In the year 2024, the landscape of mergers and acquisitions (M&A) in the United States underwent a profound transformation with the introduction of the Corporate Transparency Act (CTA). Designed to combat the misuse of shell companies and promote transparency in ownership, the act mandates comprehensive disclosures to the Treasury Department’s FinCEN, impacting approximately 30 million entities.
The definition of a “Reporting Company” under the Corporate Transparency Act (CTA) encompasses both domestic and foreign entities operating within the United States, with certain exceptions. It’s noteworthy that while some entities may be exempt from filing under the CTA, exemptions applicable to one entity within a corporate structure may not extend to others, necessitating individual evaluation for each entity involved in an M&A transaction.
The spectrum of entities falling under the Reporting Company definition is broad, yet entities falling under one of the 23 exemptions delineated by the CTA are not required to file a beneficial ownership report. These exemptions encompass various sectors including banking, insurance, public utilities, as well as certain tax-exempt entities, securities reporting issuers, and large operating companies meeting specific criteria. Determining eligibility for exemptions mandates a thorough evaluation on a case-by-case basis. Companies must diligently scrutinize each entity within their structure to avoid inadvertent noncompliance and periodically reassess as changes in circumstances may trigger CTA reporting obligations for previously exempt entities.
Key exemptions pertinent to entities commonly encountered in M&A transactions include the Large Operating Company Exemption, applicable to entities with more than 20 full-time U.S.-based employees, a U.S. operational presence, and annual gross receipts or sales exceeding $5 million; the Pooled Investment Vehicle (PIV) Exemption, encompassing entities meeting specified 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 the act; and lastly, the Subsidiary of Certain Exempt Entities Exemption, covering subsidiary entities controlled or wholly owned by exempt parent entities, with certain exceptions such as pooled investment vehicles, money services businesses, inactive entities, and entities assisting tax-exempt entities. For more information, read here.
The impact of the CTA extends beyond mere filing requirements. The entire M&A process, from entity formation to post-transaction filings and contractual considerations, necessitates meticulous attention to the new regulatory framework.
1. Thorough Due Diligence: Parties involved in M&A transactions must conduct comprehensive assessments of CTA applicability, identify relevant exemptions, and ensure compliance throughout the deal lifecycle.
2. Deal Structure Adjustments: M&A structures, representations and warranties, indemnification provisions, and closing conditions may require modifications to accommodate the demands of the CTA.
3. Seek Expert Guidance: Legal advisors and financial experts well-versed in CTA compliance play crucial roles in mitigating potential risks and navigating the complexities of the CTA.
Prospective buyers engaging in M&A activities should ascertain whether the target entity qualifies as a reporting company and evaluate its compliance with the CTA. The advent of the CTA heralds a new era for U.S. M&A transactions. Embracing transparency and accountability while adeptly navigating the intricacies of the act will be pivotal in facilitating seamless transactions and mitigating compliance risks.
Entities eligible for reporting company status are advised to review their compliance strategies. This entails tasks such as initiating the compilation of reporting data, revising internal protocols to facilitate accurate reporting, and establishing mechanisms for monitoring and updating changes in reporting information.