2024 ushered in a seismic shift for mergers and acquisitions (M&A) in the U.S. with the implementation of the Corporate Transparency Act (CTA). Aimed at cracking down on the misuse of shell companies and promoting ownership clarity, the act demands detailed disclosures to the Treasury Department’s FinCEN, impacting an estimated 30 million entities.
The term “Reporting Company” under the Corporate Transparency Act (CTA) encompasses both U.S. entities and foreign entities operating in the United States, excluding those falling under specific exemptions. While exempt entities are not obligated to file under the CTA, it’s important to note that an exemption applicable to one entity within a corporate structure may not necessarily extend to others, requiring separate evaluation for each entity involved in an M&A transaction.
The Reporting Company definition encompasses various entities, but those under one of the 23 exemptions outlined by the CTA are exempt from filing a beneficial ownership report. These exemptions cover industries like banking, insurance, and public utilities, as well as certain tax-exempt entities, securities reporting issuers, and large operating companies meeting specific criteria, to name a few. Determining exemption eligibility requires an entity-by-entity assessment. Companies must scrutinize each entity within their structure to prevent unintentional noncompliance and regularly reassess as changes in circumstances may trigger CTA reporting obligations for entities previously exempt.
Key exemptions relevant to entities commonly encountered in mergers and acquisitions include the Large Operating Company Exemption, which applies to entities with over 20 full-time U.S.-based employees, a U.S. operating presence, and annual gross receipts or sales exceeding $5 million; the Pooled Investment Vehicle (PIV) Exemption, covering entities meeting specific criteria as pooled investment vehicles and operated or advised by designated entities; the Securities Reporting Issuer Exemption, which pertains to entities registered under the Securities Exchange Act of 1934 or subject to supplementary filing requirements under section 15(d) of that act; and finally, the Subsidiary of Certain Exempt Entities Exemption, which applies to subsidiary entities controlled or wholly owned by exempt parent entities, excluding certain types of entities such as pooled investment vehicles, money services businesses, inactive entities, and entities assisting tax-exempt entities.
The CTA’s reach extends far beyond simply filing reports. The entire M&A process, from entity formation to post-transaction filings and contractual considerations, demands diligent attention to the new regulations.
- Thorough Due Diligence: Prospective buyers and target entities must meticulously assess CTA applicability, identify relevant exemptions, and ensure compliance throughout the transaction.
- Deal Structure Adjustments: M&A structures, representations and warranties, indemnification provisions, and closing conditions may require adjustments to accommodate the CTA’s demands.
- Seek Expert Guidance: Legal counsel and financial advisors versed in CTA compliance become vital players in mitigating potential risks and guiding parties through the intricacies of the CTA.
Prospective buyers involved in M&A deals should verify whether the target entity qualifies as a reporting company and assess its compliance with the CTA.
The CTA marks a new era for US M&A operations. Embracing transparency and accountability while carefully navigating the act’s intricacies will be important in facilitating smooth transactions and minimizing compliance risks.
Entities eligible for reporting company status are advised to review their compliance strategy. This involves tasks such as initiating the compilation of reporting data, revising internal protocols to facilitate accurate reporting, and establishing a mechanism for monitoring and updating changes in reporting information.
