While Delaware is a preferred state for incorporations, it is also an aggressive (and often controversial) auditor and enforcer of the unclaimed property reporting obligations of Delaware corporations that are holders of unclaimed property. So far in 2012, Delaware has had several notable unclaimed property developments.
In late June, Delaware enacted a voluntary disclosure program for holders of unclaimed property that have not been mailed a "notice of examination," have not previously entered into a voluntary disclosure agreement with Delaware prior to July 1, 2012, and have not been compliant with their unclaimed property reporting obligations. If a holder comes forward and participates in the program, a limited "look-back period" to 1996 is applied to agreements concluded by June 30, 2014. A longer look-back period to 1993 applies for agreements entered into by June 30, 2015. This voluntary disclosure program provides an incentive to holders that have not complied with their Delaware unclaimed property reporting obligations -- in an audit examination, the look-back period is to 1981 or the year in which the holder became incorporated in Delaware, whichever is more recent.
The Delaware Department of Finance's Bureau of Unclaimed Property has also issued proposed regulations that limit the look-back period for holders currently under audit examination, or who become subject to audit before the effective date of the regulation. Under the proposed regulations, these holders will have a look-back period subject to audit back to January 1, 1986 (instead of 1981), but only if the examination is completed by June 15, 2015. For all other holders who become the subject of a Delaware unclaimed property audit after the effective date of the regulation and for all holders whose audits are not completed by June 15, 2015, the 1981 look-back period will remain.
Delaware shortened the dormancy period from five years to three years with respect to determining when securities are deemed abandoned (i.e., a three-year period during which the owner of a security has failed to claim dividends or communicated in writing with the holder about the security). By regulation, Delaware requires the owner of securities to have demonstrated "positive" contact with the issuer, broker, transfer agent or other holder of the securities during that three-year period. While depositing a dividend check is considered positive contact, reinvestment of dividends pursuant to a dividend reinvestment plan or direct deposit of dividends into the owner's bank account is not considered positive contact by Delaware. While Delaware now considers the mailing of a Form 1099 to shareholders sufficient positive contact, as long as the 1099 is not returned as undeliverable, Delaware's treatment of "security property" jeopardizes securities held pursuant to dividend reinvestment plans, tax-deferred accounts and by foreign owners. In addition, Delaware's administration of the securities dormancy period could conflict with SEC Rule 17Ad-17 and its due diligence requirements for identifying and locating "lost" shareholders.
Lastly, Delaware and Staples, Inc. recently settled their unclaimed property dispute in Delaware Chancery Court. In this case, Staples had challenged Delaware's (and its third-party contingent fee auditor's) controversial practices of estimating unclaimed property liabilities of holders for years back to 1981 in which records were no longer available. The terms of the settlement are confidential. Previously, the Chancery Court had issued a formal opinion in response to the state's motion and ruled that rebates issued by Staples were "bills of exchange" or "credits" and subject to escheatment.