An estimated 25 million U.S. companies will need to file a beneficial ownership report with FinCEN under the Corporate Transparency Act ("CTA").
The beneficial ownership report will need to contain the full legal name, residential address, date of birth and a unique identifying number (such as a drivers license or passport) along with a copy of the document that contains the unique identifying number for each "beneficial owner" of the company and each "company applicant."
The initial rush of 25 million companies and tens of millions of individual beneficial owners, to prepare and file these reports with the Financial Crimes Enforcement Network (or "FinCEN") will be a massive undertaking. Companies and their attorneys will need to obtain specialized information systems in order to collect and compile these reports and retain evidence of compliance.
Once filed, each reporting company will have only 30 calendar days to amend a previously-filed report when any item of previously-reported information changes. The most obvious example of a data change is a change in residential address or a change in passport or drivers license for one of the individuals included in the report. But what other types of events might trigger a duty to amend a previously-filed beneficial ownership report?
When a company files a petition in bankruptcy with a U.S. Bankruptcy Court the court issues a "stay" order that prevents creditors from foreclosing on company assets and that also puts the company under the control of a "trustee". For as long as the case continues the company may not take any significant action without the approval of the trustee or the court.
Since the purpose of the CTA is to create a database that discloses who is in control of U.S. companies, a reporting company that files a petition in bankruptcy should amend its beneficial ownership report to provide FinCEN with notice of the change in control of the company. FinCEN has not yet finalized its regulations, so we do not yet have a form for filing this kind of notice, but presumably FinCEN will provide a template for this kind of amendment.
There are different kinds of receivership, but most involve a court issuing an order that puts an individual "receive" in charge of a company and its assets, under the court's supervision. Courts sometimes impose a receivership on a company where there is a dispute among its owners regarding who should be in control, when a government regulator charges the company with ongoing criminal activity, or as a consequence of insolvency, if a creditor petitions a court to take control of the company to preserve its assets to satisfy the creditor's claims.
In any receivership, the receiver is empowered by the court's order to take control of the company and its assets. Because the CTA tracks "substantial control" of reporting companies, the imposition of a receivership ought to trigger an amendment to the company's beneficial ownership report to FinCEN.
3. Death, Divorce and Disability
The CTA requires companies to file an amendment whenever an item of previously-reported information changes. If an individual who was covered in a beneficial ownership report should die, become disabled or become subject to the order of a bankruptcy court that requires the individual to dispose of their shares in the company, those events would represent a change.
A deceased beneficial owner no longer "counts" for purposes of the CTA (and an individual who receives shares in a company through a testamentary transfer will often be exempt from CTA reporting). As a result, a reporting company should report the passing of a beneficial ownership who was covered by a prior report.
Individuals who are disabled so that they no longer have legal control over their own affairs, often have their assets administered under a power of attorney, a trustee or custodian. While individuals who control an interest in a company as a trustee or custodian are often exempt from CTA reporting, the change in control from the disabled beneficial owner to the trustee or custodian is the kind of change that should be reported in an amendment to a beneficial ownership report with FinCEN.
In divorce proceedings, the court may sometimes order a spouse to dispose of assets (such as shares in a company) to a former spouse. Such a transfer could result in a new beneficial owner (i.e. the former spouse) whose identity must now be covered in an amendment to the beneficial ownership report. Depending on the circumstances, if the transfer caused the original beneficial holder to cease to satisfy the definition of "beneficial owner" the company would file an amendment to report that change as well.
4. Other Changes in Control
There are limitless other circumstances that might result in a change in "substantial control." Previous blog posts have covered the definition of "beneficial owner" and how an individual becomes a beneficial owner because they exercise "substantial control." An individual may have substantial control because they are an officer or director of a corporation, or because they have the power to influence the affairs of the company or its decision-making.
In the same way that company governance documents (like an LLC Operating Agreement or a corporate Shareholders Agreement) can create substantial control for an individual, revisions to those documents may eliminate substantial control as well.
Any change to company governance documents have the potential to trigger an amendment to the company's beneficial ownership report. Such changes may create new beneficial owners (by giving substantial control to persons who lacked it before) or may eliminate persons as beneficial owners (by taking away the substantial control that previously caused them to be beneficial owners).
The key take-ways from this discussion are that companies and their counsel are going to have to be alert to circumstances that create a duty to amend a company's beneficial ownership report. Reporting companies will have only 30 calendar days to file an amendment after a material event occurs that changes an item of previously-report information. Failing to file an amendment on time carries with it a $500 per day fine. A willful failure to file (or a willful filing of inaccurate information) can be a felony that carries substantial fines and possible imprisonment.
The duty to file an amendment to a beneficial ownership report is a heavy one that will require many lawyers and their clients to learn new ways of managing their corporate business.