Contractual frameworks such as the Model Contract Clauses to Protect Workers in International Supply Chains (“MCCs”) drafted by an American Bar Association Business Law Section working group, as well as those provided in the Responsible Contracting Project’s toolkit, are key tools to use in a company’s responsible procurement strategy to address US forced labor enforcement, such as potential detentions of imports pursuant to Withhold Release Orders (“WROs”) under the amended Tariff Act or the Uyghur Forced Labor Prevention Act (“UFLPA”).

The MCCs are a set of template contract clauses that focus on buyer and supplier pre-contract human rights and environmental due diligence (“HREDD”) as part of the procurement process and ongoing joint responsibility for supply chain due diligence. They emphasize finding and fixing any issues—disclosure and remediation—and thus can provide a realistic framework for responsible sourcing. The MCCs were designed to be modular and to allow companies to operationalize their responsible procurement plans.

Members of the ABA Working Group to Draft Model Contract Clauses to Protect Human Rights in International Supply Chains and the Responsible Contracting Project have spoken with US government officials, including representatives from US Customs and Border Protection and the Bureau of International Labor Affairs, regarding their frameworks. These officials have noted their hope that companies implement effective worker-driven, prevention-based models to reduce the necessity for enforcement measures. To do this, companies will need effective tools to identify and prevent labor rights issues in their supply chains. These officials agree that well-crafted contractual clauses may be a helpful tool for companies in this regard—though of course, not a silver bullet.

The number of technology tools assisting companies to learn about their supply chains and inform their responsible procurement decisions continues to grow; the MCCs are a legal tool that creates a framework to operationalize these other tools. The MCCs set out a pragmatic, operational framework of obligations facilitating HREDD and remediation.

This article first addresses why the MCC framework is an effective approach to address human rights issues and labor rights abuses in supply chains. It then discusses how the MCCs address specific areas of concern for regulators.

The MCCs are more effective than unilateral representations and warranties.

The MCCs aim to address known problems arising from the predominant contractual approach in transnational commercial contracts, which consists of impractical, unenforceable representations and warranties. The traditional representation and warranty framework places all responsibility for compliance on the suppliers, who often do not have the resources to comply. This approach has proven ineffective, as it often devolves into a tick-box exercise.

The MCC approach is to establish a framework that facilitates the parties’ cooperation on tasks such as engagement with affected stakeholders;^[1] obtaining accurate data collection and prompt disclosure; and agreeing upon realistic goals at every tier within the supply chain. By contrast, the traditional reps and warranties approach does not allow for much cooperation—and it presumes a static situation of perfection that is nearly impossible for suppliers to achieve without changes in buyer purchasing behaviors.

In the past, importers may have been comfortable simply shifting liability up the supply chain. But importers must now pivot towards a framework that is more effective given the increased enforcement activity from regulators.

The MCCs set out duties for buyers and suppliers to undertake continuing HREDD against the constant threat of adverse human rights impacts. Suppliers must provide appropriate, timely information with proper stakeholder engagement, and buyers should provide commercially reasonable assistance that actually addresses some of the key drivers of human rights issues, such as overly aggressive pricing terms. In addition to provisions that are designed to prevent human rights abuses such as forced and child labor and to encourage the identification and disclosure of actual and potential human rights issues, the MCCs provide a framework for the parties to develop a corrective action plan when issues are revealed.

Rather than focusing on “irresponsible exits” that simply terminate relationships with suppliers when issues are uncovered—a so-called cut and run strategy—the MCCs emphasize the duties of buyers and suppliers towards remediation and efforts to make victims whole.

The MCCs incorporate the UN Guiding Principles on Business and Human Rights (“UNGPs”) and Organisation for Economic Co-operation and Development (“OECD”) requirements for an operational-level grievance mechanism (“OLGM”). They also provide for a set of buyer obligations around issues such as pricing and termination, which acknowledges the key role that buyers have in the incidence of human rights abuses.

The process of establishing appropriate contracts using frameworks such as the MCCs must generate sufficient buy-in from a variety of stakeholders in order to be effective. This must include both stakeholders within an organization (e.g., purchasing, legal, sustainability teams) and external stakeholders (e.g., workers, workers’ organizations, upstream suppliers).

The MCCs address specific concerns of US regulators.

Proactive engagement with suppliers (Information Sharing)

US regulators’ goal is to prevent human rights abuses and facilitate lawful trade while combating illicit trade. While the government will continue to detain violative imports and take the necessary enforcement action, the overarching goal is to decrease the incidence of human rights abuses. Presumably, importers also do not want to contribute to human rights abuses.

The best way to accomplish this is for companies to proactively engage suppliers to integrate anti-forced and child labor as a priority within their business objectives. This is a prevention-based model, rather than an enforcement-based one.

Avoidance of human rights risks requires a shared HREDD approach to identifying vulnerabilities which is found in the MCCs, rather than a framework of unilateral representations and warranties as the former provides more confidence in the data that you are collecting.

Companies need robust and reliable data to determine whether their supply chains have a nexus to forced or child labor. If there is a nexus to forced labor, companies may wish to end this relationship^[2] In both cases, enforceable contractual commitments such as those found in the MCCs will provide useful support.

The MCCs contractually impose proper routine auditing procedures and routine reporting out of the OLGM to uncover issues and contain the scope, severity, and scale of discovered problems, particularly through stakeholder feedback. The MCCs also include an option to contractually require the input of workers and/or workers’ organizations into the structure of and feedback solicited for audit reports.

In addition, the MCCs provide for a remediation framework that doesn’t overly disincentivize revealing issues to your counterparty, as it has been argued such disincentives have resulted in implausible reports of zero issues from ostensibly well-functioning OLGMs. Observers have commented that if the OLGM reporting indicates there are no problems, there is likely a problem with the OLGM. Strengthening such channels of communication is crucial to actually address human rights abuses.

Comprehensive knowledge of supply chain (Mapping)

Companies with complex supply chains first need to undertake comprehensive mapping exercises through several tiers of suppliers to understand where their goods are made and to onboard and screen suppliers. This is a key initial step towards establishing a prevention-based framework.

Cascading down the supply chain is essential to developing a proper map. This is why the MCCs include a clause regarding obligations for a supplier’s upstream suppliers.

Only after identifying risk areas can companies decide to restructure supply arrangements or terminate relationships with problematic suppliers. But we must stress that the goal isn’t irresponsible exit, and this is actually addressed in MCCs.

The MCCs allow termination of an existing relationship if there is a sufficient Schedule P (Human Rights and Environmental Impacts) or Schedule Q (Responsible Purchasing Buyer Code) breach, but they give the supplier a right to cure provided there is no zero-tolerance violation. However, for the most part, a better scenario, one considered to more effectively address human rights abuses, would involve remediating harms when they are discovered. In fact, where the buyer causes or contributes to such harm, the UNGPs and the MCCs impose a duty of remediation on the buyer.

Accurate data collection for UFLPA Applicability Reviews (Tracing):

When submitting documentation for an applicability review (where regulators must decide whether to apply the UFLPA’s rebuttable presumption of forced labor), a company must prove its merchandise is free of inputs from the Xinjiang Uyghur Autonomous Region or companies on the UFLPA Entity List.

This requires proper supply chain mapping—as noted above. More importantly, it requires providing reliable, compelling evidence to show that the products in the detained shipment were produced according to the supply chain map. This requires tracing shipments throughout this map.

To be confident this information is reliable/compelling: (i) it should be provided by entities up and downstream in the supply chain that have a contractually enforceable obligation to do so; and (ii) it should also be provided in accordance with a standard system—rather than an ad hoc compilation of documents with relatively low degree of reliability.

If there’s a standard system where documents are regularly provided, a regulator can investigate a specific shipment in the context of the overall supply arrangement. In contrast, if an importer urgently asks a supplier to haphazardly compile a slew of documents that it has never even considered before, there is a high risk of fatal reliability/authenticity issues.

Addressing issues that are uncovered (Remediation):

Perhaps the most important potential impact of incorporating the MCCs into an organization’s contracts is how the framework facilitates effective remediation.

As noted above, proper HREDD and OLGMs will almost invariably uncover issues given the state of global supply chain practices. Therefore, it’s critical to have a system in place to remediate issues when they are discovered.

Remediation is particularly essential if the importer has a strategic supplier that is (or may be) subject to a WRO. Many human rights advocacy groups have noted that the focus on remediation supports an approach that addresses the harm suffered by stakeholders, rather than an irresponsible exit approach that often results from focusing on termination.

Evidence of regular, ongoing, shared due diligence and reporting mechanisms addressing forced and child labor can help address the concerns that may have led to a WRO. For example, US Customs and Border Protection (“CBP”) modified the WRO it issued against imports of synthetic disposable gloves manufactured by YTY Industry Holdings after finding that it properly remediated the activities that led to the WRO’s issuance. More recently, in August 2024, CBP modified the Yu Long No. 2 WRO concerning imported seafood products.

CBP will only modify a WRO if the entity’s manufacturing is free of all forced labor indicators, not just what CBP identified prior to issuing the WRO. This means remediation must be comprehensive and effective.

Proper remediation requires shared accountability, enforceability, and stakeholder participation—all of which are provided for in the MCCs.

1. It has been observed that corrective/remedial measures where affected stakeholders (such as workers, worker organizations, and affected communities) are directly engaged are preferable to measures that do not include such engagement. ↑

2. It should be noted that international best practice, as reflected in the MCCs, is to end the relationship as a last resort provided you are not in violation of any other regulations. ↑

As of January 14, 2025 all information-filing requirements mandated by the Corporate Transparency Act (“CTA”) are suspended. If, when, and the extent to which this suspension will end is currently being considered by the United States Supreme Court and U.S. Court of Appeals for the Fifth Circuit. This article considers how what might have been anticipated to be a peaceful year-end holiday season saw all three levels of federal courts (District, Circuit, and Supreme), Congress and a bureau of the U. S. Department of Treasury frantically seeking to determine the future and timing of CTA reporting obligations, and how these events might shape future developments of the CTA.

On December 3, 2024, in Texas Top Cop Shop, Inc. v. Garland (“Top Cop District Litigation”)^[3] brought by businesses and an individual owner (“plaintiffs” or “plaintiffs-appellees”)^[4] against the Financial Crimes Enforcement Network (“FinCEN”), the bureau of the United States Department of the Treasury that administers the CTA; the United States Attorney General; and the Secretary of the Treasury (the “government”), the court issued a nationwide^[5] preliminary injunction enjoining the CTA.^[6] In response to the preliminary injunction, on December 23, 2024, FinCEN gave notice it would not enforce the CTA for so long as the injunction were in place.^[7]

In response to the preliminary injunction, on December 5, 2024 the government filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit (“Top Cop Fifth Circuit Litigation”)^[8] and, on December 11, 2024, a Motion to Stay Preliminary Injunction Pending Appeal^[9] in the Top Cop District Litigation. On December 12, 2024, the District court judge ordered the plaintiffs to respond to the government’s motion by December 16, 2024,^[10] and on December 16, the plaintiffs filed a response,^[11] followed by a government reply the next day. ^[12] On the December 17, the District Court judge denied the government’s motion.^[13]

On December 9, the Notice of Appeal that the government had filed with the Fifth Circuit was docketed (Top Cop Fifth Circuit Litigation).^[14] On December 13, the government filed a Motion for a stay of the preliminary injunction pending appeal,^[15] and a Fifth Circuit motion panel requested that the plaintiffs-appellees file a response by December 17, and the government file a reply by December 19.^[16] On December 17, the plaintiffs-appellees filed a Response/Opposition,^[17] and the government filed a Reply on December 19.^[18] On December 23, the motions panel in an Unpublished Order granted the government’s motion for stay of the preliminary injunction pending appeal,^[19] and did not extend the due date for CTA filings.^[20] Shortly after the release of the Unpublished Order, FinCEN issued a BOI Alert (December 23, 2024) extending the filing dates for information reporting to January 13, 2025 or later.^[21] On December 24, the plaintiffs-appellees filed a motion for rehearing en banc,^[22] in response to which the court issued a Court Directive that a Response/Opposition to the motion for rehearing should be filed by December 31.^[23]

The lifting of the preliminary injunction was short-lived. On December 26, 2024, a merits panel of the Fifth Circuit vacated the stay portion of the order of the motions panel, effectively reinstating the preliminary injunction.^[24] The merits panel established a briefing schedule (concluding on February 28, 2025)^[25] and oral arguments (on March 25, 2025)^[26] for a determination of the government’s motion to stay the preliminary injunction. The plaintiffs-appellees’ motion for en banc hearing was dismissed as moot.^[27]

Continuing the flurry of holiday season activity, on December 31, 2024, while the government’s motion for a stay of the preliminary injunction was still pending before the Fifth Circuit, the Solicitor General, on behalf of the government, commenced an action in the United States Supreme Court (the Top Cop Supreme Court Litigation)^[28] by filing an Application for a Stay of the Injunction Issued By the United States District Court for the Eastern District of Texas (“Supreme Court Application for Stay”).^[29] The Supreme Court Application for Stay argues:

1. the district court gave insufficient deference to the presumed validity of laws enacted by Congress;^[30]
2. that the CTA is within Congress’ authority under the Commerce Clause; ^[31]
3. that the Constitutional Necessary and Proper Clause supports Congress’ authority to adopt the CTA;^[32]
4. established law supports that laws may require that persons provide requested information; ^[33]
5. the plaintiffs have not satisfied the high standards required for a facial challenge to the constitutionality of a statute; ^[34]
6. the equities support lifting the stay in that the district court failed to account for the harm to the Government in not allowing the CTA to be enforced as a tool for addressing identified problems such as domestic and international money-laundering and tax evasion (Petition pp. 26-30);
7. that the merits panel of the Fifth Circuit did not apply the correct standards in lifting the stay of the injunction;^[35] and
8. the district court’s nationwide injunction is unwarranted.^[36]

The Supreme Court Application for Stay also invited the Supreme Court to grant certiorari to consider the proper standard for the issuance of a nationwide injunction.^[37] As to the nationwide reach of the preliminary injunction, the Supreme Court Application for Stay at p. 4 argues:

At a minimum, this Court should narrow the district court’s vastly overbroad injunction. A court of equity may grant relief only to the parties before it. The district court violated that principle by issuing a universal injunction purporting to enjoin the Act itself and forbidding the enforcement of the Act even against non-parties.  Several Members of this Court have recognized that such universal relief contradicts Article III and established equitable principles and have urged clarification of these principles in an appropriate case — but the Court’s antecedent determination on a threshold procedural issue or the merits in prior cases has obviated the need to re-solve the remedial question. Because the lower courts need guidance on the propriety of universal injunctions, this Court may additionally wish to treat this application as a petition for a writ of certiorari before judgment presenting the question whether the district court erred in entering preliminary relief on a universal basis.

The Supreme Court Application for Stay was assigned initially Justice Alito, and on January 3 he issued instructions to the plaintiffs-appellees to respond not later than 4:00 pm on Friday, January 10, 2025. That Response Brief was filed well before the deadline, and on January 13 the Government filed a Reply Brief. ^[38]

Thus, the current enforceability and ultimate validity is currently before three federal courts, none of which has reached a final judgment of constitutionality of the statute. After a month of legal contention, the preliminary injunction issued in the Top Cop District Court Litigation is still in effect although that may change at any time. If the preliminary injunction is lifted, when the information disclosures that would have been filed during the hiatus will be subject to whatever administrative grace FinCEN or the acting court chooses to afford them.

The balance of this article discusses the background of the CTA and its implementing reporting regulations and the machinations they have undergone over the year-end holidays, and how this history may offer a clue to what will happen to the CTA in the future.

The CTA: A Grinch-ish “Gift”

As of December 1, 2024, the CTA^[39] as supplemented by final regulations prescribed under it (“Reporting Rule”)^[40] require each reporting company^[41] created or registered^[42] on or after January 1, 2024 (a new entity)^[43] to file a beneficial ownership information report (“BOIR”) with the Financial Crimes Enforcement Network (“FinCEN”), the bureau of the U.S. Department of the Treasury that administers the CTA, on or before ninety days after creation or registration if created or registered in 2024 and thirty days after creation or registration if created or registered after 2024.^[44]

Under the CTA, the Reporting Rule aims to “minimize burdens on reporting companies associated with the collection of beneficial ownership information, including by eliminating duplicative requirements,” while at the same time aiming to “ensure the beneficial ownership information reported to FinCEN is accurate, complete, and highly useful.”^[45] Thus, while there are still many questions about the application of the reporting requirements to reporting companies, FinCEN is actively considering new regulations to make the information it collects more useful to the banking industry.^[46]

Nonetheless, the CTA has been riddled with nuanced problems and counterintuitive applications that have been an irritant (not always minor) for even some simple business organizations. For larger, more sophisticated organizations, the CTA (particularly as implemented by the Reporting Rule) can be a cipher for a number of organizations that, without any obvious reason, are subject to the statute, including (i) homeowners associations that may exempt from BOIR reporting depending upon the federal tax exemption for which they qualify,^[47] (ii) companies that have separated their employees from the organization in which the company’s value is located, (iii) companies in bankruptcy and subject to the oversight of a Chapter 7 bankruptcy trustee, (iv) companies that have wound up their affairs, (v) limited liability companies (“LLCs”) whose organization was never completed by the admission of a member, (vii) limited liability partnerships,^[48] and (viii) companies having multiple classes of ownership. These issues have earned the CTA pride of place as a program that Project 2025 would like to exterminate.^[49]

On-Again, Off-Again, On-Again Christmas Celebrations

Top Cop is not the only litigation has been filed challenging the CTA and the Reporting Rule. The CTA has been under attack from many small businesses and small business associations as being unconstitutional either as an enactment beyond the power of Congress or an invasion of the constitutional rights of small businesses and their owners. Numerous cases in which these issues are being considered are currently pending in federal courts around the country.

In one case in the early part of 2024, National Small Business United v. Yellen (“NSBU”),^[50] the trial court, a federal district court in Alabama, entered a final declaratory judgment concluding that the CTA exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the CTA against those plaintiffs. FinCEN then issued an alert (“NSBU Alert”)^[51] to the effect that FinCEN would not enforce the CTA against the plaintiffs as long as the judgment remains in effect. The government appealed NSBU (although not the injunction separately) to the U.S. Court of Appeals for the Eleventh Circuit; the case is ongoing.^[52] In addition, FinCEN extended the filing deadlines for reporting companies located in the areas designated both by the Federal Emergency Management Agency (“FEMA”) as qualifying for individual or public assistance and by the Internal Revenue Service as eligible for tax-filing relief.^[53] In all other respects, the Reporting Rule continued to govern the BOIR reporting regime.

Later, in the fall of 2024, two other federal district courts declined to issue an injunction and preliminarily found the CTA constitutional.^[54]

At the same time the government was filing its appeal to the Fifth Circuit, Congress was considering a one-year extension on the filing deadline for reporting companies formed or created before January 1, 2024 (“existing entities”) as part of a continuing resolution, but the extension was deleted from the final enactment of the American Relief Act, 2025.^[55]

On Christmas Eve, after a hectic preholiday week punctuated by furious activities by all three branches of government,^[56] the infelicitous rolling out of the principal aspects of the CTA came to rest with some reporting companies formed after September 3, 2024 being granted by FinCEN an extension of time within which to file their initial BOIRs and the balance of the CTA reporting regime continuing in effect. Based upon BOI Alert (December 23, 2024), the due dates for initial BOIRs were set as follows:

Following the Fifth Circuit’s order lifting of the stay of the preliminary injunction, FinCEN updated the BOI Alert (December 23, 2024) on December 27, 2024 (thereby making it the BOI Alert (December 27, 2024)) to include language discussing the Top Cop Fifth Circuit Court Order.^[64] Among other things, BOI Alert (December 27, 2024) no longer mentioned the extension of due dates described in BOI Alert (December 23, 2024). Still, the due dates in the BOI Alert (December 23, 2024) remain of some interest because they suggest how FinCEN may respond if the preliminary injunction is lifted—that is, by affording a limited extension of time to some of the reporting companies that have been affected by the preliminary injunction.^[65]

All I Want for Christmas Is for the CTA to Have No Teeth

And so, as we have passed January 1, 2025, the date on which all existing entities were to have filed their BOIRs, where are we and why?

While the exact number of reporting companies that have filed their BOIRs is uncertain, pleadings in the Top Cop District Litigation suggested that at the time the preliminary injunction was issued on December 3, 2024, just approximately ten million of the estimated thirty-six million reporting companies had filed. Since this date, BOIRs have not been required, although FinCEN has continued to accept them.^[66] The hiatus in the requirement that BOIRs be filed will continue unless and until (i) the Fifth Circuit grants the government’s motion to stay the preliminary injunction, (ii) the Top Cop District Litigation is finally resolved in the government’s favor on the merits, or (iii) the government prevails on the Supreme Court Application for a Stay either because Supreme Court stays the preliminary injunction or because it determines that the preliminary injunction is inappropriate. The CTA is certainly not dead; those who have not complied when they were required to before December 3, 2024, are not exonerated; and, as demonstrated by the Top Cop motions panel Order,^[67] all of the requirements may come roaring back with very little time to prepare the required BOIRs.

Why are we in this situation? Is it because there is overwhelming support for money laundering, terrorist financing, and human trafficking? Is it because Americans, who readily surrender personal identifying information on technology platforms, are concerned about their privacy? We think not.^[68] Rather, the CTA has been adopted to satisfy an international consortium of law enforcement officials, most of whom operate under national legal systems that already require much more transparency of organizations than does the United States, particularly considering the strongly state-centric regulations of organizations. Similarly, compliance with Financial Action Task Force (“FATF”) mandates have entailed an attempted redefinition of the role of lawyers from honest advocates and advisers of clients to agents of law enforcement.^[69] Interestingly, since the adoption of CTA based upon the FATF’s mandates, the United States has narrowly elected an administration that is highly suspicious of international mandates and that has had its anticipated policies described in a document that advocates for a repeal of the CTA.^[70]

Over the four years that FinCEN has had to implement has declined to address many issues that have troubled those attempting to comply with the CTA—or, when addressing the issues, it has provided unworkable answers.^[71] These unworkable rules are imposed on millions of organizations at a cost to the organizations of billions of dollars, by FinCEN’s own reckoning. Thus, rather than trying to find an efficient way of dealing with the problems that FinCEN was trying to address, the CTA merely attempts to impose an international standard on U.S. organizations. What could possibly go wrong?

1. Other titles considered for this update included “What Could Possibly Go Wrong?”; “Season’s Greetings, Where’s Your Pleadings?”; “It Seemed Like a Good Idea at the Time”; “If You’re Not Confused, You Aren’t Paying Attention”; “Nailing Jell-O^® to the Wall”; and “How I Spent My Christmas Vacation.” In keeping with the spirit of the holiday, Chat GPT (as posted by Jeffrey Unger) chimed in with the following:

   Oh, FinCEN’s a whirlwind, it’s buzzing with schemes,
   With reports and compliance and anti-fraud dreams!
   It watches the dollars, the nickels, and dimes,
   To catch all the sneaky and dubious crimes.

   But lo, the law stumbled—it faced a tough fight,
   Declared unconstitutional, it dimmed FinCEN’s light.
   An injunction was granted; the work hit a wall,
   No chasing bad money, no watching at all!

   Then the injunction was lifted, the chase was revived,
   FinCEN back at it, its mission survived.
   But oh, once again, it was halted in court,
   Enjoined once more—what a legal report! ↑

2. The authors received thoughtful comments from Jay Adkisson, Bill Callison, Eric Dante, Cathy Krendl, Herrick Lidstone, Chip Lion, and Kevin Shepherd, based upon which we rewrote many parts of this article to add new grammatical errors and fallacious conclusions for which those commenters are not responsible. ↑

3. Texas Top Cop Shop, Inc., et al v. Garland et al. 4:24-cv-00478 – ALM (U.S. E. D. Texas (Sherman)). We below make reference to certain pleadings and other documents by reference to the document docket numbers. ↑

4. Plaintiffs are Texas Top Cop Shop, Inc.; Russell Straayer; Mustardseed Livestock, LLC; Libertarian Party of Mississippi; National Federation Of Independent Business, Inc.; and Data Comm For Business, Inc. ↑

5. The preliminary injunction purports to enjoin the CTA everywhere it may apply, hence nationwide. The government and some courts discuss injunctions of this breadth as “universal” injunctions because they also apply to all potentially affected, and not just the plaintiffs. ↑

6. D.C. Doc. 31, Top Cop District Litigation amended for a minor clarification on December 5, 2024 by Doc. 33.; Texas Top Cop Shop, Inc. v. Garland,__ F. Supp. 3d __, 2024 U.S. Dist. LEXIS 218294, 2024 WL 4953814 (E.D. Tex. Dec. 3, 2024, amended Dec. 5, 2024). ↑

7. FinCEN has been posting information on its position with respect to filing requirements as “Alerts” (“BOI Alerts”) on its BOI Beneficial Ownership Information Homepage (https://www.fincen.gov/boi). As circumstances change, FinCEN replaces BOI Alert, so that references in this paper will be to BOI Alerts updated to a specific date. In this case, the BOI Alert is BOI Alert (December 6, 2024),  Impact of Ongoing Litigation – Deadline Stay – Voluntary Submission Only (“While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.”). Although superseded BOI Alerts such as this one are no longer available on BOI Beneficial Ownership Information Homepage, they may helpful background on how FinCEN’s position evolved and provide useful guidance as to how FinCEN may respond to a lifting of the preliminary injunction. ↑

8. D.C. Doc., 32, Top Cop District Litigation amended for a minor clarification on December 6, 2024 by Document 34. ↑

9. D.C. Doc. 35. ↑

10. D.C. Doc. 36. ↑

11. D.C. Doc. 37. ↑

12. D.C. Doc. 38. ↑

13. D.C. Doc.40; Texas Top Cop Shop, Inc. v. Garland, __ F. Supp. 3d __, 2024 U.S. Dist. LEXIS 227810 (E.D. Tex. Dec. 17, 2024). ↑

14. Texas Top Cop Shop, Inc., et al v. Garland et al. 24-40792 (Fifth Cir.). ↑

15. C.A. Doc. 21, Top Cop Fifth Circuit Litigation Document 21 in which the government prayed that the preliminary injunction be stayed during the appeal or, “[i]n the alternative, the injunction should be narrowed to the companies that have been specifically identified in the district court or, at a minimum, to members of NFIB [National Federation of Independent Business].” ↑

16. C.A. Doc. 25. ↑

17. C.A. Doc. 34. During the period that the motions panel was considering the government motions, over a dozen non-parties sought to file amicus briefs in support of the plaintiffs-appellants. ↑

18. C.A. Doc. 100. ↑

19. C.A. Doc. 140. 2024 U.S. App. LEXIS 32565 (Fifth Cir. Dec. 23, 2024) (appeal from the U.S. District Court for the Eastern District of Texas). The panel consisted of Judges Stewart, Haynes, and Higginson. All three agreed to stay (i.e., rescind) the nationwide preliminary injunction, but Judge Haynes would have preserved it for the benefit of the parties before the court as had the court in NSBU. The opinion noted,

    Judge Haynes joins in part and disagrees in part. She agrees for an expedited appeal and agrees that a national injunction is not appropriate here, so she would grant a temporary stay of the preliminary injunction pending the decision of the merits panel regarding whether to deny a stay pending appeal as to the non-parties. However, she would deny the temporary stay as to the parties (while, of course, deferring to the merits panel on this point as well), including the members of NFIB, as long as their identities are disclosed to the government.

    Id. at n.1. ↑

20. Id. at n.7 (“The Businesses warn that lifting the district court’s injunction days before the compliance deadline would place an undue burden on them. They fail to note, however, that they only filed suit in May 2024 and the district court’s preliminary injunction has only been in place for less than three weeks as compared to the nearly four years that the Businesses have had to prepare since Congress enacted the CTA, as well as the year since FinCEN announced the reporting deadline.”). ↑

21. BOI Alert (December 23, 2024) Alert: Updates to Beneficial Ownership Information Reporting Deadlines—Beneficial Ownership Information Reporting Requirements Now in Effect, with Deadline Extensions. ↑

22. C.A. Doc. 142. ↑

23. C.A. Doc. 147. ↑

24. C.A. Doc. 160 (“in order to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments, that part of the motions-panel order granting the Government’s motion to stay the district court’s preliminary injunction enjoining enforcement of the CTA and the Reporting Rule is VACATED.”). ↑

25. C.A. Doc. 163. ↑

26. C.A. Doc. 165. ↑

27. C.A. Docs. 174 (motion to withdraw petition) and 181 (granting the motion to withdraw petition). ↑

28. United States Supreme Court (24 A. 653) the docket of which is available at https://www.supremecourt.gov/docket/docketfiles/html/public/24a653.html. ↑

29. The Supreme Court Application for Stay is available at https://www.supremecourt.gov/DocketPDF/24/24A653/336329/20241231163238372_24aGarland%20v%20Texas%20Top%20Cop%20Shop. Supreme Court Application for Stay p. 1, praying “for a stay of the preliminary injunction issued by the U.S. District Court for the Eastern District of Texas (App., infra, 19a-97a), pending the consideration and disposition of the government’s appeal to the United States Court of Appeals for the Fifth Circuit and, if the court of appeals affirms in whole or in part, pending the timely filing and disposition of a petition for a writ of certiorari and any further proceedings in this Court.” ↑

30. Supreme Court Application for Stay pp. 10-13. ↑

31. Supreme Court Application for Stay pp. 13-16. ↑

32. Supreme Court Application for Stay pp. 17-25. ↑

33. See, e.g., Supreme Court Application for Stay pp. 20 (“Congress has often required private individuals and entities to provide information to the government, and this Court has upheld many such requirements under the Necessary and Proper Clause.”). ↑

34. Supreme Court Application for Stay pp. 25-26. ↑

35. Supreme Court Application for Stay pp. 30-31. ↑

36. Supreme Court Application for Stay pp. 31-36. ↑

37. Supreme Court Application for Stay pp. 36-38. ↑

38. Future pleading will appear on the docket for the case at https://www.supremecourt.gov/docket/docketfiles/html/public/24a653.html.

    =https://www.supremecourt.gov/DocketPDF/24/24A653/336997/20250110130810648_Garland%20v%20TTCS%20No%2024A653%20Respondents%20Response%20in%20Opposition%20to%20Application%20for%20Stay.pdf

     

    https://www.supremecourt.gov/DocketPDF/24/24A653/337159/20250113150232824_Texas%20Top%20Cop%20Shop%20Reply.pdf ↑

39. 31 U.S.C. § 5336. ↑

40. This article employs the term used FinCEN and the courts in the litigation described herein for the regulations implementing the reporting provisions of the CTA, although there are many rules within these regulations, and they have been released in more than one adoption. The Reporting Rule appears at 31 C.F.R. §§ 1010.380(a)(1) et seq. The “final” beneficial ownership reporting rules were released in Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498 (Sept. 30, 2022). Those “final” regulations detail certain due dates, amended by Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 Fed. Reg. 66,730 (Sept. 28, 2023); supplemented with regard to the use of FinCEN identifiers by the release of Use of FinCEN Identifiers for Reporting Beneficial Ownership Information of Entities, 88 Fed. Reg. 76,995 (Nov. 8, 2023); and expanded with regard to the exemption for public utilities (31 C.F.R. § 1010.380(c)(2)(xvi)) in Update of the Public Utility Exemption Under the Beneficial Ownership Information Reporting Rule, 89 Fed. Reg. 83,782 (Oct. 18, 2024)—collectively, the “Reporting Rule.” ↑

41. Subject to certain exemptions, a reporting company is

    a corporation, limited liability company, or other similar entity that is . . . created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe or . . . formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.

    31 U.S.C. § 5336(a)(11). ↑

42. In this article, created or registered refers to the act by which an organization becomes a reporting company, as defined above. If an organization ceases to be exempt from the CTA reporting regime, it is unclear how the rules discussed in this article apply. The Reporting Rule provides that “[a]ny entity that no longer meets the criteria for any exemption under paragraph (c)(2) of this section shall file a report within 30 calendar days after the date that it no longer meets the criteria for any exemption.” 31 C.F.R. § 1010.380(a)(1)(iv). The CTA does not expressly address this situation, providing limited updating requirements for certain exempt entities having an ownership interest in a reporting company (31 U.S.C. § 5336(b)(2)(B)) or being an exempt entity by reason of the inactive entity exception. Newly nonexempt organizations should have been protected during the nationwide preliminary injunction in the same way as are entities that have been created or registered. ↑

43. 31 U.S.C. § 5336(b)(1)(C). ↑

44. As originally promulgated, the Reporting Rule would have required all initial BOIRs filed for reporting companies created on or after January 1, 2024, to be filed within thirty days. That deadline was extended to ninety days. Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, supra note 21. ↑

45. 31 U.S.C. § 5336(b)(4)(B). ↑

46. The CTA instructs FinCEN to develop regulations that will “to the greatest extent practicable . . . confirm[] beneficial ownership information provided to financial institutions to facilitate the compliance of the financial institutions with anti-money laundering, countering the financing of terrorism, and customer due diligence requirements under applicable law.” 31 U.S.C. § 5336(b)(1)(F)(iv)(II). The banking community, having the greatest access to the financial operations of its customers, is very interested in being able to shift the responsibility for customer due diligence to others. ↑

47. A homeowners association that is tax-exempt under I.R.C. §501(c)(4) is exempt from CTA filing while one that is tax-exempt under I.R.C. §528 is not exempt from CTA filing, although both homeowners associations may otherwise be identical. See FinCEN FAQ C.10 (June 10, 2024) at https://www.fincen.gov/boi-faqs#C_10. ↑

48. See Thomas E. Rutledge & Robert R. Keatinge, LLPs Are Not CTA Reporting Companies, Bus. L. Today (Oct. 10, 2024). ↑

49. See The Heritage Foundation, Project 2025, Mandate for Leadership: The Conservative Promise 707–08 (2023) (“Congress should repeal the Corporate Transparency Act, and FinCEN should withdraw its poorly written and overbroad beneficial ownership reporting rules. Both are targeted at the smallest businesses in the U.S. (those with 20 or fewer employees) and will do nothing material to impede criminal finance. The FinCEN beneficial ownership reporting rules will impose costs exceeding $1 billion annually and is exceedingly poorly drafted. FinCEN itself estimates that more than 33 million businesses will be affected and that costs will be $547 million to $8.1 billion annually.”). ↑

50. 721 F. Supp. 3d 1260 (N.D. Ala. 2024), appeal filed, Nat’l Small Bus. United v. U.S. Dep’t of the Treasury, No. 24-10736 (11th Cir. Mar. 11, 2024). ↑

51. BOI Alert (Jan. 2, 2025) Alert: Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), (“[T]he government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.”). ↑

52. Nat’l Small Bus. United, No. 24-10736. Oral argument of the case took place on September 27, 2024. ↑

53. BOI Alert (undated) Alert: FinCEN Has Issued Five Notices Extending the Filing Deadlines to Submit BOI Reports for Certain Reporting Companies in Response to Hurricane Milton, Hurricane Helene, Hurricane Debby, Hurricane Beryl, and Hurricane Francine, FinCEN (last visited Jan. 3, 2025). ↑

54. See Firestone v. Yellen, 134 A.F.T.R.2d 2024, 5683, 2024 WL 4250192, 2024 U.S. Dist. LEXIS 170085 (Sept. 20, 2024); Cmty. Ass’n Inst. v. Yellen, 2024 WL 4571412, 2024 U.S. Dist. LEXIS 193958 (D. Or. Oct. 24, 2024). These decisions have been appealed to, respectively, the U.S. Courts of Appeal for the Ninth and Fourth Circuits. ↑

55. As initially introduced on December 17, 2024, 118 H.R. 10545 provided at section 122:

    Extension of Filing Deadline for Certain Pre-Existing Reporting Companies. Section 5336(b)(1)(B) of title 31, United States Code, is amended by striking “before the effective date of the regulations prescribed under this subsection shall, in a timely manner, and not later than 2 years after the effective date of the regulations prescribed under this subsection,” and inserting “before January 1, 2024, shall, not later than January 1, 2026.”

    As a result of political jockeying, this provision was not included in the final bill, which was enacted. See also Katie Lobosco & Tami Luhby, Here’s What’s In and Out of the Government Funding Agreement, CNN Pol. (Dec. 21, 2024). ↑

56. Three branches of government counts the brief skirmish over the continuing resolution, discussed above. ↑

57. The CTA provides thus:

    In accordance with regulations prescribed by the Secretary of the Treasury, any reporting company that has been formed or registered before the effective date of the regulations prescribed under this subsection shall, in a timely manner, and not later than 2 years after the effective date of the regulations prescribed under this subsection, submit to FinCEN a [BOIR].

    31 U.S.C. § 5336(b)(1)(B). This potential two-year period (which would have expired on January 1, 2026) was reduced by the Reporting Rule to one year after the effective date of the Reporting Rule. 31 C.F.R. § 1010.380(a)(1)(iii) (“Any domestic reporting company created before January 1, 2024 and any entity that became a foreign reporting company before January 1, 2024 shall file a report not later than January 1, 2025.”). BOI Alert (December 23, 2024), Alert: Updates to Beneficial Ownership Information Reporting Deadlines—Beneficial Ownership Information Reporting Requirements Now in Effect, with Deadline Extensions, provided, “Reporting companies that were created or registered prior to January 1, 2024 have until January 13, 2025 to file their initial beneficial ownership information reports with FinCEN. (These companies would otherwise have been required to report by January 1, 2025.)” FinCEN (Dec. 23, 2004). ↑

58. The CTA provides that “[i]n accordance with regulations prescribed by the Secretary of the Treasury, any reporting company that has been formed or registered after the effective date of the regulations promulgated under this subsection shall, at the time of formation or registration, submit to FinCEN a [BOIR].” 31 U.S.C. § 5336(b)(1)(C). ↑

59. Reporting companies created or registered in the United States on or after September 4, 2024, that had a filing deadline between December 3, 2024, and December 23, 2024, were given until January 13, 2025 to file their initial BOIRs with FinCEN. ↑

60. These reporting companies were obligated to timely file their initial BOIRs before the temporary injunction issued. This simply confirms that while the temporary injunction provided relief for those for whom the deadline had not yet arrived, FinCEN took the position after the stay of the preliminary injunction that the injunction did not affect the due date for those already not in compliance with the deadline. ↑

61. Reporting companies created or registered in the United States on or after December 3, 2024, and on or before December 23, 2024, were given an additional twenty-one days from their original filing deadline to file their initial BOIRs with FinCEN. ↑

62. Reporting companies created or registered in the United States on or after December 24, 2024, and on or before December 31, 2024, were given 90 to file their initial BOIRs with FinCEN. ↑

63. 31 U.S.C. § 5336(b)(3)(ii) and 31 C.F.R. § 1010.380(b)(4)(ii) require those individuals and reporting companies that choose to obtain a FinCEN identifier to update the information that they have supplied in order to obtain the FinCEN identifier to reflect changes and corrections within thirty calendar days. Presumably, the nationwide preliminary injunction suspended enforcement of penalties for violating this requirement, but nothing in BOI Alert (December 23, 2024) explicitly tolled this thirty-day requirement. ↑

64. See BOI Alert (December 31, 2024) see note 7 Alert: Impact of Ongoing Litigation—Deadline Stay—Voluntary Submission Only, provided the following information:

    On December 23, 2024, a panel of the U.S. Court of Appeals for the Fifth Circuit granted a stay of the district court’s preliminary injunction entered in the case of Texas Top Cop Shop, Inc. v. Garland, pending the outcome of the Department of the Treasury’s ongoing appeal of the district court’s order. FinCEN immediately issued an alert notifying the public of this ruling, and recognizing that reporting companies may have needed additional time to comply with beneficial ownership reporting requirements, FinCEN extended reporting deadlines. On December 26, 2024, however, a different panel of the U.S. Court of Appeals for the Fifth Circuit issued an order vacating the Court’s December 23, 2024 order granting a stay of the preliminary injunction. Accordingly, as of December 26, 2024, the injunction issued by the district court in Texas Top Cop Shop, Inc. v. Garland is in effect and reporting companies are not currently required to file beneficial ownership information with FinCEN. ↑

65. In its Supreme Court Application for a Stay of the Injunction Issued By the United States District Court for the Eastern District of Texas at page 9 (“Recognizing that reporting companies may need additional time to comply with the Act given the period when the preliminary injunction was in effect, FinCEN extended the reporting deadlines in certain respects, including by extending the deadline for entities formed before 2024 from January 1, 2025, to January 13, 2025. See C.A. Doc. 105 at 1-2, NSBU v. United States Department of the Treasury, No. 24-10736 (11th Cir. Dec. 24, 2024).”). ↑

66. It is reported that ss of January 3, 2025, FinCEN had received some 13.7 million BOIR filings (although it uncertain how many of those filings were initial BOIRs of existing entities). ↑

67. This was subsequently undone by the Top Cop Fifth Circuit Court Order. ↑

68. As recently noted by Jay Adkisson, the information required by the CTA is “no more onerous than one arranging an international flight.” Jay Adkisson, Unusual Fifth Circuit Self-Reversal Sows Confusion for BOI Reporting, Forbes (updated Dec. 30, 2024). ↑

69. See Am. Bar Ass’n, Resolution 100 (adopted Aug. 2023); see also Robert R. Keatinge, Comments on Changes to Rule 1.16, SSRN (Oct. 4, 2024). ↑

70. The prior administration published support for the CTA. See Statement of Administration Policy: H.R. 2513—Corporate Transparency Act of 2019, as Amended by Manager’s Amendment, Am. Presidency Project (Oct. 22, 2019). The present administration doubled down on that support when the Solicitor General signed onto the New Years’ Eve Supreme Court filing defending the CTA and seeking the stay or modification of the preliminary injunction. It is worthy of note that many cite the support expressed by Marco Rubio, the presumptive incoming secretary of state, for the CTA. Press Release, Sen. Marco Rubio, Rubio, Colleagues Urge Treasury to Fully Implement Corporate Transparency Act (May 10, 2022). A letter sent by Senators Rubio and Elizabeth Warren to U.S. Treasury Secretary Janet Yellen and FinCEN calls for implementation of “Rubio’s Corporate Transparency Act (CTA), which was signed into law in 2020 (P.L. 116-283).” Id. In considering the importance of this position in the incoming administration, it should be noted that the letter not only was coauthored by Warren (D-MA) but also was cosigned by Senators Chuck Grassley (R-IA), Sheldon Whitehouse (D-RI), Ron Wyden (D-OR), Bob Menendez (D-NJ), and Bill Cassidy (R-LA). It is unclear whether bipartisan support for the CTA will be a benchmark of the incoming administration, or whether those legislators who previously supported and defended it will change their position if the new administration signals otherwise.

    . ↑

71. One of the clearest examples is the conflict between the requirement that the BOIR be true, complete, and correct and the fact that at times it will be impossible to obtain the information required to be included. Rather than craft a workable resolution of this conundrum, FinCEN ignores the problem because it is inconvenient. See Notice of Information Collection; Request for Comments, 88 Fed. Reg. 67,443 (Sept. 29, 2023) (FinCEN effectively says that allowing a partial filing with a description of unavailable information “would incorrectly suggest to filers that it is optional to report required information, and that reporting companies need not conduct a diligent inquiry to comply with their reporting obligations.”). Thus, rather than providing guidance to clarify that ongoing diligence is necessary, the Reporting Rule simply disregards the problem. See also Robert R. Keatinge & Thomas E. Rutledge, Impossible Things: Compliance with the Corporate Transparency Act When Beneficial Owners or Company Applicants Are Nonresponsive, Bus. L. Today (Dec. 16, 2024). ↑

In Canadian mergers and acquisitions (M&A) transactions, especially those involving the purchase of shares, the issue of unpaid vacation pay to employees on incentive compensation (such as commissions and bonuses) is often overlooked during diligence—yet it has the potential to lead to significant post-closing liability.

Understanding the Issue

In Canada, provincial employment standards legislation requires that employers pay vacation pay to employees on all remuneration earned, where remuneration is comprised not only of base salary, but also incentive compensation like bonuses, commissions, and other performance-based earnings. Despite the statutory requirement, many businesses overlook this obligation as it relates to payments on incentive compensation. This may occur for a variety of reasons:

1. Lack of awareness. There appears to be a misconception that vacation pay is payable only on base salaries, and that any “extras” such as commissions, bonuses or other performance-based earnings do not trigger any vacation pay entitlements.
2. Incorrect interpretations of employment law. Even among those who understand that incentive compensation may attract the payment of vacation pay, there is a common misunderstanding that vacation pay is not payable on incentive compensation if such compensation was paid at the company’s discretion. This is analysis is, unfortunately, only partly true. Generally speaking, vacation pay is payable on all wages—including incentive compensation like commissions and bonuses—unless the incentive compensation payments were (i) wholly at the discretion of the employer, and (ii) not related to hours, production, or efficiency. In other words, if bonuses are discretionary but are tied in any way to hours, production, results, or efficiency (i.e., performance), such payments are regarded as “wages” for the purposes of employment standards legislation and attract vacation pay requirements. 
3. Administrative oversight. It is conceivable that a company’s human resources, administrative, or accounting function is not set up in a way that contemplates the payment of vacation pay to employees on the portion of their wages tied to their performance-based earnings.

The Current Landscape

In recent years, there has been a noticeable and steady rise in class action litigation against Canadian employers for failing to pay vacation pay on employees’ bonuses and commissions. Consistent with employment standards legislation, workers in various sectors are increasingly challenging their employers’ compensation practices, arguing that vacation pay should be calculated on total earnings, including bonuses and commissions, rather than just their base salary.

A key example of this growing trend is the ongoing RBC class action lawsuit,^[1] one of several proposed class actions targeting banking and insurance companies for unpaid vacation pay on incentive compensation, with more than a billion dollars at stake. In RBC, the plaintiffs are arguing that their vacation pay entitlements should have factored in all performance-based earnings (including commissions and bonuses), not just base salary.

Ongoing class actions like RBC are noteworthy because their outcome has the potential to set a precedent that could open the floodgates for similar claims across Canada—whether by way of further class actions or individual claims. Regardless, the Canadian legal landscape is shifting as workers are increasingly seeking to ensure they are being compensated fairly and in line with employment standards legislation, with claims regarding vacation pay entitlements as the most recent example. This growing trend reflects broader shifts in labor rights advocacy and a heightened awareness of employees’ statutory rights in Canada.

Relevance to M&A

From an M&A perspective, it is imperative to ensure that proper diligence is conducted to confirm that the target has been historically compliant with its vacation pay obligations. If Canadian employees have previously been deprived of their vacation pay entitlements, a buyer could be on the hook for significant post-closing liabilities if the noncompliance comes to light. Courts are reluctant to deprive employees of their legal entitlements, so a buyer’s exposure can become material very quickly insofar as it may involve the correction of past underpayments (or nonpayments) dating back to an employee’s date of hire. Given that incentive compensation is often a key component of employee compensation packages, the financial impact can be substantial.

Cross-Border M&A Implications

In cross-border M&A transactions involving a Canadian parent and a US subsidiary, complexities can arise regarding vacation pay obligations, especially when Canadian employees are temporarily working in the US. While US law typically governs employees of a US subsidiary, Canadian employment standards—including in respect of vacation pay entitlements—may still apply to Canadian employees working in the US on secondment or temporary assignment.

For example, if a Canadian employee is working in the US part of the year, there may be uncertainty regarding whether such employee’s vacation pay is calculated under Canadian or US law. Although US vacation policies differ significantly from Canadian standards, it is crucial for Canadian employers to ensure compliance with both US and Canadian vacation pay obligations during the employee’s assignment in the US. Failure to do so could expose the company to liability if vacation pay is not correctly calculated or paid in line with Canadian employment standards.

Mitigating the Risk

For both buyers and sellers in an M&A transaction, understanding the potential risks for unpaid vacation pay on incentive compensation is crucial. Sellers should ensure that their HR and payroll practices are in full compliance with Canadian employment standards before entering into negotiations. A thorough due diligence process should include a review of vacation pay accruals and payments, particularly as they relate to performance-based incentive compensation.

For buyers, it is essential to work with legal advisors who are familiar with the nuances of Canadian employment law and the risks associated with noncompliance with Canadian vacation pay requirements. For M&A deals that have a cross-border component, buyers should conduct thorough due diligence to identify any potential vacation pay liabilities for employees working in both countries. In particular, buyers should diligence the target’s vacation pay accruals to ensure that they have been properly documented, even for employees temporarily working in the US, to mitigate the risk of post-closing exposure.

Engaging in early discussions about these potential liabilities can help structure the deal in a way that minimizes exposure for the buyer, including by way of addressing the concern in the employment representations and warranties, or including a specific indemnity regarding exposure for historical noncompliance. A buyer may also opt to procure representations and warranties insurance as a risk mitigation tool, but it should be aware that insurers in the Canadian market are live to the issue, and so buyers should be prepared to address any potential risk during underwriting.

Conclusion

The issue of unpaid vacation pay on incentive compensation is an often-overlooked risk in Canadian M&A transactions, despite that the issue has the potential to result in a significant post-closing liability. It is imperative that transacting parties conduct fulsome diligence to identify whether there is any exposure, and to address this issue proactively.

1. Cunningham v. RBC Dominion Securities, 2022 ONSC 5862 (CanLII). ↑

On December 17, the Federal Trade Commission (FTC) finalized its “Rule on Unfair or Deceptive Fees” (Junk Fees Rule), designed, the FTC noted, to prohibit bait-and-switch pricing and mandate clear and conspicuous price disclosures in the live-event ticketing and short-term lodging industries. While similar in nature to some of the junk fee rules finalized by the Consumer Financial Protection Bureau (CFPB), the FTC’s Final Rule targets industries outside of the CFPB’s authority and highlights the Biden administration’s continued focus on all things junk fees, even in the waning moments of the Biden presidency.

To Whom Does the Junk Fees Rule Apply?

Initially, the FTC had proposed the Junk Fees Rule apply to any “business,” which it defined as “an individual, corporation, partnership, association, or any other entity that offers goods or services, including, but not limited to, online, in mobile applications, and in physical locations.” After receiving significant comments, the FTC narrowed the definition to businesses that offer “covered goods or services,” which the Junk Fees Rule defines as “live-event tickets or short-term lodging, including temporary sleeping accommodations at a hotel, motel, inn, short-term rental, vacation rental, or other place of lodging.”

Notably, the FTC declined to include other industry-specific carve-outs to live-event tickets or short-term lodging businesses that are otherwise covered by the Junk Fees Rule.

What Does the Final Rule Do?

The Junk Fees Rule does not prohibit any type or amount of fee or outlaw any specific pricing strategy. Hiding or misrepresenting a fee, however, would constitute an unfair or deceptive practice. A covered business that charges a fee must “tell consumers the whole truth up-front about prices and fees” by providing clear and conspicuous price and fee disclosures in a manner that is “easily noticeable (i.e., difficult to miss) and easily understandable by ordinary consumers.”

To accomplish this:

1. the disclosure must be made in the same way the communication or advertisement is made (i.e., visual, audible, or both);
2. a visual disclosure, by size, contrast, location, and length, must “stand out” from other text;
3. an audible disclosure must be delivered in volume, speed, and cadence sufficient for an ordinary consumer to hear and understand it;
4. disclosures in online communications (e.g., the internet or mobile app) must be “unavoidable”;
5. the disclosure must use diction and syntax understandable to the ordinary consumer and must be in every language in which the representation or communication is;
6. the disclosure must comply with all of these requirements in each medium used;
7. the disclosure must not be contradicted or mitigated by anything else in the communication; and
8. when a communication targets a specific audience, “ordinary consumers” as defined by the Junk Fees Rule includes members of that specific audience.

The Junk Fees Rule also requires covered businesses to prominently display the “total price” of a covered good or service. The “total price” is the maximum total of all fees or charges a consumer must pay for any good(s) or service(s) and any mandatory ancillary good or service, except that government charges, shipping charges, and fees or charges for any optional ancillary good or service may be excluded.

What Comes Next?

The FTC voted 4–1 in favor of publishing the Final Rule, but the dissenter, Commissioner Andrew Ferguson, is a notable one. Commissioner Ferguson was recently tapped by President-Elect Trump as the FTC’s next chair. In his dissenting statement, Commissioner Ferguson took no issue with the substance of the Junk Fees Rule. Rather, his dissent focused on his belief that “the time for rulemaking by the Biden-Harris FTC is over.”

That being said, Commissioner Ferguson did appear to leave the door open for enforcement of the Junk Fees Rule during the Trump Administration, noting:

My vote, however, should not be understood to state my position on the Final Rule’s merits, or on whether the Commission under President Trump should enforce the Final Rule. On the merits, Commissioner Holyoak correctly points out that the Final Rule bears little resemblance to the flagrantly unlawful version of the rule the Commission proposed more than a year ago. The Final Rule addresses practices and industries for which the Commission has some evidence of prevalence as Section 18 requires. It is therefore a significant improvement over what the Commission originally threatened to inflict on the American economy.

Nevertheless, because the Junk Fees Rule is subject to the Congressional Review Act (CRA), it may never take effect. Under the CRA, Congress has the ability to enact a resolution of disapproval, which, if done, would invalidate the Junk Fees Rule and prevent its implementation. But, while it is likely that Congress will use the CRA to invalidate some of the CFPB’s “junk fees” rulemaking, the FTC’s Junk Fees Rule is narrow, as Commission Ferguson noted, and it does not cap fees. It is also likely to be extremely popular with the public, as evidenced by the overwhelmingly positive comments the FTC received during the comment period. So, it is not clear whether a Republican Congress would feel compelled to add this one to the CRA pile.

If Congress does not invalidate the Junk Fees Rule, it will take effect 120 days after its publication in the Federal Register.

Data and analytics company LexisNexis, a division of RELX, has embraced the rule of law as central to its corporate mission. According to its website, its business “is driven by the mission to advance the rule of law around the world, which is vital for building peace and prosperity in society.” In 2019, the company established the LexisNexis Rule of Law Foundation to coordinate its rule of law work. Leading these efforts has been Ian McDougall, president of the LexisNexis Rule of Law Foundation and former LexisNexis general counsel, who is also a member of the World Justice Project (WJP) Rule of Law Leadership Council. WJP Executive Director Elizabeth Andersen caught up with Ian recently to learn more about LexisNexis’s commitment to the rule of law. An edited transcript of their conversation follows. 

Elizabeth Andersen: Tell me the origin story of the LexisNexis Rule of Law Foundation. How did LexisNexis come to prioritize the rule of law?

Ian McDougall: When LexisNexis Chief Executive Officer Mike Walsh appointed me as general counsel twelve years ago, he asked me to think about the company’s good work on various volunteer projects in over one hundred countries and consider how that work could be organized under a coherent theme that the company could unite behind. It seemed to me that all of these projects were related in one way or another to the rule of law, so that became our theme. 

As a first step, we, like WJP, had to decide what we mean by the rule of law. Our approach was to undertake historical research about how this idea had developed in different parts of the world. We wanted to get the world—through history—to tell us what the rule of law meant, rather than the other way around. The common themes that emerged make up the four pillars of the rule of law that we use: equality before the law, an independent judiciary, access to the law, and access to remedy.

We were careful to be as nonpolitical as possible and to avoid difficult language and topics, so we talk about access to remedy, rather than “justice,” because we are avoiding very interesting but sometimes philosophical debates that can sidetrack us. We don’t include, for example, “human rights” or “democracy” in our definition, because these are, as far as we are concerned, outcomes that depend on the rule of law as we define it. This approach means that I can go to meetings with Chinese officials and to meetings with U.S. senators and make exactly the same speech. This nonpolitical approach is also important to making this something that the business community can get behind. 

You’ve been a real advocate for businesses taking up the rule of law cause. How do you make the case? 

Well, you have to talk to business in the language of business. That means saying or proving things like: When the rule of law is stronger, per capita GDP is stronger. You have a bigger marketplace and more opportunity to sell your goods. When the rule of law is stronger, you can protect the investment that you’re making in that country. 

Using these as avenues to interest the business community—to be able to say quite openly, this is not only the right thing to do, but it’s in your naked self-interest to do it right. You want to operate in this country; how do you do that when there is no facility to protect your investment or protect your intellectual property or do any of these basic things that mean that you have half a chance of getting a return on your investment? The answer is you need to get involved with us in advancing the rule of law, because that gives you the foundation for business investment. 

How does LexisNexis advance the rule of law, and what do you recommend to other businesses interested in advancing this cause? 

We do it by a very simple strategy of two points. First, deploy your core skills. In other words, take what you’re already good at and deploy that capacity to advance one or more of the four pillars of the rule of law. Second, work with partners who can bring something to the table. That’s where the Foundation comes in. It has served as a focal point for us to organize our capacity to contribute to the rule of law and as a vehicle for building key partnerships. 

And how does that work in practice? Give us some concrete examples of assets that LexisNexis has deployed in this work. 

We are a legal publisher, so quite naturally, we have helped countries to create the consolidated laws of their country. Sometimes in post-conflict situations, a country’s been destroyed, and there is hardly any record of what laws were in place before. We’ve had editorial teams go to the country, do research, see what exists, see where the gaps are, and then help the country to draft laws that fill the gaps in what they have or don’t have. They produce a consolidated set of laws.

We have also done judge training, helping judges understand how to operate in a rule of law context, to be thinking about the underlying principles they ought to be advancing in their judgments.

An important thing for the legal community is not to think too narrowly about the skill sets you have. Whenever you talk to a group of lawyers, the first thing they talk about is pro bono legal advice. There is so much more that can be done by people with legal education than that, important though it is. I’ve mentioned editorial work and teaching, there’s also project management—these kinds of skills can be deployed. When I say core skills, I don’t want people to think too narrowly, that a lawyer’s only core skill is to give free legal advice. It’s much, much wider than that; a huge range of activity can be done. 

As an example, LexisNexis has produced a coloring book for young children, explaining the “ABCs” of the rule of law. Each page of the coloring book has a little statement about the importance of the rule of law that relates to the picture to be colored. We’ve just received a request for ten thousand of these coloring books to be distributed to schools in Uganda. It’s an example of someone at LexisNexis thinking in a legal frame of mind but deploying another skill that they had—in this case, artistic ability. 

I helped found the UN Committee on Business for the Rule of Law. One of the things we created was a toolkit with some examples of what companies have done. There was a motorbike company, for example. How can a motorbike company advance the rule of law? They found a project where pro bono legal advice was being given, but it was hard for their partners to reach difficult-to-get-to places. They donated their motorbikes to enable lawyers to get to remote villages to deliver legal advice. There are all kinds of ways that businesses can think about contributing. 

And is it only the lawyers at LexisNexis, or are others in the business active in this work? 

Everyone can get involved. We have something called a project board. When a rule of law idea comes up, they post to the project board what jobs they need and appeal for people to join the project and volunteer their time. It’s important to remember that when we’re talking about the core skills of an especially large organization, that involves a large range: accounting, project management, and management generally, to name just a few. 

What are the potential pitfalls that a business might contemplate if they were to follow your lead, and how would you recommend navigating them? 

If you want to advance the rule of law around the world, you may have to try to engage with places that most people are trying to avoid. You’re trying to do things that are basically nation building, and sometimes you are going to have to speak to people who are not nice. It sounds like a risky thing to do, until you get a reputation that helps people understand what you’re doing. That’s the advantage of working through an organization like the LexisNexis Rule of Law Foundation, because then the motivations behind what you’re doing become obvious.

What do you say to the business leader who is concerned that engaging on rule of law issues might harm their business relations, cause political risk, or otherwise disadvantage them? 

We have to remember that there are many places around the world where it is just impractical for an individual, whether that be an individual company or an individual person, to take action. That’s why you have to work in a collective way, through organizations or associations. By working through an organization, you can start to make this an issue. Once it becomes an issue, then people start talking about it. Once people start talking about it, then you’re starting to move opinion and you’re starting to create the environment for action. 

Is there a project of the foundation of which you are most proud? 

One that we often cite is the Eyewitness to Atrocities app, which is a collaboration with the International Bar Association (IBA). The International Criminal Court noted that there are many bits of video information around the world online that show bad things happening that they can’t use as evidence because they’re not verified. The app was created to location stamp, time stamp, and encrypt video information about war crimes and crimes against humanity so that it would be admissible to a court. When the user does that, it gets sent to a Lexis server like a secure vault, which is then held for review by an appointed panel of IBA human rights lawyers. If the user’s phone happened to be confiscated, there’s no data left on the phone that the eyewitness app was ever used. 

It became a flagship for us because very soon after it was launched, it was used in support of successful International Criminal Court prosecutions of two people from the Democratic Republic of the Congo for crimes against humanity and war crimes. We know it works. 

That is an example of us advancing one of the four pillars of the rule of law (access to remedy, in this particular case), deploying our core skills (in this case, technology), and working with a partner (the IBA), in order to deliver a successful rule of law project.

How has the rule of law work benefited your company? 

Recruitment, retention, and morale go through the roof when people are a part of these projects. People want to join the company because it has this mission at its core. We know of technologists who could join the other big technology companies and choose to join us because they want to be involved in things like this. Whenever we do employee surveys and test the temperature of employee morale, top of the list every time is the rule of law stuff.

When I was recruiting lawyers to my legal team fifteen years ago, the questions they would ask at the end of the interview were: Is there a bonus? How much holiday do I get, and does this come with a health scheme or pension? Now the question I get asked is how to get involved in rule of law projects. It’s totally transformed the conversation in recruitment. 

One last question: Is there anything about the way in which this work has played out that has surprised you? 

I think one surprise for me has been the degree of enthusiasm that this work generates. It’s tremendous to see the impact that it has had on the people involved in the projects. It really is wonderful to see, and also it’s given us as the company the opportunity to be involved in some amazing experiences.

“Tapping Core Business Skills to Advance the Rule of Law: A Conversation with LexisNexis Rule of Law Foundation President Ian McDougall” is part of a series on the rule of law and its importance for business lawyers created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.

APPENDIX A

Issues for Lawyers to Consider in Legal Technology Agreements

Legal technology agreements are not always abundantly clear, but consider addressing the following issues:

1. Three types of data – original, derived and usage data
2. How this data can be used, other than for the benefit of the system
3. What “access rights” non-lawyers have
4. What can the software provider aggregate and extrapolate from the data, and specifically, in instances where a law firm is uploading data into an AI system, confirmation that either the data will only be used to train models for the law firm’s use or the data will not be used for training at all
5. How data is being delivered between the parties
6. Where it is being stored to inform compliance with sovereignty requirements and data residency requirements?
7. Specify how data can be stored for each of your different regions and then the global framework
8. How does the user access the data across different regions without pulling data inadvertently from one location to other privacy policies and other protocols?
9. How does the information get into the system?
10. Storage requirements
11. Data retention requirements
12. Removal requirements and controls
13. Control of data the lawyer inputs
14. Control of new data and right to remove (complicated by cloud technology from different providers), and as implicated by GDPR
15. Specific provisions regarding how data can be used, what derivative works can be created, what sort of aggregated de identified data can be leveraged in any sorts of contracts
16. If the agreement is silent, assume this information can be used in different way
17. “Derivative Works” provision, critical because part of the benefit of the solution is to provide the lawyer a derivative work, such as a fully compiled PDF version of the document with its appropriate signature pages; this is difficult because the vendor wants to make sure that the lawyer can do everything needed or promised by the technology
18. Clarify no other uses of the data
19. Add specific permissions around client confidential information
20. Data residency requirements that tell the lawyer exactly where the data will be and cannot be shifted between regions
21. Specify that all “Customer Data” (or “Company Content”) is owned by the customer and define customer data; any exceptions must be clearly spelled out.
22. Confirmation whether there are exceptions to the otherwise applicable rules around data storage and access for the purposes of abuse monitoring or similar (e.g. to guard against hate speech or terrorism).

The Consumer Financial Protection Bureau (CFPB) recently finalized a rule that will subject the country’s most active digital wallets to ongoing supervision by the agency. Will the CFPB’s new supervisory authorities be a game changer, or is this action much ado about nothing?

Overview of the Digital Wallet Larger Participant Rule

The rule identifies “general-use digital consumer payment applications” subject to supervision as any nonbank that provides 50 million consumer payment transactions, in U.S. dollars, to multiple unaffiliated persons in a year, regardless of the payment method used to fund the payment.

Consumer payment transactions include any transfer of funds by a consumer to another person for personal, family, or household purposes, whether the funds belong to the consumer or are made by extending credit, e.g., from a deposit account or credit card, respectively.

Payment functionality includes both

• funds transfer functionality—receiving funds from a consumer in order to transmit them to a third party (e.g., a “staged wallet” where funds are obtained and then remitted), or accepting from a consumer and transmitting payment instructions; and
• payment wallet functionality—when payment account details or credentials are stored and transmitted to facilitate a consumer payment transaction, e.g., when a digital wallet stores tokenized payment credentials and passes them to a merchant in a tap-to-pay transaction.

Excluded payment transactions include

• payments solely to repay a debt
• international money transfers and securities and commodities transfers
• payments to purchase goods or services from the wallet provider, i.e., first-party payments, or when making donations to a fundraiser selected from a wallet provider
• certain prepaid accounts, e.g., health savings accounts and gift certificates

Consequences of the CFPB’s Supervision of Digital Wallets

In the end, this will leave roughly seven companies subject to ongoing supervision by the CFPB, covering 98 percent of the digital wallet market.

This could be a game changer for a few reasons:

Full visibility for digital wallets. In the short term, companies subject to supervision for offering digital wallets will be subject to exams that evaluate all their activities related to consumer financial products and services—e.g., data access and use activities subject to new Section 1033 personal financial data rights obligations, data security and sharing activities under the Gramm-Leach-Bliley Act, lending activities under the Truth in Lending Act, marketing, and other activities subject to the general prohibition on unfair, deceptive, or abusive acts and practices. While the CFPB will likely focus on payment activities, the broad scope of services provided in digital wallets today—think driver’s licenses, boarding passes, concert tickets, student IDs, and more—could directly or indirectly involve financial products or services, and the commingling of these data within a single wallet could be an area of focus.

Increased visibility of known problem areas. Over the longer term, the CFPB will gain a better understanding of the full range of digital wallet activities and other developing practices of digital wallet providers, including details of their relationships with third parties. Risks highlighted in the final rule relate to Regulation E error resolution obligations of digital wallets and the commingling of financial data with other data for marketing (e.g., email, calendar, health, fitness, and other data stored on a mobile device), among others. The supervision of larger participants could cause the CFPB to search for those risks throughout the industry, creating a trickle-down effect on the broader market. In fact, the CFPB stated in the final rule that supervisory highlights will be published periodically to share insights from examinations of these larger participants with the broader market.

Leaving open the potential for action on digital currency. In limiting the final rule to only cover U.S. dollar transactions, the CFPB sidestepped its potential exertion of supervisory jurisdiction over digital currency or digital asset wallets, leaving open the possibility that digital currency or digital asset transactions could be subject to the CFPB’s jurisdiction over the transmission or exchanging of “funds” under the Dodd-Frank Act.^[1]

On the other hand, this larger participant rule could be much ado about nothing for a few reasons:

Top wallets are already well known to the CFPB. The seven companies now subject to supervision have been on the CFPB’s radar and have likely been subject to requests for information in the past, both directly (see the CFPB’s 1022 order requesting information about digital wallet activities in 2021 and the resulting report released in 2023 highlighting the role of big tech firms in mobile payments) and indirectly (e.g., banks could already be required to share information about their digital wallet arrangements with their supervisors, including the CFPB and other federal regulators).

Supervisory activities are slow, isolated, and largely confidential. Supervisory activities are a long slog. Supervision will be limited to a handful of large digital wallet providers, conducted in a deliberately slow and carefully structured way. This supervision shouldn’t directly impact the many third parties that interact with those wallets, though some trickle-down effects are possible in the medium to long term.

The change in administration could slow-roll implementation. With the coming change in administration, the final larger participant rule could be subject to rejection by Congress under powers granted to it under the Congressional Review Act, though it’s unclear if there’s support for such a move in Congress at this time. Assuming the final rule survives such a challenge, the CFPB’s budget is likely to come under scrutiny, and its limited resources might not be directed towards newer areas such as this, where risks are less apparent or aren’t clearly defined.

1. See 88 Fed. Reg. 80197, 80202 (November 17, 2023). ↑

This is the first installment in the Year in Governance Series from the In-House Subcommittee of the ABA Business Law Section’s Corporate Governance Committee. Each month, the series will share key tips on a different corporate governance topic. To get involved in the Corporate Governance Committee, please visit the committee’s webpage.

“As Chair of the Corporate Governance Committee, I would like to extend my sincere appreciation to the authors for this publication.  The Corporate Governance Committee has ongoing opportunities for writing and volunteering with various projects whether it’s an article you want to publish or a CLE that you want to present. Our Committee is dedicated to helping you promote informative resources for corporate governance practitioners.  You may contact me, Kathy Jaffari, at [email protected] to get involved.”

Board meeting minutes establish the record of matters considered and actions taken by the board. They are evidence of compliance with legal and regulatory requirements and of directors’ discharging their fiduciary duties. Minutes are often the first thing a plaintiff’s lawyer wants to see when challenging the company, and they can determine whether the challenge is limited to the company or whether the plaintiff can take action against board members personally. Draft them with this in mind.

1. Pre-draft the minutes.
   Use the board meeting agenda and presentation materials as a guide. Having a good starting point frees up the drafter to listen to the dialogue and capture questions and actions for follow-up. The pre-draft of the minutes should capture essential information such as where and when the meeting takes place, whether it is a regular or a special meeting, attendance, quorum, and what presentations were given and by whom. If an item is presented in response to a prior request from the board, the minutes should reflect that, particularly if the request was documented in prior meeting minutes.
2. Be consistent.
   If you note “unanimous” approval for some resolutions or “extensive” discussion for some topics, but don’t use those descriptors for others, this opens an avenue of inquiry that might otherwise be avoided. The same is true for being detailed in your notes about some topics but high-level for others. Think through whether you record time for each agenda item, ending time for the meeting, and whether and when various people enter and depart the meeting, including in executive session. Practices differ on these matters, but be consistent in your approach.
3. Be objective.
   Minutes should not reflect emotion, color commentary, or value judgments. They should simply and clearly identify topics discussed, actions taken, and follow-up requested. To this end, avoid jargon, make sure code names can be decoded, and keep the tone professional.
4. Be mindful in describing specific board action.
   The board should consider “approving” corporate actions but only “concurring” with significant actions taken by subsidiaries, to best protect corporate separateness. Use words like “agreement” and “support” if a formal approval is not required and you want to evidence alignment. Document a formal resolution if there might be a need for a certified copy of a board resolution later.
5. Avoid attributing questions or comments to particular directors.
   Doing so can provide a roadmap for plaintiffs’ lawyers seeking to drive a wedge between directors. The board acts as a body, and minutes themselves should align with this concept. Exceptions apply where directors must recuse themselves from a vote, and in the rare instance where a director wants their dissent recorded in the minutes.
6. Special situations require special attention.
   Privileged discussions between counsel and the board should be described as privileged. Consider not including privileged substance in the minutes, as minutes are generally not privileged. If a director has a conflict on a matter being discussed, the conflict should be disclosed and documented (further measures like recusal might also be appropriate).
7. Manage drafts.
   Ideally only the final approved minutes are retained, and all drafts are destroyed. This helps ensure there is only one record of the meeting—the right one. For this reason, it is risky to make an audio or video recording of meetings. If minutes are redacted for an intended purpose, ensure the unredacted version is saved appropriately.
8. Be timely in drafting and reviewing minutes.
   Memories fade. It is best to draft the minutes immediately so they can go through the review cycle while participants have a strong recollection of what happened. Draft minutes should be reviewed by the general counsel, the chairman/lead director, and perhaps presenters, then presented to the full board/board committee for approval at the next regular meeting of the board/board committee.
9. Manage access to minutes.
   Although minutes might not be protected by privilege, they should be treated as confidential. They should be accessible on a need-to-know basis by staff. Agree with auditors on terms by which auditors can review minutes, and redact anything protected by privilege. Auditors should not have access to drafts that have not yet been approved by the board.
10. Note only the essential in executive session.
    Generally, minutes are not taken in executive session, so as to encourage directors to speak freely. However, it is important to capture any formal action taken or resolutions passed in executive session, e.g., setting of CEO pay.

The views expressed in this article are solely those of the authors and not their respective employers, firms or clients.

This article aims to highlight the key legal considerations and gating requirements to be assessed by global investors undertaking big-ticket mergers and acquisitions (M&A) deals arising out of the acquisition of a majority shareholding or control of an entity not incorporated in India that has a direct or indirect subsidiary in India (“India Co”), leading to an indirect change of control of such India Co (“Indirect Acquisition”).

Approvals Under Foreign Exchange Regulations

The extant foreign exchange regulations in India provide, inter alia, the permissible entry routes (i.e., approval route, where approval from the government of India (“GOI”) is required, including in certain sensitive sectors such as pharmaceuticals, defense, etc.; and automatic route, where no such prior approval is required); sectoral caps; and other conditionalities that are applicable to investments by nonresidents. If the India Co operates in a sector falling under the approval route or a sector that prescribes any sectoral caps or conditionalities, the respective approval requirement or sectoral caps or conditionalities would be triggered in the case of Indirect Acquisitions as well.

On April 17, 2020, the GOI issued Press Note 3 of 2020 (“PN-3”), which provides that prior GOI approval needs to be obtained in cases where the beneficial owner of any investment in India (direct or indirect) is situated in or is a citizen of any country that shares land borders with India. While PN-3 does not prescribe any thresholds for determination of beneficial ownership, the prevalent market view is that if beneficial ownership of investments, whether direct or indirect, from land-bordering countries is less than 10 percent of the share capital of the acquirer, then no approval would be required under PN-3. The process for seeking approval under PN-3 can typically take up to fourteen weeks, and the approvals can take between nine and twelve months, based on the sector in which the India Co operates.

Obligations Under (Indian) Companies Act, 2013

Reconstitution of Board of Directors

The (Indian) Companies Act, 2013 read with rules framed thereunder, as amended from time to time (“Companies Act”), prescribes the minimum number of directors for a private company (two directors) and a public company (three directors). An Indirect Acquisition typically necessitates a reconstitution of the board of directors, wherein nominees of the acquirer are appointed as directors of the India Co. Furthermore, the Companies Act also prescribes that at least one director on the board of directors must be an Indian resident (someone who must have resided in India for a minimum of 182 days during the past financial year). Lastly, if any director is a citizen of any country that shares land borders with India, prior GOI approval would be required for their appointment. Under the Companies Act, a person has to obtain certain registrations to be eligible for appointment as a director, which can take up to two weeks from the date of submission of requisite documents, among other requirements.

Change in Nominee Shareholders

Under the Companies Act, a private company is required to have a minimum of two shareholders, and a public company is required to have a minimum of seven shareholders. Typically, in the case of an Indirect Acquisition, to meet the minimum shareholders requirement, group entities or individuals from the acquirer group hold at least one share of the India Co as nominee(s) and legal owner(s), with the acquirer holding beneficial ownership over such shares held by the nominee(s). The Companies Act also requires certain filings to be undertaken by the India Co to announce the change in nominee shareholders.

Change in Significant Beneficial Ownership

Under the Companies Act, an individual who holds a beneficial interest is required to make a declaration in connection with such beneficial interest. Individuals with a beneficial interest include those (a) who hold indirectly, or together with any direct holdings, not less than 10 percent of shares or voting rights in an Indian company; (b) who have the right to receive or participate in not less than 10 percent of the distributable dividend or any other distribution in a financial year through indirect holdings alone, or together with any direct holdings; or (c) who have the right to, or actually exercise, significant influence or control in any manner other than through direct holdings alone.

The Companies Act further clarifies that if the holding company of the India Co is a body corporate, the individual holding more than 50 percent of the share capital of the holding company will be the significant beneficial owner (“SBO”). However, if the holding company of India Co is a pooled investment fund (“PIF”) or an entity controlled by a PIF, the SBO could be either the general partner of the PIF or the investment manager of the PIF.

Since an Indirect Acquisition may trigger a change in the significant beneficial ownership of the India Co, the acquirer should take steps to identify such changes and, if applicable, cause the new SBO to make the necessary declarations. The India Co will also be required to maintain and update registers and make filings owing to the change in the SBO.

Obligations Under Charter Documents

All charter documents and material agreements affecting the structure and governance of the India Co should be reviewed to assess if any consent is required for undertaking the Indirect Acquisition or if the Indirect Acquisition triggers the exercise of any specific rights available to shareholders under such documents.

Dematerialization of Securities

Pursuant to a recent amendment to the Companies Act, all private companies (except small companies and government companies) in India (hereinafter “Covered Companies”) are now required to facilitate the dematerialization of their existing securities, and all fresh issuances are to be in dematerialized form. Earlier, this requirement only extended to public companies. This may have implications for Indirect Acquisitions if they involve either a pre-closing restructuring involving transfer of securities of a Covered Company or a change of the nominee shareholder, given that a security holder will be impeded from transferring the securities of a Covered Company that have not been dematerialized. Similarly, the person or entity that will become a security holder in the Covered Company will need to have a demat account in India. These requirements may have an impact on the timing of deal closing of such Indirect Acquisition.

Approval/Notification Under Antitrust Laws

The Competition Act, 2002 (“Competition Act”) sets out the thresholds for approval requirements for global M&A deals. The Competition Act exempts acquisitions, mergers, and amalgamations from the requirement of seeking approval from the Competition Commission of India (“CCI”) where the value of the assets of the target entity in India is less than INR 4.5 billion (approximately USD 53.80 million) or the turnover is less than INR 12.5 billion (approximately USD 149 million) (“De Minimis Exemption”). In the event that the De Minimis Exemption is not available to the parties, approval is required from the CCI based on the prescribed jurisdictional thresholds.

Recently, an additional threshold was introduced based on the global deal value (effective date September 10, 2024). An approval requirement is triggered when the global deal value exceeds INR 20 billion (approximately USD 242 million) and the target enterprise has substantial business operations in India (“Deal Value Threshold”). The parties/groups involved will no longer be able to avail themselves of the De Minimis Exemption if the Deal Value Threshold is breached. Accordingly, the parties will need to assess whether the Indirect Acquisition will exceed any of the thresholds above, triggering an approval/notification requirement from the CCI.

Tax Implications

Under the Indian income tax law (“IT Act”), an Indirect Acquisition may result in taxability of capital gains in the hands of the seller and corresponding liability of the acquirer for withholding taxes (subject to the provisions of any applicable double-taxation avoidance agreements). Indian tax laws deem the shares or interest of a nonresident entity to be capital assets situated in India if the shares of the nonresident target entity derive substantial value from assets located in India. Shares of a nonresident entity are considered to substantially derive their value from assets located in India if the value of such assets (a) exceeds INR 100 million (approximately USD 1.2 million) and (b) represents at least 50 percent of the value of all the assets owned by the acquirer.

If the capital gains are taxable in the hands of the seller, there will be a corresponding liability of the acquirer for deducting tax at source while remitting the sale consideration and for paying the same to the GOI within the prescribed timelines. For deducting tax at source, the acquirer would be required to obtain certain tax registrations. Obtaining such tax registrations can take up to four weeks from the date of application. Furthermore, if the nonresident seller does not have the requisite tax registrations in place, it could result in deduction at a higher rate. It is therefore important for the parties to examine at the outset the tax-related implications emanating from the Indirect Acquisition.

Other Points for Consideration

Sector-Specific Regulatory Approvals

Depending on the sector in which the India Co operates, the Indirect Acquisition may trigger a requirement to seek approval from the relevant regulatory body. For instance, any Indirect Acquisition involving a banking company in India would trigger the requirement to seek approval from the Reserve Bank of India (the central bank of India). It is important, therefore, for the parties to assess this requirement with respect to an Indirect Acquisition.

Treatment of Employee Stock Options

India’s foreign exchange laws allow a nonresident entity to issue employee stock options to employees of its Indian subsidiary if, inter alia, such stock options are offered globally on a uniform basis and the Indian subsidiary undertakes certain regulatory filings in connection with such issuance. Typically, the documents governing an Indirect Acquisition provide for cancellation, rollover, or swap of such global stock options. It is important for the parties to analyze the treatment of such global stock options pursuant to the Indirect Acquisition, as there could be implications under the foreign exchange laws.

Other Due Diligence Items

Other issues that emanate out of due diligence exercises, such as prior consents or notification requirements under material contracts, or lender consents getting triggered by an indirect change of control, will also have to be identified and addressed to ensure a seamless transition after the Indirect Acquisition.

Conclusion

While the issues discussed above are some of the common issues typically encountered in an Indirect Acquisition, the acquirer should undertake exhaustive legal due diligence from an Indian perspective to account for any other issue that may impact the Indirect Acquisition. Early identification of such issues is critical to ensure adherence to overall deal timelines.

Bid me run, and I will strive with things impossible.

—William Shakespeare, Julius Caesar, Act II, Scene 1

The Corporate Transparency Act (“CTA”)^[1] requires almost every small organization to promptly report information (including copies of certain identifying documents) to the Financial Crimes Enforcement Network (“FinCEN”) with respect to itself and its direct and indirect individual principal constituents, and it imposes civil and criminal penalties on the organization and some of its individual constituents for the organization’s willful failure to timely file the required information. While it is the organization charged with filing the reports, compliance with the CTA requires the cooperation of the individuals who are listed on the report. What happens if the organization—as a result of the recalcitrance, unavailability, or disagreement of the individuals from whom the information must be obtained^[2]—is unable to obtain the required information promptly enough to comply with the requirements of the CTA? While FinCEN is aware of the problem, it has nevertheless decided to resolve it by assuming that it does not exist. This very real problem subjects the organization, as well as the constituents responsible for compliance, to penalties for violations over which they may have no control.

An Entirely Complete BOIR

The CTA requires each organization that is a reporting company (“reporting company”)^[3] to file a beneficial ownership information report (“BOIR”)^[4] with FinCEN in accordance with regulations issued by FinCEN. The regulations promulgated by FinCEN (collectively, the “Reporting Rules”)^[5] mandate that the BOIR contain “true, correct, and complete” information and copies of identifying documents^[6] about the reporting company and each individual who is a beneficial owner (“beneficial owner”)^[7] or a company applicant (“company applicant”).^[8] The Reporting Rules require that a reporting company file a BOIR (“initial BOIR”)^[9] shortly after^[10] its creation or registration. Further, if and when any of the previously reported information with respect to the reporting company or its beneficial owners (but not company applicants) changes, the reporting company must file an update (“updated BOIR”).^[11]

Willful failure to comply with these requirements will subject the reporting company and individuals meeting the definition of senior officer^[12] to civil and criminal penalties.^[13] In addition, the CTA permits FinCEN to assess civil and criminal penalties on any individual who is a beneficial owner or company applicant who prevents the reporting company from filing a complete and accurate BOIR.^[14]

As discussed below, FinCEN has assured the public that these rules are not intended to provide a “gotcha” for the tens of millions of reporting companies and their senior officers, beneficial owners, and company applicants subject to these rules, but in its formal guidance, FinCEN has largely described its rules as absolute and intractable—guidance that is especially troubling when considering the penal nature of the CTA.

In a regulatory release dated September 29, 2023,^[15] FinCEN published a document titled “Agency Information Collection Activities; Submission for OMB Review; Comment Request; Beneficial Ownership Information Reports” (“2023 Notice”).^[16] Therein, FinCEN, based upon what it described as a “significant number of commenters” who were “uniformly critical” of any provision that would allow reporting companies to file reports indicating that information about a beneficial owner was “unknown,” declined to adopt “unknown checkboxes” that would allow organizations to file partially completed BOIRs and thereby give FinCEN notice of the organization’s inability to obtain the beneficial ownership information (“BOI”) required to complete the BOIR.^[17]

In the 2023 Notice, FinCEN acknowledged that reporting companies “could face difficulties in obtaining information promptly,” but having consulted with “behavioral scientists at the General Services Administration, technology experts at the Department of the Treasury, and various others throughout the U.S. Government (USG) who have expertise around these issues,” FinCEN stated:

The consultations highlighted potential, though not inevitable, pitfalls in not providing an explanatory mechanism in the BOIR Form when a filer is unable to obtain certain required information. This might inadvertently discourage reporting companies from filing in a timely manner (or filing at all) because they do not have sufficient information. It may also incentivize reporting companies to file meaningless or untruthful information in certain fields to make a deadline. These difficulties also have the potential to significantly increase the volume of inquiries to FinCEN’s Contact Center from reporting companies that seek clarification of the filing requirements when they are unable to obtain BOI.^[18]

In other words, FinCEN acknowledged that some reporting companies will not be able to comply with the system as it currently exists.

Mindful of this, the 2023 Notice proposed a potential alternative option (“drop-down option”) that would allow reporting companies to temporarily supply the BOI that they have available and the reasons why they are temporarily unable to provide BOI with respect to some beneficial owners (this would not be available with respect to the provisions of the BOIR applicable to the reporting company itself or the company applicants), thereby providing current BOI that is available. The drop-down option would not excuse the reporting companies of their reporting obligations, and the BOIR would not be considered complete until the missing BOI has been submitted. The drop-down option is still unimplemented.

Thus, it is clear that, under the current regime, both FinCEN and the supporters of the BOIR form do not wish the BOIR to be filed unless it is entirely complete. This is reflected in the 2023 Notice and the current BOIR reporting form, which precludes indicating that any BOI is unavailable.^[19]

Notwithstanding this position, in response to another common situation in which a BOIR may not be timely filed as a result of circumstances beyond the control of the reporting company—that is, when the reporting company has not received its taxpayer identification number (“TIN”)—FinCEN in its Frequently Asked Questions (“FAQs”)^[20] expressly provides that the BOIR should not be filed until the TIN is obtained but that the reporting company would be advised to document its reasonable efforts to obtain the TIN.^[21]

The Horns of the Dilemma

It is impossible to comply with current BOIR reporting requirements if the reporting company is unable to obtain the necessary BOI from a beneficial owner or company applicant. The horns of this dilemma^[22] are to not file and in so doing breach the filing deadlines or, in the alternative, to file an incomplete report in opposition to the requirement to not only file a complete report but also to certify it to be true and complete.^[23] So, which (if either) of the following is a better alternative?

1. Filing a BOIR that is not entirely true, correct, and complete (perhaps attempting to provide additional notification as to the BOI that is not included)
2. Following the procedure established in FAQ G.3 with respect to TINs discussed above—that is, delaying the filing of the BOIR until the necessary BOI is provided while documenting the reasonable efforts to obtain the same from the beneficial owner at issue^[24]

As to the additional notification, we have heard suggestions about various ways in which reporting companies might use additional communications with FinCEN to address the missing BOI:

1. through use of a pdf filing with an additional explanation attached;
2. through a notice to FinCEN via its email or telephonic helpline^[25] or the chat function;^[26] or
3. by preparing a notice and uploading it at one of the “identifying document image” portals^[27] in lieu of an image of an identifying document.

The efficacy of any of these approaches in communicating with FinCEN is uncertain. On the one hand, the reporting company may profess that it has done all it can and has afforded FinCEN with not only all the available BOI but also (presumably) evidence of its efforts to collect the missing BOI. That assessment must, however, be balanced against FinCEN’s rejection of an option to file an incomplete report to the effect that the filing of a BOIR that is not true, correct, and complete is not acceptable. Perhaps rendering these additional notification options unavailable is that an incomplete filing would contradict the statement required to complete the filing: “I further certify, on behalf of the reporting company, that the BOI contained in this BOIR is true, correct, and complete.”^[28]

This is unfortunate because the alternative discussed in the 2023 Notice—allowing a filing with an opportunity to provide notification of the BOI not supplied—would be similar to the method used by the Internal Revenue Service in permitting notification of inconsistent positions (Form 8082) and would provide FinCEN with notification of the BOI not supplied in a manner that would clearly associate the absence of the BOI with the BOIR to which it applies.

It is worth noting in this context that in many business organizations, particularly those organized before the CTA was adopted, the organization may have no legal right to demand BOI from its beneficial owners and company applicants in general and especially those individuals who are indirect beneficial owners.^[29] As discussed below, the CTA as interpreted in the Reporting Rules imposes criminal and civil penalties on those beneficial owners and company applicants who fail to provide their BOI and documentation, but, in a catch-22 for the twenty-first century, it is FinCEN, not the reporting company, that can assess those penalties—and it is FinCEN that has explicitly denied the reporting companies any way for to communicate those individuals’ failures to it.

The CTA includes both civil and criminal penalties,^[30] and as a penal statute it should be strictly construed and construed with lenity.^[31] In its public pronouncements, FinCEN has indicated that it is mindful of the penalties and will not apply them arbitrarily.^[32] As noted above, while the CTA requires filing by the reporting company and imposes civil and criminal penalties on persons who willfully provide false information or fail to provide information to FinCEN, the Reporting Rules interpret the civil and criminal penalties as applying to beneficial owners and company applicants who fail to provide their BOI and documentation to the reporting company.^[33] Even in the absence of the rule of statutory construction, it is difficult to understand how failing to take an action that, as noted in the 2023 Notice, is impossible to accomplish could be categorized as a willful violation.^[34]

Less-Than-Perfect Choices

Of the two realistic options available to FinCEN discussed above—(i) providing a method, whether in the form of a drop-down option or otherwise, to inform FinCEN of unattainable BOI (as discussed in the 2023 Notice); or (ii) deferring the obligation to file the BOIR until the filer believes it has all of the BOI necessary (as provided for TINs in FAQ G.3), in either case including a requirement that the reporting company diligently pursue obtaining the missing BOI—it would appear that the most useful would be for FinCEN to adopt a program similar to that described in the 2023 Notice, with an orderly regimen for filing and notifying FinCEN of the problem (and potentially identifying recalcitrant owners for FinCEN to contact). Unless and until FinCEN provides a workable alternative that takes account of the real problems faced by real reporting companies, however, probably the better approach is for the reporting company to continue with well-documented efforts to collect the required BOI and to defer filing the BOIR until it is satisfied that the information in the BOIR is “true, correct, and complete,” rather than to file a BOIR known to be less than “true, correct, and complete.”^[35]

Robert Keatinge is of counsel to Holland & Hart LLP in Denver, Colorado. Thomas E. Rutledge is a member of Stoll Keenon Ogden PLLC in Louisville, Kentucky. They are both coauthors of Larry E. Ribstein, Robert R. Keatinge & Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies (Thomson Reuters, updated Nov. 2024), and Robert R. Keatinge, Ann Conaway & Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies (Thomson Reuters, updated Nov. 2024). The opinions expressed in this article are solely those of the authors and not of any other person.

1. See 31 U.S.C. § 5336. For a review of the CTA generally, see Larry E. Ribstein, Robert R. Keatinge & Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies, at ch. 4A (Nov. 2024). ↑

2. It is important to recognize that it is the reporting company, and not the affected individual, that will make the determination that the affected individual is a beneficial owner and, if applicable, a company applicant. See Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg., infra note 5, at 59514 (“The fundamental premise of the CTA is that the reporting company is responsible for identifying and reporting its beneficial owners and applicants.”(citing 31 U.S.C.A. § 5336(b)(1)(A))); id. at 59515 (“Given that the CTA places the responsibility on reporting companies to identify their beneficial owners, . . .”); FinCEN FAQ K.4 (Dec. 12, 2023). This is a two-edged sword. Initially, an individual not advised that they are, as to a particular reporting company, a beneficial owner should have no exposure for not being included in that company’s BOIR. But then a reporting company’s determination that an individual is a beneficial owner is arguably final and conclusive (presuming that it was made in good faith) as to that person, and they are obligated to provide either their identifying information or FinCEN ID. There is no mechanism by which a person may object to FinCEN or another body that “I don’t care what they say—I’m not a beneficial owner.” ↑

3. See 31 U.S.C. § 5336(a). ↑

4. See id. § 5336(b)(1); see also 31 C.F.R. § 1010.380(b) (effective Jan. 1, 2024). ↑

5. See 31 C.F.R. § 1010.380 (effective Jan. 1, 2024). The reporting regulations appear at 31 C.F.R. §§ 1010.380(a)(1) et seq. The “final” beneficial ownership reporting regulations were released in Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 (Sept. 30, 2022). The final rules followed from a notice of proposed rulemaking, Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69920 (Dec. 8, 2021), which itself followed from the advance notice of proposed rulemaking set forth in Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 17557 (Apr. 5, 2021). Those “final” regulations related to certain due dates amended by Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 Fed. Reg. 66730 (Sept. 28, 2023), supplemented as to the use of FinCEN identifiers by the release of Use of FinCEN Identifiers for Reporting Beneficial Ownership Information of Entities, 88 Fed. Reg. 76995 (Nov. 8, 2023), and expanded as to the exemption for public utilities (31 C.F.R. § 1010.380(c)(2)(xvi)) in Update of the Public Utility Exemption Under the Beneficial Ownership Information Reporting Rules, 89 Fed. Reg. 83782 (Oct. 18, 2024) (collectively, “Reporting Rules”). ↑

6. See 31 C.F.R. § 1010.380(b) (“Each [BOIR] shall be filed with FinCEN in the form and manner that FinCEN shall prescribe in the forms and instructions for such report or application, and each person filing such report or application shall certify that the report or application is true, correct, and complete.” (emphasis added)). ↑

7. See 31 U.S.C. § 5336(b)(3); 31 C.F.R. § 1010.380(d). ↑

8. See 31 U.S.C. § 5336(b)(2) (describing this individual simply as “applicant”); 31 C.F.R. § 1010.380(e). ↑

9. See 31 U.S.C. §§ 5336(b)(1)(A), (B), (C); see also 31 C.F.R. § 1010.380(e). ↑

10. See 31 U.S.C. § 5336(b)(1)(A) (providing that each reporting company created after the effective date of FinCEN regulations shall file an initial BOIR). As originally adopted, 31 C.F.R. § 1010.380(a)(1) required entities formed or registered on or after January 1, 2024, to file their initial BOIRs within thirty calendar days of creation or registration; and any entity created or registered before January 1, 2024, to file its initial BOIR no later than January 1, 2025. This rule was amended by RIN 1506-AB62, Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 Fed. Reg. at 66732, to extend the BOIR filing deadline from thirty days to ninety days for entities created or registered on or after January 1, 2024, and before January 1, 2025. Effective for organizations created or registered on or after January 1, 2025, the initial BOIR is due within thirty days of formation. ↑

11. See 31 U.S.C. § 5336(b)(1)(D); 31 C.F.R. § 1010.380(a)(2). If, post-filing, it is determined that any submitted information was inaccurate, a corrected report may be filed. If the information concerning the company applicant changes, no updated BOIR need be filed. See 31 C.F.R. § 1010.380(a)(2). ↑

12. See 31 C.F.R. § 1010.380(f)(8). This term does not appear in the CTA. ↑

13. See 31 U.S.C. § 5336(h)(1); 31 C.F.R. § 1010.380(g) (discussed below). ↑

14. 31 U.S.C. § 5336(h)(1); 31 C.F.R. § 1010.380(g). ↑

15. This release postdated the release of the Reporting Rules by just more than a year and predated the initial effective date of the Reporting Rules by just more than three months. ↑

16. See Agency Information Collection Activities; Submission for OMB Review; Comment Request; Beneficial Ownership Information Reports, 88 Fed. Reg. 67443 (Sept. 29, 2023). ↑

17. See id. at 67444:

    Consistent with the requirements of the PRA, FinCEN carefully considered the comments received in response to the 60-day notice that proposed the BOIR Form for public comment. Notably, commenters were uniformly critical of the checkboxes that would allow a reporting company to indicate if certain information about a beneficial owner or company applicant is “unknown,” or if the reporting company is unable to identify information about a beneficial owner or company applicant. Commenters referred to these checkboxes as the “unknown checkboxes.” A significant number of these comments expressed concern that the checkboxes would incorrectly suggest to filers that it is optional to report required information, and that reporting companies need not conduct a diligent inquiry to comply with their reporting obligations. These commenters requested that FinCEN remove all such checkboxes.

    In response to the comments, FinCEN is pursuing a revised approach to the BOIR Form that will not contain unknown checkboxes. This approach will consist of a first implementation [that] will be used starting January 1, 2024, and a potential alternative implementation, which may be adopted [at] a later date following feedback from filers, law enforcement agencies, and other key stakeholders. In the first implementation, it will require every field to be completed (i.e., have responses entered in text boxes), and the BOIR Form can only be submitted once each required field has been filled out. Any field left blank, whether intentionally or accidentally, will prevent the filer from submitting their BOIR Form. It is our hope that filers will find the filing process to be seamless, users of the database will determine that the information collected is accurate, and all stakeholders, including law enforcement, will find this implementation to be sufficiently straightforward, transparent, and efficient. Throughout the months after this approach is implemented, FinCEN will seek continual feedback from filers and database users.

    See also Letter from the Independent Community Bankers of America to FinCEN (Oct. 30, 2023) (approving FinCEN’s removal of all “unknown checkboxes” from its BOIR form and stating, “ICBA appreciates FinCEN’s careful consideration to remove all 29 ‘unknown’ checkboxes. In its new approach, FinCEN will require every field to be completed (i.e., have responses entered in text boxes), and the BOIR form can only be submitted once each required field has been filled out. Any field left blank, whether intentionally or accidentally, will prevent the filer from submitting their BOIR form. ICBA fully supports this new approach and believes the spirit of the CTA would be fulfilled under this process.”); ICBA: Additional Beneficial Ownership Reporting Changes Needed, Indep. Cmty. Bankers of Am. (last visited Dec. 11, 2024). ↑

18. 88 Fed. Reg. 67443. “BOI” refers to the personal identifying information that a reporting company must include in its BOIR to identify each company applicant or beneficial owner. See also 31 C.F.R. § 1010.380(b)(1)(ii). ↑

19. See Fin. Crimes Enf’t Network, Beneficial Ownership Information Report: Filing Instructions (Jan. 2024) (stating, at page 3, that the information on the BOIR must be “true, correct, and complete”; at page 6, that “BOIRs must be complete before they can be filed with FinCEN. FinCEN will not accept a BOIR if any items marked with a red asterisk (*) are blank”; and, at page 9, that the terms none, not applicable, and unknown may not be used on the BOIR form). ↑

20. Beneficial Ownership Information: Frequently Asked Questions, Fin. Crimes Enf’t Network (last visited Dec. 11, 2024). ↑

21. See FinCEN FAQ G.3 (July 24, 2024):

    A reporting company must report its tax identification number when reporting beneficial ownership information to FinCEN and, indeed, will be unable to submit its BOI report without including a tax identification number. In such circumstances, in addition to making all reasonable efforts to file its BOI report in a timely manner (including requesting all necessary information as early as practicable), the reporting company should file its report as soon as it receives its EIN. As a best practice, the reporting company may consider retaining documentation associated with its efforts to comply with the BOI reporting requirements in a timely manner. ↑

22. See Be on the Horns of a Dilemma, Cambridge Dictionary (last visited Dec. 12, 2024) (“to be unable to decide which of two things to do because either could have bad results”). ↑

23. See 31 C.F.R. § 1010.380(b) (effective Jan. 1, 2024). ↑

24. What would be those reasonable efforts is a topic beyond the scope of this discussion, and will necessarily depend upon the nature of the beneficial owner. The communications to a corporation or an LLC that is an owner of the reporting company will be different from the communications to a distant relative who by inheritance is an owner. ↑

25. Need Help? Contact Us, Fin. Crimes Enf’t Network (last visited Dec. 12, 2024). ↑

26. BOI: Beneficial Ownership Information, Fin. Crimes Enf’t Network (last visited Dec. 12, 2024). ↑

27. Fin. Crimes Enf’t Network, OMB No. 1506-0076, Beneficial Ownership Information Report (May 29, 2024), Questions 33 and 51. ↑

28. Although an individual may submit the certification on behalf of a reporting company as its agent, that may be little comfort in a future FinCEN enforcement action. See also Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498, 59514 (Sept. 30, 2022):

    While an individual may file a report on behalf of a reporting company, the reporting company is ultimately responsible for the filing. The same is true of the certification. The reporting company will be required to make the certification, and any individual who files the report as an agent of the reporting company will certify on the reporting company’s behalf. ↑

29. It bears noting that neither the CTA nor the Reporting Rules provide for a cause of action by the reporting company against a beneficial owner or company applicant who refuses to provide BOI or who otherwise interferes with the efforts of a reporting company to comply with the law. ↑

30. See 31 U.S.C. § 5336(h)(1) (making it unlawful to “(A) willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with subsection (b); or (B) willfully fail to report complete or updated beneficial ownership information to FinCEN in accordance with subsection (b)”); id. § 5336(3)(A) (imposing civil and criminal penalties of $500 per day plus fines of not more than $10,000 and imprisonment of not more than two years or both for violating the reporting requirements); see also 31 U.S.C. § 5336(h)(6) (“In this subsection, the term ‘willfully’ means the voluntary, intentional violation of a known legal duty.”) The $500 per diem is adjusted for inflation. See Federal Civil Monetary Penalties Inflation Adjustment Act of 1990, Pub. L. No. 101-410 (as revised by section 701 of the Bipartisan Budget Act of 2015, Pub. L. No. 114-74 (Nov. 2, 2015)). As of this writing, the per diem rate has increased to $591. See also FinCEN FAQ K.2 (Apr. 18, 2024). ↑

31. See Ladner v. United States, 358 U.S. 169, 79 S. Ct. 209, 3 L. Ed. 2d 199 (1958). ↑

32. See, e.g., Andrea Gacki, Dir., Prepared Remarks of FinCEN Director Andrea Gacki During Beneficial Ownership Information Reporting Event in Media, Pennsylvania (Sept. 16, 2024) (“But let me be clear. Small business owners doing their best to comply with the law should not lose sleep over these new reporting requirements. The CTA penalizes willful violations of the law, and this is where we plan to focus our enforcement actions. It’s not a ‘gotcha’ exercise, and we’re not looking to needlessly burden America’s thriving small business community.”). ↑

33. 31 C.F.R. § 1010.380(g) (effective Jan. 1, 2024):

    Reporting violations. It shall be unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with this section, or to willfully fail to report complete or updated beneficial ownership information to FinCEN in accordance with this section. For purposes of this paragraph (g):

    1. 1. 1. The term “person” includes any individual, reporting company, or other entity.
          2. The term “beneficial ownership information” includes any information provided to FinCEN under this section.
          3. A person provides or attempts to provide beneficial ownership information to FinCEN if such person does so directly or indirectly, including by providing such information to another person for purposes of a report or application under this section.
          4. A person fails to report complete or updated beneficial ownership information to FinCEN if, with respect to an entity:
             1. such entity is required, pursuant to title 31, United States Code, section 5336, or its implementing regulations, to report information to FinCEN;
             2. the reporting company fails to report such information to FinCEN; and
             3. such person either causes the failure, or is a senior officer of the entity at the time of the failure. ↑

34. See supra note 30. ↑

35. On December 3, 2024, in a case styled Texas Top Cop Shop, Inc. v. Garland, a nationwide preliminary injunction was issued against the enforcement of both the CTA and the Reporting Rules. No. 4:24-cv-478, 2024 WL 4953814, 2024 U.S. Dist. LEXIS 218924 (E.D. Tex. Dec. 3, 2024, amended Dec. 5, 2024). That decision is currently on appeal to the U.S. Court of Appeals for the Fifth Circuit as Case No. 24-40792. Whether the preliminary injunction will be affirmed, restricted in its scope, or reversed is as of this date unknown. ↑