New rules governing the review of transactions by the Committee on Foreign Investment in the United States (“CFIUS”) take effect today. The two new CFIUS rules are available here and here.
CFIUS, an inter-agency panel of the U.S. government, reviews foreign investment for national security concerns. Historically, CFIUS jurisdiction was limited to transactions in which a foreign person could acquire control of a U.S. business, and those filings were voluntary. The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) authorized significant CFIUS reforms, including expanded jurisdiction, mandatory filing requirements, and other important changes taking effect today. Below is a brief summary of the key reforms to the CFIUS process. For a more detailed discussion of the rules, see our prior analyses of the proposed rules and key changes to the final regulations.
1. CFIUS jurisdiction expands into two areas.
- Non-controlling investments in critical technology, critical infrastructure, and sensitive personal data companies (referred to as “TID U.S. businesses”). Previously CFIUS only had jurisdiction over transactions which could result in control by a foreign person. Now, in addition to control transactions, a non-controlling investment of any amount of equity or contingent equity in a TID U.S. business will be subject to CFIUS review if the foreign investor will receive (a) access to material non-public technical information, (b) board member or observer rights; or (c) involvement in substantive decisionmaking pertaining to the relevant technology, infrastructure or data.
- Critical technology companies produce, design, test, manufacture, fabricate or develop one or more critical technologies, which are defined generally based on export control classifications. Important anticipated rulemakings by the Commerce Department regarding emerging and foundational technologies will increase the scope of what is considered a critical technology.
- Critical infrastructure companies perform certain functions such as owning or operating covered investment critical infrastructure listed in an appendix to the rule.
- Sensitive personal data companies maintain or collect, directly or indirectly, sensitive personal data of U.S. citizens. The scope of relevant data is described in detail.
- Real estate transactions. A purchase, lease or concession that affords a foreign person specified property rights within certain airports and maritime ports and near sensitive U.S. government facilities are now subject to CFIUS review. Covered real estate (e.g., within one mile (“close proximity”) or within 100 miles (“extended range”)) of certain military installations is listed in an appendix to the real estate rule and on the CFIUS website.
2. While most filings are still voluntary, the new regulations require filings for two types of transactions involving TID U.S. businesses.
- Substantial foreign government interest: A CFIUS filing is mandatory if a foreign government or state-owned entity will acquire a substantial interest in a TID U.S. business. A “substantial interest” is a voting interest by a foreign person of 25 percent or more in a U.S. business, where the national or subnational governments of a single foreign government have a voting interest of 49 percent or more in that foreign person.
- Critical technologies: A CFIUS filing is mandatory for certain transactions involving a TID U.S. business that produces, designs, tests, manufactures, fabricates, or develops critical technologies that are used by the TID U.S. business in, or specially designed for use in, specified industries, including many manufacturing industries, such as petrochemical manufacturing, nuclear electric power generation, semiconductor manufacturing, and others.
Mandatory filings must be made at least 30 days before the desired closing date and can be made using a new short-form declaration. There are no mandatory filings for real estate transactions.
3. CFIUS now permits parties to file voluntary short-form declarations, which CFIUS will assess within 30 days.
Voluntary declarations are easier to prepare and could significantly reduce the time required to obtain CFIUS approval for relatively benign transactions.
4. A new “White List” includes only Australia, Canada and the UK, and creates an exception only for mandatory filings and the expanded areas of jurisdiction over non-controlling investments and real estate.
CFIUS may identify additional excepted foreign states to the White List in the future. The list is available on the CFIUS website. To qualify as an excepted foreign investor, investors must meet various conditions, such as having at least 75 percent of all board directors of the investor and each of its parents be nationals only of excepted foreign states or the United States. Importantly, there is no exemption for control transactions.
CFIUS is expected to issue additional rules to implement the filing fees authorized by FIRRMA and to refine the definition of which critical technology transactions are subject to mandatory filing requirements. However, the rules taking effect today implement most of the CFIUS reforms authorized by FIRRMA.
The CFIUS regulations implementing FIRRMA are complex and include significant changes from the traditional CFIUS process. Anyone contemplating a transaction of any size involving a non-U.S. investor and critical technology or infrastructure, sensitive personal data, real estate involving airports, maritime ports, or near military and other sensitive government facilities should seek CFIUS counsel.
