The Corporate Transparency Act: Key Areas of Consideration for Legal Opinions
The Corporate Transparency Act (“CTA”) takes effect on January 1, 2024. The CTA is administered by, and requires filing beneficial ownership information (“BOI”) with, the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury. While the law includes a significant number of exemptions, the reporting requirements are intended to be broadly applicable for corporations, limited liability companies, limited partnerships, and other, similar entities created in or registered to do business in the United States. The CTA registration and reporting requirements have several implications for legal opinions requested in connection with a range of transactions, primarily by banks, title insurance companies, and insurance companies, although the list may expand as know-your-client requirements develop in response to these requirements.
The following is a brief discussion of some customary opinion provisions given in an array of banking, finance, investment, and other corporate transactions, and how the CTA may affect the ability to give these opinions.
A key issue underlying the following discussion points is that an opinion giver is only professionally equipped to express opinions as to the law and compliance with it; the opinion giver has no special capacity to confirm factual matters. In particular, the opinion giver has no professional basis to determine if any report filed with FinCEN pursuant to the requirements of the CTA is accurate or timely. Therefore, for factual matters, opinion givers generally require their clients to certify as to the factual underpinnings of the opinion, which can lead to personal liability if the opinion is challenged.
Good Standing and Valid Existence
- “Holdings Inc. is validly existing as a corporation and in good standing under Delaware law and has the corporate power to execute and deliver the Loan Documents to which it is a party and to perform its obligations thereunder.”
- The CTA may add complexity to giving an opinion on these issues. Good standing and valid existence opinions relate to the formation of an entity under the law of the jurisdiction where the entity is formed, and do not necessarily involve compliance with other legal requirements. Such opinions are usually based solely on review of a government-issued good standing certificate or certificate of formation, as applicable. It is possible that opinion requesters may assert that, and/or FinCEN may advise as guidance that, any entity subject to the CTA reporting requirements is not in “good standing” if the required FinCEN reports haven’t been accurately and timely filed. Attorneys do not have the professional ability to opine as to the accuracy and/or timeliness of any such filing. In addition, whether a report has been filed is a factual matter, not a legal issue, and therefore beyond the scope of any requested legal opinion.
- A request for an opinion concerning the due registration of a business entity in a jurisdiction other than the one in which it is incorporated or formed may present similar issues if the other jurisdiction requires evidence of compliance with the CTA to register in the other jurisdiction. The opinion requester may want more than a certified official confirmation of a FinCEN filing (if the FinCEN regulations allow for sending written confirmation to a third party that a filing had been made) in such a situation.
No Conflict With Laws
- No violation – “The execution and delivery by Holdings Inc. of the Loan Documents to which it is a party does not, and the performance by it of its obligations thereunder will not, (i) result in a violation of the Delaware General Corporation Law, New York law or any U.S. federal statute or any rule or regulation thereunder or (ii) result in a violation of its certificate of incorporation or by-laws.”
- Compliance with Laws – “Except for the filing of the Financing Statements, other than those authorizations, approvals, consents and filings that have been obtained or made and are in effect, no authorizations, approvals, consents or filings are required to be obtained or made by Holdings Inc. under the laws of the State of New York, any federal laws of the United States of America or the Delaware General Corporation Law, in connection with the execution and delivery and the performance by the Holdings Inc. of the Loan Documents to it is a party.”
- It is important to note the distinction between these two opinions: the former speaks of “no violation of law,” while the latter affirmatively asserts compliance with laws. The “no conflict with laws” opinions may be given so long as the opinion giver notes that the scope of the opinion relates only to the transaction itself, such that a complete review of the accuracy and/or timeliness of FinCEN filings, if any, would be beyond the scope of the opinion. However, if the applicable transaction documents contemplate the organization (by incorporation or agreement) of a new entity as part of the transaction, then the opinion giver will probably be required to confirm a facially appropriate FinCEN filing.
- If the requested opinion is the affirmative statement that all laws have been complied with, this would appear to require a review of any FinCEN reports filed and an assessment of their accuracy and timeliness, unless the requester allows the opinion giver to expressly exclude any review or assessment of the contents of FinCEN reports.
Due Execution and Performance:
- “Holdings Inc. has all requisite corporate power and authority to execute and deliver the Loan Documents to which it is a party and to perform the obligations which it is obligated to perform under the Loan Documents to which it is a party and has taken all necessary action to authorize the execution, delivery and performance of the Loan Documents to which it is a party. The Loan Documents have been duly executed and delivered by each of the DE Covered Parties.”
- A “power and authority” opinion would not present an issue, unless the opinion giver becomes aware that there is one or more control persons who has not approved the transaction (as for example a proverbial “silent partner”).
- An “execution, delivery and performance” opinion could present an opinion giver with problems, if the transaction requires formation of a new entity (such as a Special Purpose Vehicle [“SPV”] for leveraged financing). In such a case, compliance with the CTA would probably be necessary to give such an opinion.
It is important to note that any opinion given as part of a transaction should not extend to the reporting entity’s obligation to keep CTA filings up to date. Opinions are understood to speak as of the date given. When opinion preparers may need to consider whether they are able to address the accuracy and completeness of any filing related to beneficial ownership reporting, we note that there is the possibility that some law firms might decline to opine about CTA compliance, as such an opinion involves, as noted above, opinions not only as to matters of law, but also as to facts or mixed facts and law. Clients that are requested to provide legal opinions that involve issues posed by the CTA will need an attorney who can help navigate the nuances and requirements of the new law and provide opinions that are able to be given under the CTA (consistent with counsel’s professional ability) while not expanding the scope of what can be legally opined on in the opinion itself.
Developments with the CTA are expected to evolve, and our Business Law attorneys look forward to offering further insights in that connection. If you have any questions pertaining to CTA compliance or general inquiries into reporting, please do not hesitate to reach out to Andrew J. Kimball, Esq., at email@example.com or Peter D. Hutcheon, Of Counsel, at firstname.lastname@example.org.