On January 13, the Department of the Treasury, on behalf of the Committee of Foreign Investment in the United States (CFIUS), released final rules designed to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). The final rules take effect on February 13. For the most part, the rules retain the same form and substance as the proposed regulations that were previously issued on September 17, 2019. As with the proposed regulations, the final rules attempt to codify the practices and procedures at CFIUS pre-FIRRMA.
Pre-FIRRMA, CFIUS had authority to review transactions that could result in control of a U.S. business by a foreign person. FIRRMA expanded CFIUS’ authority to review certain foreign non-controlling investments and real estate transactions that had previously fallen outside of its jurisdiction. The new rules retain many of the provisions of the existing regulations, but there are a number of substantive changes to aid in the implementation of FIRRMA.
(1) Expansion of CFIUS Jurisdiction Over Noncontrolling Investments in U.S. Businesses Involved in Technology, Infrastructure and Sensitive Personal Data
CFIUS has always had wide-ranging jurisdiction to review certain investments in which a foreign person acquired control of a U.S. business (now defined as “covered control transactions”), but the final rules implement CFIUS’ expansion of its authority to review non-controlling “covered investments” in U.S. businesses involved in critical technology, critical infrastructure, and sensitive personal data, collectively referred to as “TID U.S. Businesses.”
“Covered investments” involve a U.S. business that either: (1) produces, designs, tests, manufactures, fabricates or develops one or more critical technologies; (2) owns, operates, manufactures, supplies or services critical infrastructure; or (3) maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.
The non-controlling covered investment must allow the foreign person one of the following rights: (1) access to material nonpublic technical information; (2) membership or observer rights on the board of directors; or (3) involvement, other than through voting of shares, in the substantive decision-making process of the U.S. business.
(2) Expansion of CFIUS Jurisdiction Over Investments in Real Estate
In another example of CFIUS expanding its jurisdiction, CFIUS issued a separate set of rules specific to its authority pursuant to FIRRMA to review real estate transactions. Prior to FIRRMA, CFIUS was only able to review a transaction involving the acquisition of real estate if that transaction could result in control by a foreign person of an entity engaged in interstate commerce in the U.S. FIRRMA expanded CFIUS’ jurisdiction to include certain stand-alone real estate transactions involving the purchase, lease or concession of U.S. real estate to foreign investors that:
- is located within, or will function as part of, an air or maritime port;
- is in “close proximity” to (i.e., within one mile of) a U.S. military or other sensitive U.S. government location;
- is within the “extended range” (i.e., between one mile and 100 miles) of certain military installations; and
- is within certain geographic areas associated with missile fields and offshore ranges.
Specifically, the transactions must provide the foreign person three or more of the following specific property rights to fall within CFIUS review - physical access to the real estate, exclusion of others from physically accessing the real estate, improvement or development of the real estate, or the right to affix fixed or immovable structures or objects to the real estate.
Sites falling within the scope of CFIUS review include military installations listed in appendices to the final regulations, as well as specific airports and maritime ports enumerated in lists published by the U.S. Department of Transportation. The rules also allow for multiple exceptions to CFIUS jurisdiction, including real estate transactions in urbanized areas or urban clusters, transactions involving residential housing, the lease or concession or real estate in airports and maritime ports for the purpose of retail sales, and certain transactions involving commercial space in multi-unit commercial buildings.
These rules only apply to transactions where the regulations governing investments in U.S. businesses are not applicable. There is no mandatory filing requirement for real estate transactions.
(3) Excepted Investors Identified in Australia, Canada and the United Kingdom
The rules create an exception to CFIUS’ jurisdiction over non-controlling covered investments and certain real estate transactions for foreign persons defined as “excepted investors” from certain “excepted foreign states.” CFIUS has now identified Australia, Canada and the United Kingdom as the initial excepted foreign states. According to CFIUS, it identified these countries “due to certain aspects of their robust intelligence-sharing and defense industrial base integration mechanisms with the United States.” CFIUS has noted that it may expand the list in the future. In order for each of these countries to remain excepted foreign states after the initial two-year period, CFIUS will make a determination regarding that state’s foreign investment review processes and bilateral cooperation with the United States on national security-based investment reviews.
Importantly, CFIUS retains the authority to review a transaction that could result in foreign control of any U.S. business, regardless of whether the foreign person is an “excepted investor.”
(4) “Principal Place of Business” is Defined
For purposes of considering an excepted investor, CFIUS has adopted the “nerve center” test used by U.S. federal courts to determine diversity jurisdiction as the basis for an interim definition of a party’s “principal place of business.” Thus, U.S. funds that use offshore structures but maintain their principal places of business in the U.S. will be subject to this rule.
(5)Availability of a Declaration
In one of the most significant process changes, FIRRMA allows parties to submit an abbreviated filing for any covered transaction through a declaration, as opposed to a voluntary notice. Declarations will allow parties to a transaction to submit the basic information in a submission that should not exceed 5 pages in length. A declaration also has a 30-day abbreviated timeframe for review.
(6) Critical Technology Pilot Program
The pilot program on critical technologies expires on February 12, 2020. However, the new rules incorporate many of the pilot program provisions, including the mandatory filing requirement for certain covered transactions involving critical technologies. The rules also note that the Department of Treasury intends to issue a notice of proposed rulemaking that would revise the mandatory declaration requirement regarding critical technology from one based upon the North American Industry Classification System (NAICS) codes to one based upon export control licensing requirements.
(7) Mandatory Filing Requirements
In addition to the mandatory filing requirement noted above, parties to covered transactions that result in the acquisition of a substantial interest (defined as 25% or more voting interest) in a TID U.S. business by a foreign person in which a foreign state has a substantial interest (49% or more voting interest) will be required to submit a declaration or notice to CFIUS.
(8) For Now, No Filing Fee
CFIUS notifications still have no filing fee as the final rules confirmed that CFIUS will publish a separate proposed rule about potential filing fees at a later date.