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Final CFIUS Regulations Significantly Expand Jurisdiction

The US Department of the Treasury issued final regulations (“Final Rules”) last week that expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review non-controlling foreign investments in certain US businesses and certain real estate transactions. The existing jurisdiction of CFIUS to review any transaction in which a foreign person acquires control of a US business with national security concerns has not changed. The final regulations become effective February 13, 2020.

CFIUS Jurisdiction Expanded to Cover Minority, Non-Controlling Investments in TID US Businesses

Under the final regulations, CFIUS’s jurisdiction is expanded to allow it to review certain minority, non-controlling investments in US businesses that (1) produce or develop critical technologies; (2) own or operate critical infrastructure; or (3) maintain and collect sensitive personal data of US citizens. CFIUS defines such businesses as a “TID US Business”.

A minority, non-controlling investment in a TID US Business will be subject to CFIUS review if it provides a foreign investor with one of the following: (1) access to material nonpublic information of the TID US Business; (2) right to appoint a board member or board observer of the TID US Business; or (3) any involvement (other than the voting of shares) in substantive decision-making of the TID US Business regarding the development of critical technologies, the operation of critical infrastructure or the use of sensitive personal data.

Under this expanded jurisdiction, the CFIUS process and filings largely remain voluntary.

However, as discussed below, a mandatory filing is required in two situations: (1) certain “substantial interest” foreign government-related transactions in TID US Businesses, and (2) certain investments “critical technologies” TID US Businesses.

Mandatory Filings Required for Certain “Substantial Interest” Investments by Foreign Government-Controlled Entities

A mandatory filing is required for transactions resulting in the acquisition of a “substantial interest” in a TID US Business by a foreign person in which a foreign government has a “substantial interest”. Under the Final Rules, the “substantial interest” requirement would be met if a foreign person has a voting interest (direct or indirect) of 25% in a TID US Business and a foreign government has a voting interest (direct or indirect) of 49% or more in that foreign person. With respect to funds and partnerships, a foreign government will be deemed to have a “substantial interest” if it holds at least 49% in the general partner, managing member or equivalent.

Mandatory Filings for Certain Foreign Investments in Critical Technologies

The Pilot Program, which established mandatory filing requirements for foreign investments in certain TID US Businesses involved in “critical technologies”, will expire on February 12, 2020. However, certain key aspects of the Program will remain in effect under the Final Rules. As with the Pilot Program, mandatory filings are required for investments in a TID US Business involving “critical technologies” that give a foreign investor certain substantive rights in that business – either control, board membership or observer rights, access to material nonpublic information, or involvement (other than voting of shares) in substantive decision-making regarding the TID US Business. The term “critical technologies” generally means defense articles, nuclear equipment and materials, select agents and toxins, a broad range of dual-use items subject to export control and certain “emerging and foundational” technologies that will be controlled for export under forthcoming regulations.

Under the Pilot Program, the filing requirement was triggered by a TID US Business producing, designing, testing, manufacturing, fabricating or developing a “critical technology” in one of 27 different enumerated NAICS Code industries. The Final Rules state that separate, additional rules will be issued that will eliminate the association between “critical technologies” and NAICS Codes, and will instead be based upon export control licensing requirements. Therefore, going forward, the mandatory filing requirement would be triggered by a TID US Business producing, designing, testing, manufacturing, fabricating or developing a “critical technology” that is subject to export control licensing requirements, regardless of the self-assigned NAICS Code in which the business operates. Further detail has not yet been provided so the significance of this modification remains to be seen.

In addition, the Final Rules include certain exceptions to these mandatory filing requirements for foreign investors from “excepted foreign states” (as discussed below), investments in a fund managed and ultimately controlled by US nationals, foreign investors who are already subject to mitigation, and investments in a TID US Business that is a TID US Business solely because it is involved in certain non-sensitive encryption technology.

Exemptions for Foreign Investors from Australia, Canada and UK

Certain investors from “excepted foreign states” are exempt from CFIUS’s expanded jurisdiction over TID US Business investments. Under the Final Rules, the “excepted foreign states” are Australia, Canada, and the United Kingdom.

Generally, persons who are nationals exclusively of excepted foreign states (and/or the US) can qualify as “excepted investors”, as can foreign governments of excepted foreign states.

An entity will be deemed an “excepted investor” if, among other requirements: (1) it is organized under the laws of an excepted foreign state or the US; (2) 75% or more of the members and 75% or more of the observers of the board of directors are citizens of either the US or an excepted foreign state; and (3) all investors that hold a 10% or more equity interest are citizens of either the US or an excepted foreign state.

“Excepted investors” are not subject to CFIUS’s expanded jurisdiction for non-controlling investments or covered real estate transactions (discussed below), nor to the mandatory filing requirements for “substantial interest” investments or “critical technologies” investments described above, but they do remain subject to the traditional CFIUS jurisdiction for transactions that would result in their control of a US Business with national security implications.

CFIUS Jurisdiction Expanded to Cover Certain Real Estate Investments

The existing CFIUS jurisdiction covers foreign investments in real estate only if it allows a foreign person to gain control over a US Business. Under the Final Rules, CFIUS has expanded jurisdiction to review purchases, leases and concessions of real estate by foreign persons, including Real Estate Investment Trusts (REITs), involving property with geographic proximity to airports or maritime ports, or sensitive US military and other government sites.

The Final Rules state that CFIUS intends to make a web-based tool available in the near future to assist in the determination of whether a real estate transaction would qualify as a “covered real estate transaction” subject to CFIUS review. Note that while the scope of “covered real estate transactions” subject to CFIUS review has expanded, these transactions are still voluntary filings under the Final Rules.

Remaining Questions

  • Treasury plans to issue separate rules amending the criteria for mandatory filing requirements to be based on export control licensing requirements rather than NAICS Codes. This is a welcome change since it should simplify the classification of such businesses and aid in a more precise determination of whether a US business constitutes a TID US Business.
  • “Emerging and foundational technologies” still have not been defined by the Department of Commerce. This definition will have a major impact on jurisdiction over what constitutes a “critical technology” for purposes of a TID US Business.
  • Filing fees will be determined in later rulemaking. CFIUS is permitted to impose filing fees not to exceed the lesser of 1% of the transaction value or $300,000.

Investors and companies are now faced with a more complicated CFIUS framework and analysis, and CFIUS will continue to be a key issue in future transactions involving foreign investment. In light of the Final Rules, fund managers should also review their fund documents to determine whether existing governance rights and/or access rights could potentially trigger CFIUS’s expanded jurisdiction. If you have questions about this alert and its applicability, please contact Roger Wells, Tom Worthington or Rachel Meyer.

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