In late April 2008, the U.S. Department of the Treasury published proposed regulations on national security reviews of acquisitions of U.S. businesses by foreign persons. In addition to codifying many current practices, the proposed regulations would subject an expanded range of transactions and non-U.S. investors to review by the Committee on Foreign Investment in the United States (CFIUS).
U.S. law permits the President of the United States to suspend or prohibit any "covered transaction" based on credible evidence that a foreign person exercising control over a U.S. business might take action that threatens to impair U.S. national security. The proposed regulations would govern the process by which CFIUS reviews transactions to determine if such evidence exists.
The proposed regulations adopt a broad facts-and-circumstances style approach to determining the threshold concept of control. In addition to such customary items as voting power and board representation, the proposed regulations expand the indicia of control to include:
- minority shareholder protections and other contractual
- informal and indirect arrangements;
- influence over a long list of enumerated corporate
actions including reorganizations, mergers, dissolutions,
relocations and major expenditures; and
- "other means to determine, direct or decide
The safe harbor for investments involving no more than 10% of the outstanding voting interests in a U.S. business has been modified to apply only to transactions "solely for the purpose of investment." The proposed regulations indicate that CFIUS may review any transaction if the foreign person possesses or develops any purpose other than investment (even after the initial investment has closed), or takes any action inconsistent with acquiring or holding such interests solely for the purpose of investment. In addition, because the proposed regulations do not specify any minimum size threshold, CFIUS may review an investment without regard to the size of the target U.S. business.
The proposed regulations define a "foreign person" to include a "foreign national," a "foreign entity," a "foreign government" and any entity over which control is exercised or exercisable by a foreign national, foreign entity or foreign government. The broad scope of these definitions will likely capture many Canadian pension plans, similar government-sponsored plans and government pension fund managers as being either controlled by a foreign government or as a foreign entity.
A foreign national is any individual other than a U.S. national.
A foreign entity is either
- a public company organized in a non-U.S. state whose
equity is primarily traded on a non-U.S. exchange; or
- any other entity organized in a non-U.S. state in which
foreign nationals hold, directly or indirectly, at least 50%
of the outstanding ownership.
A foreign government is any non-U.S. government or body exercising government functions including (but not limited to) national and subnational governments, including their respective departments, agencies and instrumentalities.
In an indication of the political sensitivity that investments by sovereign wealth funds and other state-owned entities have generated in the United States recently, the proposed regulations stipulate that no "foreign government-controlled transaction" -- defined as any covered transaction that could result in control of a U.S. business by a foreign government or a person controlled by or acting on behalf of a foreign government -- may be cleared to proceed without first being subjected to a mandatory 45-day investigation in addition to the initial 30-day review.
The proposed regulations expand the scope of industries that may have national security implications requiring CFIUS review. Any transaction that could result in foreign control of "critical infrastructure" would become the subject of a mandatory 45-day investigation if CFIUS determines such control could impair national security and that impairment has not been mitigated. Critical infrastructure is defined as physical or virtual systems and assets so vital to the United States that their incapacity or destruction would have a debilitating impact on national security. The breadth and vagueness of the drafting ensures that this definition can encompass a broad and changing scope of industries.
Impact on Non-U.S. Lenders
Transactions in which foreign lenders make loans to U.S. businesses may also be subject to CFIUS review. While the acquisition of a security interest in voting securities or assets of a U.S. business is expressly excluded from CFIUS review, the proposed regulations state that CFIUS may review loans or financings by foreign persons when, because of imminent or actual default, the foreign person may obtain control of a U.S. business. It remains to be seen if this apparent uncertainty (e.g., the risk that a foreign lender might be prevented from foreclosing on its collateral despite a default) would impact secured lending by foreign persons to U.S. businesses. In addition, though not specifically addressed in the proposed regulations, it would seem that a complex, though not atypical, covenant package might be sufficient to justify a finding of control that would render the initial loan a covered transaction subject to CFIUS review.
The proposed regulations require that each foreign person provide personal information regarding its officers, directors, beneficial owners and parent companies. Certifications of accuracy and completeness must be provided in a proscribed form and CFIUS would be authorized to impose civil penalties of up to $250,000 per violation on any person who
(a) submits a material misstatement or omission in a notice or who makes a false certification; or (b) violates a material agreement or condition entered into or agreed upon with CFIUS.
CFIUS may also reopen an already concluded review of a transaction in the case of (a) or (b) above.Public Comment
Written comments on the proposed regulations may be submitted until June 9, 2008.
Marc Kushner is a partner in the Corporate Practice Group of the firm's New York office. Benjamin Zeliger is an associate in the Business Law Department in the firm's New York office.