Recent Court Decisions Add to Uncertainty for Businesses

A constitutional ruling by an Alabama judicial body has the rest of the country wondering about its potentially widespread implications. Sound familiar? We’re not talking about the Alabama Supreme Court ruling that embryos created through IVF are children, but another recent decision. This one, by an Alabama federal court, found the Corporate Transparency Act to be unconstitutional. And like other recent legal challenges, it has placed the business community in a state of limbo.

The CTA requires reporting companies to disclose information about their so-called beneficial owners to the Financial Crimes Enforcement Network – commonly known as FinCEN – within the Treasury Department. Beneficial owners include individuals who maintain substantial control over a company or own at least 25% of a company. Reporting companies also must update FinCEN whenever beneficial ownership changes.

Earlier this month, the U.S. District Court for the Northern District of Alabama found the CTA went beyond congressional authority, ruling in favor of the National Small Business Association in a lawsuit against the Treasury Department. The decision by the federal district court hinged on the determination that the CTA applies to “local” activity by corporations formed under state laws. Therefore, the ruling enjoined FinCEN from enforcing the CTA against the NSBA.

The story appears far from over, though. For one thing, the government will likely file an appeal, which would also include a request for a stay on the federal district court’s order. If a stay is granted, the CTA situation would remain status quo until a ruling is made on the appeal.

Meanwhile, FinCEN is apparently taking the position that the ruling applies exclusively to the NSBA and related parties. That means all other reporting companies remain fair game in its view. Lastly, the ruling in NSBA’s favor will likely spawn similar lawsuits against FinCEN across the country. One such case in the U.S. District Court for the Northern District of Ohio requests a nationwide injunction to prohibit FinCEN from enforcing the CTA.

Putting the CTA in legal limbo only adds to the regulatory uncertainty now confronting businesses. For instance, the U.S. Fifth Circuit Court of Appeals in December put the kibosh on the Securities and Exchange Commission’s efforts to gain more information from companies about their share buyback plans. The decision came after the agency failed to correct what the Fifth Circuit had deemed “defects” in the buyback rule within the timeframe allowed by the panel. Presumably, that means companies should abide by the old reporting regime. But who knows?

The effects of the Supreme Court’s affirmative action ruling last year continue to ripple throughout the corporate world, too. Even though the decision dealt directly with admissions policies in higher education, the same logic would apply to corporate diversity, equity and inclusion programs, wouldn’t it?

For now, companies should get used to living in the grey areas.

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