Unclaimed merger consideration is generally a liability of the buyer to non-redeeming selling shareholders. This is why merger agreements usually provide that unclaimed closing consideration will be held by or returned to the buyer after a specified period of time, typically one year following the closing date. Eventually, however, this unclaimed property will be deemed abandoned and escheat to the state after a period of time provided by statute. Under these laws, the buyer is generally considered the holder of these funds, even when the funds are held by a paying agent or an escrow agent. Thus, the buyer is ultimately responsible for determining which state’s laws apply, reporting any abandoned property to the applicable state treasurer and transferring that property. Failure to comply with these rules can result in penalties or fines.
Although this concept is often addressed with respect to closing consideration, surprisingly, it is rarely addressed with respect to post-closing escrow payments, or otherwise mentioned in escrow agreements. Future escrow payments that remain undistributed due to non-redeeming selling shareholders presumably should be handled in the same manner as initial disbursements of merger consideration. When escrow agreements are silent on this issue, it can leave the parties uncertain as to how long an escrow account should remain open or how the remaining escrow funds should eventually be distributed.
This is one of several reasons why a shareholder representative should resist the notion of accepting released escrow funds for further distribution to shareholders. Accepting such funds could deem the representative the holder of any unclaimed property and subject it to the reporting, recordkeeping and property transfer requirements of multiple and varying state escheat laws.
Sometimes SRS Acquiom is asked, “but why can’t you just re-allocate the unclaimed consideration to the other shareholders pro rata?” Intuitively, this has some appeal. The selling shareholders might argue that the buyer should have to pay the full purchase price for the business, and that amount should be split among the shareholders that can be located. Unfortunately, that is not the way the law works. Merger consideration payable to a shareholder is generally considered property of that shareholder under abandoned property laws, and these laws provide no authority for re-allocation. Rather, the laws preserve the right of the lost shareholder to claim those funds from either the buyer or the state. Therefore, the buyer is effectively paying the full purchase price with some shareholders simply failing to claim their portion.