United States: CFIUS Updates: New FAQs Clarify Positions; Possible Expansion Of Scope Of Real Estate Review

In our recent article Amid TikTok Tensions, CFIUS Signals Increased Enforcement and Other Updates, we discussed updates from the Committee on Foreign Investment in the United States ("CFIUS" or "the Committee") primarily with respect to enforcement.

Since then, the Committee has issued guidance on important CFIUS topics through new Frequently Asked Questions ("FAQs") and published a proposed rule to expand the scope of its jurisdiction over real estate transactions by foreign purchasers.

As a refresher, CFIUS is an interagency committee chaired by the Department of the Treasury ("Treasury"). Historically, the Committee has limited its review to foreign investment in the United States that leads to foreign control of a U.S. business. After the passage of the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA"), however, the Committee now also has jurisdiction over certain non-controlling investments and real estate transactions by foreign persons.

CFIUS Guidance through New FAQs

"Spring Rights" Disallowed in the Context of Mandatory Filings

In addition to expanding the jurisdictional scope of CFIUS, FIRRMA also mandated filings with the Committee for 1) certain investments by foreign governments in "TID U.S. businesses," which are U.S. businesses involved in critical technologies, critical infrastructure, or sensitive personal data, or 2) foreign investments in a U.S. business that produces, designs, tests, manufactures, fabricates, or develops "critical technologies." A mandatory filing with CFIUS is required to be filed at least 30 days prior to the "completion date" of the transaction.

One new FAQ, published on May 11, 2023, clarifies the Committee's position with respect to the triggering of the "completion date" in the context of a mandatory declaration:

Question: How does CFIUS determine the "completion date," in assessing when a mandatory filing should be submitted, where the foreign person first acquires equity interest but will not receive control or covered investment rights until after CFIUS's review?

Answer: The "completion date" is the earliest date upon which any ownership interest is conveyed, assigned, delivered, or otherwise transferred to a person [31 C.F.R. § 800.206]. In a transaction where the ownership interest is conveyed before the foreign person receives the corresponding rights, the "completion date" is the earliest date upon which the foreign person acquired any of the equity interest. For example, if Company A acquired a 25 percent ownership interest in Company B on July 1, but its right to control Company B was deferred until after CFIUS reviews the transaction, the "completion date" for the transaction is July 1. If the transaction is subject to the mandatory declaration requirement pursuant to 31 C.F.R. § 800.401, the latest date that the parties can file the transaction with CFIUS is June 1. Note that contingent equity interests are assessed separately under 31 C.F.R. § 800.207.

This FAQ clarifies that, in the context of a mandatory declaration, foreign parties may not use the date on which delayed rights that trigger mandatory filing come into effect as the completion date. These delayed rights are sometimes called "springing rights" because the foreign investor immediately receives equity in the U.S. business, even if the rights that would trigger a filing (e.g., board appointment, voting rights, or rights to material nonpublic information) are not granted until the transaction receives CFIUS clearance, at which point the delayed rights "spring" into place. According to the FAQ, the completion date is the first date on which the foreign party obtains equity in the U.S. business, even if the investment does not at that time convey any rights triggering a mandatory declaration.

This clarification creates a problem for transaction parties and deal practitioners who sometimes structure deals to include "springing rights." In situations requiring mandatory declarations, foreign investors and acquirers must file with the Committee at least 30 days before any equity in the target is transferred. The Committee's position will inevitably lead to delays in investments, even where no CFIUS triggering rights have yet been granted to foreign investors.

In addition, because this FAQ involves the timing for filing a mandatory declaration, there are potential penalty implications for parties that fail to adhere to the Committee's interpretation. Per the CFIUS Enforcement and Penalty Guidelines, "the failure to timely submit a mandatory declaration or notice" constitutes a violation, and violations can subject the transaction parties to civil penalties. It remains to be seen how strictly the Committee will enforce a late filing of a mandatory declaration based on the delayed conveyance of "springing rights," but parties should be diligent in assessing the timing requirements for mandatory declarations based on the recently published FAQ.

CFIUS May Require Information about Passive Foreign Limited Partners in an Investment Fund as Part of Its Review

Another FAQ was published on May 11, 2023, and the Committee's clarification in this instance demonstrates the extent to which CFIUS may request information on a foreign limited partner ("LP") of an investment fund, even when the LP is a completely passive investor:

Question: Does CFIUS require information on all foreign persons, such as limited partners in an investment fund, that would hold an interest in a U.S. business, whether directly or indirectly, as part of the transaction?

Answer: In addition to the information required for submission of a complete filing with CFIUS, to facilitate its review, CFIUS through the Staff Chairperson may request follow-up information with respect to all foreign investors that are involved, directly or indirectly, in a transaction, including limited partners in an investment fund. Like other aspects of the CFIUS process, the scope of such a request depends on the facts and circumstances of each transaction. For example, CFIUS often requests identifying information for indirect foreign person investors, including limited partners, their jurisdiction(s) of organization, and ultimate ownership, among other information, regardless of any arrangements that may otherwise limit the disclosure of such foreign person's identity. CFIUS may also request information with respect to any governance rights and other contractual rights that investors collectively or individually may have in an indirect or direct acquirer or the U.S. business to facilitate the Committee's review regarding jurisdictional or national security risk-related considerations. Such information, as with all information filed with CFIUS pursuant to 50 USC 4565, is subject to the confidentiality protections afforded by 50 USC 4565(c).

This FAQ, which confirms a typical practice of CFIUS, makes it clear that parties must adequately prepare the information the Committee may request during its national security review. When reviewing transactions involving investment funds, the Committee will often request additional information regarding foreign LPs, especially when the funds were based in China. This FAQ signals a possible intention by the Committee to review passive foreign LPs more regularly in transactions involving investment funds.

It is worth noting that CFIUS may request information related to "any governance rights and other contractual rights" investors may have in an acquirer of the U.S. business. Investment fund parties to CFIUS filings should therefore be prepared to produce documentation on governance of the fund, including side letters with foreign LPs.

Follow-up questions pursuant to a CFIUS filing have incredibly tight deadlines (i.e., two business days in the case of a declaration filing and three business days in the case of a notice filing), so foreign investors would be wise to compile potentially relevant information and documentation related to investment funds before the submission to CFIUS.

Proposed Rule to Expand Real Estate Jurisdiction

On May 5, 2023, Treasury published a proposed rule (the "Proposed Rule") to increase the number of military installations covered by the Committee's jurisdiction over real estate transactions. Pursuant to FIRRMA, the Committee has jurisdiction to review certain purchases of U.S. real estate by foreign persons, but this jurisdiction is limited to real estate transactions that fall within a prescribed distance of certain "sensitive military installations" listed in Appendix A to 31 C.F.R. Part 802. The list currently contains 211 military installations, including military bases, research centers, and training centers, among others.

The Proposed Rule seeks to add the following installations to the list in Appendix A:

• >Air Force Plant 42, Palmdale, California
• Dyess Air Force Base, Abilene, Texas
• Ellsworth Air Force Base, Box Elder, South Dakota
• Grand Forks Air Force Base, Grand Forks, North Dakota
• Iowa National Guard Joint Force Headquarters, Des Moines, Iowa