My partner and co-conspirator at AsktheVC (Jason Mendelson) guest blogs tonight.
Unfortunately, I (Jason) get stuck being the shareholder representative in our merger deals where we can’t find someone else to do the job. (Someone should start a company – hmmm.) We had a deal that over a year ago distributed the escrow, but the escrow agent wasn’t able to find a dozen or so shareholders and today, we still have $500,000 or so in the account.
Every month, I get a statement from U.S. Bank saying “Hi, you have $500,000 in your account.” And every month, I ask myself “what can I do to bring this to a close?” I’ve done the obvious. I’ve gotten the shareholder list, tried some Internet searching, asked former company executives if they know any contact information, etc. Nothing. (As an aside, I don’t really have a duty to do this, but I figured it’s all good karma to try.)
So today, I ask our friends at U.S. Bank “what happens” if these folks are never located. Simple, she says: the state gets the money. (In this case, the state being California.)
Huh?
It seems that money left in escrows defaults to the state after some period of time. Here is a little source of revenue for the state that I was previously unaware of. I began to ask myself is there a way that lawyers can better draft a merger agreement; i.e. all money left over in the account is distributed pro-ratably to shareholders who are locatable. Answer: no.
CA state law says that you must treat all shareholders equally. If you give one set of shareholders the consideration earmarked for other shareholders, you breach this covenant. Even is Delaware if the choice of law, or the companies involved are located outside of CA, it still may be possible for CA to go after you if the shareholder who doesn’t get paid is a resident of CA. You can, however remit the cash or stock back to the acquiring company if you so choose to do so. Um, yeah, thanks.
So, the bottom line is that the state has found a hidden revenue source and is using corporate law as a shield to support its position. I love it.
This example is relevant for California. We haven’t done an exhaustive analysis of other states, but we will just for our perverse curiosity.