State clashes over money with businesses it courts

Delaware’s abandoned property program has long been a source of friction within the state’s normally cozy relationship with top corporations.

Finance Secretary Tom Cook recently told the Delaware Economic and Financial Advisory Council, the panel that produces state revenue estimates, that the state continues to face resistance from corporations to turn over money they are legally required to report. He expressed surprise that accounting regulations passed after the Enron scandal had not prompted companies incorporated in Delaware to “clean up their books.”

“I find it amazing that Sarbanes-Oxley was passed ... and these companies did not turn around and clean up their books at that time and fail to file at all with the State of Delaware,” Cook said.

Harold Kim, executive vice president of the U.S. Chamber Institute for Legal Reform, agreed that Delaware has “the legal authority and the right to uncover” abandoned property that is not paid to the state, but said “we think that the incentives are particularly skewed.

“There seems to be a business model by these auditors to be as aggressive as possible to make it as cumbersome as possible, as unreasonable and to force and leverage some type of settlement,” Kim said.

Delaware Republicans recently proposed a change the program that would prohibit the use of auditors that charge a contingency fee – firms that collect a percentage of what they recover for the state. The state's contract auditor, Kelmar Associates, the target of the Republican legislation, has such an arrangement, collecting up to 12 percent on any of recoveries through their corporate audits.

“This is a business performing a service, and they should be compensated for that service, but there has to be limits,” Sen. Greg Lavelle, R-Sharpley, said in a statement.

The proposal was preceded by a letter from the Delaware State Chamber of Commerce to Markell that urged the governor to rethink the state’s policies around abandoned property and restrict the use of out-of-state auditors.

“Outsourcing a governmental audit function and paying tens of millions of dollars to out of state contractors, rather than training and employing Delawareans to perform what audit work is fairly required, cannot continue,” said the letter, which was signed by chamber president Rich Heffron and chairman Mark Stellini.

The state has taken steps to reach out to corporations, establishing an appeals process on unclaimed property audits, instituting a sweetened voluntary reporting program and, recently, proposing a measure that would reduce interest charged if a company fails to timely report unclaimed property.

Michael Houghton, a Wilmington lawyer who represents corporate clients in unclaimed property matters, said his clients don’t believe they’re “playing on a level playing field,” and the reputation of the program could damage Delaware’s broader incorporation business.

“The success of our so called Delaware franchise ... is a lot about perception, how business feels we treat and value their legal presence in Delaware,” Houghton said. “Companies may not be correct in their perception, but perception is very much reality in the corporate law business Delaware relies on so heavily.”

Contact Jonathan Starkey at (302) 983-6756, on Twitter @jwstarkey or at jstarkey@delawareonline.com.