Over the past six years, the unclaimed property compliance landscape has changed dramatically in Delaware, and as a result of those changes, the future state of unclaimed property in Delaware is strong. In June 2012, legislation was passed by the Delaware General Assembly and signed by Governor Jack Markell to create a new voluntary disclosure agreement (“VDA”) program that would be administered out of my office, the Department of State. In the prior decade or so, the primary vehicle to ensure company compliance with their unclaimed property reporting obligations was through an unclaimed property audit. Relying primarily, if not solely, on audits to get companies into compliance is not a good way to incent compliance, especially for a state that prides itself on being a corporate-friendly jurisdiction. Audits by their very nature can be contentious, take a lot of time and often do not lead to future robust and regular annual filings.
VDA Program Overview
We set out in 2012 to build an option for companies to voluntarily step forward to report their past-due unclaimed property through a rigorous, yet fair process that would not only give companies a level of certainty with a full release and waiver of future audit for the period covered by the VDA, but also directly incent future compliance by making three years of future annual compliance filings a condition of said release and audit waiver.
To administer a program that will be efficient and ultimately fair, it was critical we establish expectations up front. We published implementing guidelines outlining what process companies should follow after enrollment, what testing we expected to be done and what we wanted the final submission to look like. We also needed to convince companies that the new VDA program was a more business friendly, efficient and fair process for companies to come into compliance. In the first eight months after we started, we saw enrollment go from 19 companies in January 2013, to more than 400 by June 2013, and over 1,000 today.
More importantly, in late 2013 and 2014 we began settling VDAs, and companies could see we were living up to the expectations we had set. The first several years of success led to even more sweeping changes in Delaware law in 2015. These changes include, but are not limited to, changes in the look back period, extending the VDA program indefinitely, and I think most significantly, not allowing a company to receive a new audit notice in Delaware without first having an opportunity to enter the VDA program. In three years, we went from a state that relied primarily on audits to get holders into compliance, to a state that was going to rely on voluntary compliance.
Impact of Temple-Inland Decision
Nothing was more indicative of how the compliance landscape had changed in Delaware then what happened after the Temple-Inland decision was issued in June 2016. Without question, the decision was critical of several specific executive actions taken by the state during that audit that in combination the Court deemed to be procedurally unfair. However, the facts and circumstances in the Temple-Inland audit bear little, if any, resemblance to our administration of the VDA Program. The impact of the Temple-Inland decision on the VDA program was virtually non-existent, as we settled VDAs days after the decision was rendered and continued settling VDAs in the months and years immediately after.
From my perspective, there are several reasons why the Temple-Inland decision had such a minimal impact on the VDA program. The first is that the way Delaware, and every other state, has historically estimated unclaimed property liability creates a bright line between what is owed to the state of formation of a company and every other jurisdiction, ensuring that a company does not pay twice for the same unclaimed property. More importantly, the VDA program’s approach to estimation is the best business practice for all involved. Having such a bright line rule benefits holders as compared to the alternative of performing potentially 50 separate estimations based off of 50 different state standards, and then entering into 50 different VDAs or audits to come into legal compliance. Finally, the reality is an unclaimed property compliance gap exists in corporate America, and the VDA program provides companies with a compliance option that brings certainty in terms of a release of liability and waiver of audit and does so through a process that is efficient and fair.
And make no mistake, the name of the game is compliance. Annual compliance rates in Delaware are very low, and I would imagine other states would say the same. The VDA program itself is a testament to that fact, as nearly 600 companies, including thousands of their subsidiaries, of all sizes and virtually all industries have stepped forward with a significant amount of unclaimed property to report. Let me also be clear that to really drive meaningful, robust and full compliance, the state needs to have a strong audit program to examine companies that do not wish to voluntarily step forward.
There will always be disagreements, and in turn there may be additional litigation in Delaware and other jurisdictions. However, by establishing expectations up front, offering companies a meaningful voluntary compliance option and maintaining a strong audit program, I believe Delaware has cemented a strong foundation to carry the state’s unclaimed property compliance programs well into the future.
By The Honorable Jeffrey W. Bullock, Secretary of State of Delaware