Eighteen months after the enactment of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), the law’s expansion of the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”) became fully effective on February 13, 2020, as new regulations, finalized in January 2020 (see our Legal Update), went into effect.
The regulations have far-reaching implications for transactions involving foreign investors and formally expand CFIUS’s jurisdiction to new types of transactions. While the CFIUS process will remain largely voluntary, the new regulations impose a mandatory filing requirement on certain transactions involving “critical technologies” as well as certain transactions in which a foreign government has an interest, including through state-owned enterprises. The new regulations also permit a short-form filing process, a “Declaration,” which parties to all transactions may utilize.
CFIUS’s Expanded Jurisdiction
Pursuant to the new regulations, CFIUS now has jurisdiction over three types of transactions:
- Greenfield real estate transactions by a foreign investor in which the real estate at issue is located in proximity to specified ports and specified sensitive government and military installations;
- “Covered control transactions,” which are transactions “by or with any foreign person which could result in foreign control of any U.S. business” (i.e., the traditional scope of CFIUS jurisdiction); and
- “Covered investments,” which are small, non-controlling investments by foreign persons in US businesses that deal in critical technologies, critical infrastructure or sensitive personal data and in which a foreign person gains certain rights with respect to the US business at issue. These businesses are referred to as “TID US businesses,” those dealing in certain Technology, Infrastructure and Data.
In most instances, the CFIUS review process will remain technically voluntary, though CFIUS retains the ability to initiate its own review of transactions, including those that have been completed, as well as the ability to impose after-the-fact conditions on, or require the divestment of, an already-closed transaction to mitigate any perceived risks to US national security.
The new regulations make a CFIUS filing mandatory in two situations. First, the new regulations largely subsume a pilot program introduced in November 2018 (see our Legal Update), and require a mandatory filing for covered control transactions and covered investments in TID US businesses that produce, design, test, manufacture, fabricate or develop “critical technologies” and which then either use or specifically design such technologies for use in one of 27 specified industries. However, CFIUS noted that sometime soon they will be phasing out the latter part of this test.
Second, the new regulations require a mandatory filing for the acquisition of a “substantial interest” (in this context, defined to mean a voting interest of 25 percent or more) in a TID US business by a foreign person in which a foreign government has a “substantial interest” (defined here to mean a voting interest of 49 percent or more).
Changes to the Filing Process
The new regulations also allow for the use of a short-form Declaration rather than a Joint Voluntary Notice (“JVN”) when submitting transactions to CFIUS for review. As compared to a JVN, a Declaration requires the provision of less information by the parties. Most notably, a Declaration does not require the provision of personal identifier information from the foreign investor and its leadership (including from the leadership of its parents), which is often time-consuming for parties to obtain.
While investors will welcome the new regulations’ allowance of the use of Declarations for any transaction submitted to CFIUS, they should also take into account the implications of CFIUS’s possible responses to such Declarations. Once CFIUS accepts a Declaration, it has 30 days to take action on it. In response to a Declaration, CFIUS may:
- Request a JVN from the parties (the acceptance of which would begin CFIUS’s 45-day review process) or unilaterally take action to review the transaction;
- Conclude its action with respect to the transaction by indicating to the parties that there are no unresolved national security concerns; or
- Take no action with respect to the transaction, meaning that CFIUS is not able to complete action on the basis of the Declaration and that the parties may file a JVN if they wish to receive affirmative approval from CFIUS.
In addition, during both the JVN review and the Declaration assessment, CFIUS can ask questions of the parties which must be answered quickly: within three business days and two business days, respectively. While the new regulations do not implement CFIUS filing fees, FIRRMA provides CFIUS with the authority to institute such fees in the future. Any such fees are statutorily limited to the lesser of 1 percent of the value of a transaction or $300,000.
Implications for Foreign Investors
The new CFIUS regulations represent a major expansion of CFIUS’s jurisdiction and significant changes to the CFIUS review process. As a result, parties to cross-border transactions should carefully consider CFIUS at every step of the process.