Most public companies use their transfer agents – and often, one or more outside service providers to handle some or all of these duties, as we will describe below. It is very important to note at the outset, however, that the ultimate responsibility for such programs lies squarely with the issuer. Many courts have held that issuers have a duty to their shareholders to do right by them – And there are many things that can go wrong here: everything from simple mistakes, or oversights, or failures to search with sufficient diligence – especially where large amounts are concerned – right down to outright thefts of abandoned property and to fraudulent schemes on the part of a rogue service provider, or an employee of theirs – or yours – to convey the property to themselves: The label itself, as we often point out, is akin to posting a big “Steal Me” sign on the file. (Please see the article on our website, “Tales from the Crypt” for some hair-raising examples, where the consequences to issuers were dire indeed.)
SEC rules require that issuers, or their agents, conduct an automated “search” of a qualified data-base, in an attempt to find a current address for shareholders whose mail has been returned as undeliverable. There are a few pitfalls here, however, that issuers should be aware of before they choose a provider.
Some ‘searchers’ intentionally use the worst databases they can find – because there are several opportunities for them to make some pretty serious money along the way. Some of them obtain commissions from abandoned property clearinghouses, based on the value of the cash and securities that are turned over to them for escheatment to various member states. Some search firms focus on another strategy – offering “asset recovery programs” where the found-shareholders agree in advance to pay a sometimes hefty percentage of the assets returned to them when they are ‘found’ and reunited with their property.
Another little known but important fact you should know – current SEC rules regarding “search” do not apply to shareholder accounts in corporate names and in the names of known decedents – which are typically the top-two categories in terms of total dollars deemed ‘abandoned’ by so-called “lost shareholders”!
So there are some serious potential conflicts of interest here where your own best interests as a public company are concerned – AND where your duties to shareholders are concerned – vs. what may be in the best interest of a potential service-provider. Some agents cold-bloodedly use a computerized model to analyze your lost shareholder base and determine which avenue will bring them the most cash. And we have reported periodically on service providers who have offered “bonuses” – in the form of deep discounts on transfer agency or other services – or even “free services” – if the issuer gives them free reign with their shareholder-paid asset reunification services. This is a red-flag to say the least – and taking such deals, we say, would be a major breach of a company’s fiduciary duties to its shareholders.
Next, you need to know that virtually every state in the union has one or more laws on its books governing the periodic reporting and “escheatment” of shareholder assets that the states deem to be abandoned…and that essentially, no two states have exactly the same rules. So there is a complex and ongoing job-of-work to be done to report, and then to turn over truly abandoned property to the state of the holders’ last known residence, in accordance with each state’s rules and regulations.
Very important to know is that states have been regularly ratcheting up their rules – shortening ‘dormancy periods,’ inventing new rules to deem property abandoned if the holder has not contacted the company in some way (either by writing a letter, phoning the call center or voting their proxy) – and even proposing to block the use of asset reunification programs once the dormancy date has passed. They have also been hiring outside “auditors” who demand to review your records, back as far as 10 years (!) – and then attempt to impose or “negotiate” big fines and back-interest penalties, since for many cash-strapped states this is a major revenue stream. (Currently, there is a case in Federal Court for the District of Delaware asserting that Delaware has applied new rules and imposed them retroactively, to unconstitutionally seize and sell assets belonging to Delaware resident or their lawful heirs…so stay tuned here. Also, please see the article on our website, “When the Protectors Become the Predators” for more info about existing and proposed state regulatory schemes.)
Most important for public companies to know, most states don’t just grab the uncashed dividend checks – they sell the “underlying shares” – usually asap – and, if the ‘lost shareholder’ or his or her heirs come forward later on, most states will NOT replace the property they’ve seized – but will only pay out what they received when the shares were sold. This has led to several multi-million-dollar lawsuits, asserting that issuers ‘did not do right’ by shareholders - which, sometimes, they, or their service-provider, did NOT do.
Here is the real solution to the costly and trouble-filled compliance problems posed by abandoned property, and it’s an amazingly simple one: Hire an experienced and ethical service-provider to conduct an ongoing “asset reunification program.” With today’s excellent databases one can find virtually every so-called “lost shareholder” in America with ease. And once a piece of mail comes back, the faster you look, the easier it is to find the owners or their heirs - which assures that you have indeed “done right” by them.
Just be sure that you have vetted prospective providers with care – and that they will search for all shareholders, large and small – and that the fees they propose to charge the ‘found shareholders’ are fair and reasonable ones. The providers you choose should also have strong financial, privacy and data-security controls - plus the wherewithal to sustain a big employee defalcation, should a bad-apple come along, since you will often be looking at surprisingly large sums. (The transfer agents listed in our Online Directory are a good place to start…Then you should look into Keane, and Alliance Advisors, to develop an ongoing asset reunification program that is exactly right for you - and where, normally, the T-A and the “search firm” will work hand-in-glove to do the job. Beware cold-callers and relative newcomers to the business - and be especially wary of proffered ‘rebates’ and other ‘tying schemes’.)
The best part of all this; if you focus on asset recovery programs rather than escheatment - and have them done right - there will be nothing for those greedy and intrusive state auditors to audit – and nothing for you to report and escheat!