United States: Pennsylvania Audits Public Companies For Unclaimed Securities

Holders that use third-party transfer agents, such as Computershare, should check their mailboxes, as they are likely to have a notice from Pennsylvania of an unclaimed property audit.

Pennsylvania has engaged third-party audit firm Kelmar Associates LLC to conduct audits of publically held companies with Pennsylvania-resident shareholders to identify shares that may have become "dormant" under Pennsylvania's unclaimed property law.

The notices are especially concerning, given recent, major changes to Pennsylvania's law.

Recent Changes to Pennsylvania Unclaimed Property Law The notices to issuers come on the heels of drastic changes to Pennsylvania's unclaimed property law, many of which impact shareholders. For more on these changes, see our prior alert.

For example, effective July 2014, the Legislature made changes to its audit process and to rules concerning securities. In particular, the new law: (i) shortened the dormancy period from five years to three years; (ii) provided that Treasury's selection of the auditor may not be questioned by the holder; (iii) gave Pennsylvania the option to charge for the cost of a third-party auditor hired by Treasury at a rate of $200 per day, so long as the audit reveals reportable property; and (iv) permitted any records obtained during the course of an audit to be shared with other states.1

Shares are presumed abandoned and, thus, reportable in Pennsylvania, if the shareholder has not "claimed" or "indicated an interest" in the shares within three years after the "date prescribed for delivery" of the shares to the shareholder.2 To indicate an interest in shares, a shareholder must take some affirmative action that is documented by the issuer or its transfer agent.3 Arguably, therefore, shares owned by Pennsylvania residents may become abandoned even where the shareholder does not move and continues cashing dividend or distribution checks related to the shares.

There are several issues, however, with the application of Pennsylvania's presumption of abandonment to shares. For example, what constitutes the "date prescribed for delivery" for shares is unclear. Is it the issue date, or some other trigger event? It is also unclear whether shares held more than three years but fewer than five years automatically became dormant upon the implementation of the shortened dormancy period under the 2014 legislation. The commonwealth could take the position that holders would have had to file a catch-up report reporting these shares last year, and if this was not performed, there is risk that shares will now be treated as not reported timely.

Perhaps most concerning is that Pennsylvania requires the state treasurer to sell escheated shares immediately upon receipt,4 and hold only the proceeds of the shares in custody for the owner.5 Thus, shareholders will lose the benefit of any appreciation or dividends on the shares once they are transferred by the holder to the Treasury. Contrary to federal law,6 and law in other states (including Delaware)7, Pennsylvania requires no notice to shareholders of the transfer and sale of the shares.8

Issuers thus face two concurrent and opposing risks—penalties and interest for failure to escheat on the one hand, and injury to shareholders (and therefore, the risk of a lawsuit for improper escheatment) on the other.9 Shareholder actions against issuers for improperly escheating shares have occurred in other states.10

What to Do If your company receives an audit notice indicating that Pennsylvania is auditing your transfer agent, tread carefully and remember that the auditor may be compensated for taking aggressive positions in the audit. Make sure you understand who has the financial and legal obligation with respect to the audit and to escheatment of the shares. Become involved so as to protect your rights against unauthorized disclosure of any information that could be shared with other states. Consider reaching out to your shareholders to minimize the likelihood of future claims from such shareholders for wrongful escheat. Finally, closely analyze the law—especially as it relates to the dormancy period—to ensure that no shares identified by the auditor as dormant are transferred to the state unless you agree that the shares are clearly covered by Pennsylvania's unclaimed property requirements.

If you are interested in more details on the application of Pennsylvania's unclaimed property law to shares or have questions about how to respond to an unclaimed property audit notice, please contact one of the authors of this alert, or the Reed Smith attorney with whom you normally work.


1. See P.L. 1053, No. 126, § 5.

2. 72 P.S.. § 1301.6.

3. 72 P.S. § 1301.1.

4. 72 P.S.. § 1301.17(e) .72 P.S. § 1301.17(b), (e).

5. Federal law requires issuers or transfer agents to reach out to the property owner if there is one piece of returned mail.

6. See 17 CFR 240.17Ad-17 (b)(2), (c)(1).

7. 15 DE Reg 1330 dated March 1, 2012.

8. 72 Pa. C. S. § 1301.17(b).

9. The Pennsylvania Supreme Court has blessed expressly the state's right to take custody of shares after a period of inactivity, despite the risk of loss to the shareholder. In re Philadelphia Elec. Co., 39 Pa. D. & C. 53 (Com. Pl. 1940), aff'd, 43. A.2d 116 (Pa. 1945). In that case, the trial court explained, "We are unable to see why fluctuating values should render the State powerless to act to conserve an abandoned interest in property of this nature. It may be that a different method of handling this property would be more equitable, but we are concerned with the legislature's constitutional power, not the wisdom of its actions." 39 Pa.D. & C. at 59.

10. See e.g. JLI Invest S.A. v. Computershare Trust Company, N.A. 1:15-cv-11474-ADB (U.S. Dist. Ct, filed March 30, 2015) and JLI Invest S.A. v. Thomas J. Cook, et al., Docket No. 11274 (Del. Ch., filed July 9, 2015).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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