Important Update on the Corporate Transparency Act: Preliminary injunction puts nationwide compliance on hold… but for how long?
December 5, 2024With the year-end filing deadline only weeks away, the Corporate Transparency Act (CTA) has once again been found to be unconstitutional (on a preliminary basis). In Texas Top Cop Shop, Inc., et al v. Merrick Garland, the United States District Court for the Eastern District of Texas invalidated the CTA on federalism grounds, taking an analytical approach similar to another case handed down earlier this year that also found the CTA unconstitutional. However, in contrast to the earlier case, the District Court issued a preliminary injunction on a nationwide basis, suspending CTA compliance for everyone, not just the immediate plaintiffs in the action, until final resolution of the CTA's constitutionality in further, more extensive court proceedings. Because the government has not yet reacted publicly to this decision1 and is almost certain to appeal the preliminary injunction, every Reporting Company (as defined under the CTA) faces a difficult decision on whether to continue to expend time and treasure on its CTA compliance. As a pure legal matter, the decision clearly renders the CTA universally unenforceable – for so long as the preliminary injunction remains in place. So, as of right now with the preliminary injunction in place, a Reporting Company could stop working on its CTA compliance. However, if the government is successful on appeal and convinces the appeals court to lift the injunction before the existing January 1 filing deadline, a Reporting Company that went "pencils down" may be unable to restart and complete its CTA compliance process in time to meet the January 1 filing deadline, unless the appeals court or the government (FinCEN) grants an extension for the time lost while the preliminary injunction was in effect. To navigate between this "rock and hard place," a Reporting Company should consider taking a "middle" path. Under this approach, a Reporting Company continues unabated its CTA compliance, up to and just short of filing any required beneficial ownership interest report. If the preliminary injunction is lifted without any grace period, the Reporting Company should be well-positioned to file timely any required beneficial ownership interest report, thereby avoiding any potential late filing penalties. However, if a Reporting Company takes this middle path, the Reporting Company may find that it has spent substantial money and time to comply with a law that ultimately does not go into effect. Thus, whether this middle path makes sense for a Reporting Company will depend upon the specific circumstances particular to the Reporting Company, including the Reporting Company’s ownership and organizational complexity, the financial and operational burden of the ongoing (and possibly unnecessary) compliance work, the desire to avoid disclosure of the Reporting Company’s ownership and management structure (unless absolutely required to do so), and the willingness of third parties to cooperate in the face of the preliminary injunction by providing to the Reporting Company their identifying information or information needed to establish a CTA exemption for the Reporting Company. 1Since this release of this alert, the government has filed an appeal and issued a press release on this issue. Please click here for a discussion of FinCEN's reaction to the nationwide injunction on the CTA. We are continuing to monitor this situation closely and will provide further guidance if and when the courts or FinCEN issue additional guidance. If you have any questions about this late-breaking development or need help choosing the right compliance strategy in this highly uncertain and fluid legal environment, please contact your Herrick attorney or any member of Herrick’s CTA compliance team through our Corporate Transparency Act Resource Center. |
Mark A. Limardo at + 1 212 592-1494 or [email protected] © 2024 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such. |