As of February 13, 2020, the new regulations strengthening and expanding the authority of the Committee on Foreign Investment in the United States (CFIUS or Committee) are now in effect, spearheaded by U.S. Department of Treasury following passage of the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018. As Venable previewed last fall, these final regulations provide CFIUS with expanded authority to review certain non-controlling investments in U.S. businesses, as well as some real estate transactions, and implement new rules that make notice to the Committee mandatory, rather than voluntary, for some transactions.
As discussed in prior alerts, there are actually two sets of rules that become effective today. The first set of rules amends current CFIUS procedures, set forth in Part 800 of the Treasury Regulations. In addition to updating and clarifying these procedures, the changes to Part 800 implement FIRRMA's expansion to now include non-controlling investments in U.S. businesses involved in "critical technologies," "critical infrastructure," or "sensitive personal data" of U.S. citizens (so-called TID U.S. businesses, for Technology, Infrastructure, and Data). The second set of rules, set forth through a newly created Part 802 of the Treasury Regulations, implements the Committee's expanded jurisdiction over real estate transactions. Key provisions of these changes are outlined below.
Non-Controlling Investment Transactions
Under the final rules, the Committee has an expanded mandate to review non-controlling foreign investments in TID U.S. businesses, in cases where the investment transaction affords a foreign person access to material non-public information in the possession of, certain management rights in, or involvement in the substantive decision-making of, the TID U.S. business. (For a deeper dive into how a U.S. business may qualify as a TID U.S. business, please refer to our prior alert.)
Nevertheless, not all such investments by foreign investors fall within the Committee's jurisdiction. Treasury has placed Australia, Canada, and the United Kingdom on an inaugural whitelist of "excepted foreign states." Generally speaking, investment transactions involving an "excepted foreign investor"—that is, foreign nations and foreign government entities of one of these excepted foreign states—are not covered investments. Significantly, this whitelist applies only to investment transactions, not to control transactions. Determining whether a foreign entity qualifies as an "excepted foreign investor" requires its own analysis. For example, a foreign entity may qualify if (a) it is organized in the United States or in an excepted foreign state; (b) 75% or more of the board members and observers are U.S. nationals or nationals of an excepted foreign state; (c) holders of 10% or more of the outstanding voting interest (or other methods of control) are U.S. nationals or nationals of an excepted foreign state; and (d) at least 50% of the ownership interest is held by U.S. nationals, nationals of an excepted foreign state, or a foreign government or entity in an excepted foreign state (or 80%, if the entity is not primarily traded on an exchange in the U.S. or an excepted foreign state).
The final rules also impose mandatory filing requirements for two types of covered transactions flagged by Treasury, in particular:
- Transactions involving a foreign government-owned or -controlled foreign person acquiring a "substantial interest" in a TID U.S. business. Treasury has defined a "substantial interest" under a two-part test: (1) the foreign person must acquire a voting interest of at least 25%, and (2) an interest of 49% or more in the foreign person's general partner, managing member, or equivalent must held by a foreign government; and
- Transactions involving a controlling or non-controlling investment in certain U.S. businesses that produce, design, test, manufacture, fabricate, or develop critical technology. (Such transactions have been covered by a CFIUS pilot program since November 2018.) The industries subject to the mandatory declaration requirement are currently listed by the North American Industry Classification System (NAICS) code at Appendix B to Part 800 of the Treasury Regulations; however, Treasury has indicated that it anticipates proposing a new classification system based on export control licensing requirements, rather than the NAICS code.
Real Estate Transactions
Real estate transactions now subject to the Committee's expanded mandate include purchases and leases of real estate in certain airports and maritime ports, or near sensitive U.S. military sites or U.S. government facilities. The covered airports and seaports draw upon lists issued by other government agencies, particularly within the U.S. Department of Transportation. The covered military and government sites, which have been revised slightly since Treasury's proposed rulemaking, are still included in Appendix A to Part 802. In its commentary on the final rules, Treasury indicates plans to provide a tool on its website to show the real estate under the geographic coverage of the Committee's jurisdiction.
As with non-controlling investment transactions, the real estate regulations currently place Australia, Canada and the United Kingdom on a whitelist of "excepted real estate foreign states." The analysis for determining whether a foreign entity is an "excepted real estate investor" is similar to the analysis outlined above.
Other Considerations
FIRRMA authorizes CFIUS to collect filing fees for parties' submission of joint notices. By law these fees cannot be greater than 1 percent of the transaction value or $300,000 (adjusted annually for inflation), whichever is less. In issuing the final rules, Treasury did not provide any further details on these fees, or identify their effective date. Treasury did note, however, that it expects to publish separate regulations on these fees at a later date.
Importantly, these new regulations now apply to all transactions unless, prior to February 13, 2020, the parties to a transaction have completed the transaction; the parties have executed a binding written agreement establishing the material terms of the transaction; one of the parties has made a public offer to shareholders to buy shares in the U.S. business; a shareholder has solicited proxies in connection with an election of the board of directors of a U.S. business; or an owner or holder of a contingent equity interest has requested the conversion of the contingent equity interest. If parties have already submitted notice of a covered transaction to CFIUS and are engaged with the Committee regarding the transaction, the prior rules will continue to apply.
Conclusion
While notice to the Committee is voluntary in most cases, certain proposed transactions pose concerns that now require a mandatory declaration regime. CFIUS has the power to impose significant mitigation measures—or even unwind a completed deal—if the Committee has not reviewed a deal. Therefore, if your proposed deal includes aspects of foreign control or investment, it is critical to consider the Committee's authority and the potential impact of these updated regulations. To discuss whether your transaction is subject to CFIUS jurisdiction, or if you are interested in discussing the details of the newly implemented regulations, please reach out to Venable's International Trade Group for more details.