names or addresses, as applicable. Barganier asks what "records" does the Secretary of State have that would indicate that such a company would benefit from a VDA program? Are the Departments of State and Finance sharing compliance history records? Or is State just looking at its list of Delaware incorporated companies?

This is not to say that a Delaware VDA through the Department of State could not benefit a company, in the right circumstance. As of early March, though, the process is still too new and too many questions still remain to know the true effectiveness of the program for large corporate holders. This is especially true for companies that have a history of compliance but may have areas of historical or recent acquisition liability.

Even if a VDA is not necessary for your company, compliance is! The Department of Finance has begun initiating audits in the past month. As the Secretary of State warned in its letter, a Delaware audit can last years, as the state's auditors look through your company's books and records to as far back as 1981 and may assess interest and penalties of up to 100% of the assessed liability. With the extrapolation methods used to determine a company's liability when records are not available, these assessments can reach into the tens of millions of dollars. It is a unusual item that no one wants to report in their quarterly or annual SEC filings.

See Also:
Delaware Expands Secretary of State VDA Program
Minnesota Begins VDA Program
Audit Nightmare: Young America Corp