On March 9, 2020, the Department of the Treasury (Treasury), as Chair of the Committee on Foreign Investment in the United States (CFIUS or the Committee), published a proposed rule to impose, for the first time, fees on parties to foreign investment transactions who request that CFIUS review their transaction under Section 721 of the Defense Authorization Act (Section 721).1 Such CFIUS reviews enable the parties to "covered transactions" under Section 721 to obtain CFIUS's assurance that proceeding with the transaction will not be blocked or limited by the President for national security purposes. Since 1988, CFIUS has been required to conduct such reviews upon receipt of a "notice" from the parties to a covered transaction, which often is an extensive process involving the numerous federal agencies that are members of CFIUS. Under the proposed rule, CFIUS would require fixed filing fees for certain voluntary notices based on the expected value of the transaction. CFIUS expects these fees to range from $750 for lesser value transactions to the statutory maximum of $300,000 for large transactions, adjusted annually for inflation. As discussed below, this fixed-fee approach may deter some parties from voluntarily filing notices with CFIUS, particularly where the national security risks of their transaction appear relatively insignificant. Interested parties have a limited window to comment on the impact the proposed fees may have.
The Foreign Investment Risk Review Modernization Act (FIRRMA), which was enacted in 2018, authorized CFIUS to impose fees on parties filing such voluntary notices. As discussed in our prior Advisories, FIRRMA also made it mandatory for the parties to certain specified covered transactions to submit a short "declaration" to CFIUS at least 45 days prior to the planned transaction closing date.2 Neither the FIRRMA nor CFIUS' new proposed rule would impose fees on parties for submitting such mandatory declarations. Nor would the proposed rule impose a fee on parties who choose to submit a declaration as a voluntary matter, rather than a full notice.
The proposed rule is open for public comment through April 8, 2020, which allows a very short period for public input. Below we provide a brief background and describe key elements of the proposed rule on which interested parties may wish to submit comments.
FIRRMA provided CFIUS with extensive new authority to review foreign investments in US businesses and to recommend action by the President under Section 721 to block or impose conditions on such investments. Through interim regulations published in October 2018, some of the FIRRMA reforms were implemented almost immediately; thereafter, in January 2020, Treasury published two final rules implementing most of the remaining directives of FIRRMA.3 However, the January final rules left unaddressed FIRRMA's provision that "the Committee [CFIUS] may assess and collect a fee in an amount determined by the Committee in regulations."4 It is that provision that CFIUS proposes to exercise through the proposed fee rule.
The new proposed rule would establish filing fees for notices filed with the Committee pursuant to the traditional voluntary notice process—as noted, CFIUS does not propose to impose any fees on parties who are required to inform CFIUS of their transactions pursuant to the FIRRMA-based mandates for filing "declarations" regarding certain particular types of proposed foreign investments. The proposed fees are based on the expected overall value of the disclosed transaction, with smaller transactions (i.e., those with a value of less than $500,000) not being assessed a filing fee. For transactions with values equal to or greater than $500,000, the filing fee is based on a tiered approach:
- Transactions equal to or greater than $500,000 but less than $5,000,000 require a filing fee of $750.
- Transactions equal to or greater than $5,000,000 but less than $50,000,000 require a filing fee of $7,500.
- Transactions equal to or greater than $50,000,000 but less than $250,000,000 require a filing fee of $75,000.
- Transactions equal to or greater than $250,000,000 but less than $750,000,000 require a filing fee of $150,000.
- Transactions equal to or greater than $750,000,000 require a filing fee of $300,000.
Under the proposed rules, CFIUS would not begin review of a transaction until after payment of the required fee, which normally would occur at the time parties file their voluntary notice of the transaction.
Although Treasury is not proposing to impose any fee for submitting a mandated short-form "declaration" or for undergoing any review that is self-initiated by CFIUS based on a notice filed by any member of CFIUS, the proposed filing fees would be required in cases where CFIUS has completed its review of a declaration and the parties subsequently file a notice, whether CFIUS has requested that the parties file the notice or has informed the parties that it is not able to conclude action and the parties elect to file a written notice. In addition, the proposed fees would apply in cases where the parties choose to file a notice, rather than a short-form declaration, when a declaration is required.
CALCULATING TRANSACTION VALUE
The proposed rules describe how to calculate the overall value of a particular transaction in order to determine the applicable fee. Generally, this process will be straightforward, based on the amount that is being paid by the foreign party to the transaction, including cash, assets, shares or other ownership interests, debt forgiveness, services, or other in-kind consideration. For transactions involving non-cash assets, interests or services, or other similar consideration, the value will generally be calculated using fair market value of the assets or real estate being acquired as of the date the parties file the notice. The proposed rules also provide for the calculation of transaction value under certain more complex transactions, such as when a transaction arises from the conversion of a previously acquired contingent equity interest.
The proposed rules require that, along with a good faith estimate of the net value of the interest acquired in the US business by the foreign person, parties provide the Committee with the value of the transaction and an explanation of the methodology used to determine such valuation.
FEE WAIVER AND REFUND
Under the proposed rules, filing fees may be waived in certain, limited circumstances. Specifically, the CFIUS Staff Chair may waive the filing fee in whole or in part, if the Staff Chair determines that "extraordinary circumstances" related to national security merit waiving the fee. However, the proposed rules make clear that parties should not expect CFIUS to provide waivers on a frequent basis.
Additionally, the proposed rules allow parties to petition for a refund by demonstrating that a party or the parties to a transaction paid a greater fee than the amount required at the time of filing. The proposed rules also provide that a full refund will be issued if the Committee determines that a transaction is not a covered transaction (i.e., CFIUS lacks jurisdiction to review the transaction under Section 721). Finally, parties will not be required to pay an additional fee where the Committee allows the parties to withdraw and re-file a notice unless the resubmission requires consideration of new information.
The imposition of a fee for filing a voluntary notice could significantly impact parties' decisions whether to file such notices. For years, many parties have found the cost of preparing a notice to CFIUS to be outweighed by the comfort they can obtain from receiving a written statement from CFIUS, following the Committee's review (and in some cases, subsequent investigation) of their planned transaction, that there will be no further government action regarding the transaction under Section 721. Parties have therefore often filed voluntary notices even in cases where they were relatively confident that CFIUS would find no national security risks to be posed by their planned transactions.
The imposition of a filing fee will likely weigh the scales much more heavily against filing voluntary notices where national security risks seem minimal or even non-existent. It is also possible that the requirement to pay a fee may deter certain foreign investments altogether. Indeed, in its preface to the proposed rule, Treasury notes that it is particularly interested in receiving comments related to the impact that filing fees may have on a party's decision to engage in a transaction and whether parties will continue to file voluntary notices. Treasury also will consider comments on the methodology it has proposed for valuing specific transactions, which as Treasury indicates, could be done in a variety of ways.
Given the short period in which to submit comments, interested parties will want to focus quickly on those issues of importance to them and what contribution they might make in providing Treasury with their views and possibly alternatives to certain aspects of the proposed rules.
1 85 Fed. Reg. 13,586 (Mar. 9, 2020).
2 See New Law Expands and Reforms CFIUS Jurisdiction and US Export Controls, Arnold & Porter (Aug. 13, 2018).
3 See CFIUS Finalizes Rules Implementing Its Expanded Jurisdiction to Review Foreign Investment in US Businesses, Arnold & Porter (Jan. 17, 2020); CFIUS Finalizes FIRRMA Real Estate Transaction Rules, Arnold & Porter (Jan. 17, 2020).
4 See 50 U.S.C. § 4565.
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