On 13 January 2020, the U.S. Department of the Treasury (Treasury) issued the long-awaited final regulations (the Regulations) that implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the statute governing the Committee on Foreign Investment in the United States (CFIUS). The Regulations, which include a final rule relating to real estate transactions and a final rule for all other covered transactions, largely retain the substance of the proposed rules issued in September 2019 (the Proposed Rules) and will be effective 13 February 2020.
Notably, FIRRMA and the Regulations represent the first major overhaul of the CFIUS regime in over a decade. With the issuance of the Regulations, the implementation of FIRRMA is substantially complete, thus ushering in a new era for U.S. foreign investment reviews in which CFIUS's jurisdiction is broader and some transactions trigger a mandatory filing.
Key takeaways from the Regulations include:
- Expansion of CFIUS's
Jurisdiction to Non-Controlling Investments: The
Regulations cement CFIUS's enhanced authority to review foreign
non-controlling investments in certain U.S. businesses. CFIUS's
jurisdiction will now capture transactions involving foreign
non-controlling investments in certain U.S. companies associated
with critical technologies, critical infrastructure, and sensitive
personal data of U.S. citizens (so-called TID U.S. businesses), if
the investments would afford the foreign person (i) access to
material nonpublic technical information of the U.S. business, (ii)
membership or observer rights on, or the right to nominate an
individual to a position on, the board of directors or equivalent
governing body of the U.S. business, or (iii) any involvement,
other than through the voting of shares, in certain substantive
decision-making of the U.S. business. Descriptions of these TID
U.S. businesses are set forth below:
- Critical Technology U.S. Businesses: These are U.S. businesses that "produce, design, test, manufacture, fabricate, or develop" one or more critical technologies. The term "critical technologies" is defined as: (i) defense articles or defense services controlled under the International Traffic in Arms Regulations, (ii) certain items on the Commerce Control List of the Export Administration Regulations, (iii) items subject to nuclear-related controls administered by the Nuclear Regulatory Commission and Department of Energy, (iv) select agents and toxins identified in regulations promulgated by the U.S. Department of Agriculture, or (v) "emerging" and "foundational" technologies under the Export Control Reform Act of 2018, which is currently subject to a pending rulemaking proceeding.
- Critical Infrastructure U.S. Businesses: These are U.S. businesses that perform the functions set forth in Column 2 of Appendix A to Part 800 with respect to so-called "covered investment critical infrastructure" set forth in Column 1 of Appendix A. Column 1 of Appendix A lists 28 types of covered investment critical infrastructure, including: certain internet protocol networks, internet exchange points, submarine cable systems, oil refineries and pipelines, liquified natural gas terminals, air and maritime ports, and public water systems.
- Sensitive Personal Data U.S. Businesses: These are U.S. businesses that maintain or collect, directly or indirectly, sensitive personal data of U.S. citizens. The Proposed Rule sets forth a definition of "sensitive personal data," which includes "identifiable data" and genetic information. In response to the public's concerns over the breadth of the term genetic information, the Regulations make changes intended to circumscribe the range of genetic data that will be viewed as sensitive personal data. Sensitive personal data now includes the results of an individual's "genetic tests" as used in the Genetic Information Non-Discrimination Act of 2008 (GINA), as long as such data is identifiable. Test data from U.S. Government databases used routinely for research are excluded.
Importantly, CFIUS retains its traditional jurisdiction over transactions that could result in foreign control of any U.S. business.
- Mandatory Declarations for Certain
Foreign Government-Backed Transactions and Foreign Investments in
Critical Technologies: The Regulations mandate filings for two
types of foreign investments – those involving certain (i)
foreign government-backed investments in TID U.S. businesses, and
(ii) foreign investments in critical technology TID U.S. businesses
with a nexus to specified industries.
- Foreign Government-Backed Investments in TID U.S. Businesses: Filings are required for transactions involving "substantial interests" in which (i) a foreign person acquires a 25% or greater voting interest, direct or indirect, in a TID U.S. business, and (ii) a foreign government, in turn, holds a 49% or greater voting interest, direct or indirect, in that foreign person. The Regulations also provide that a "substantial interest" held by an "excepted foreign state" (as discussed below) will not trigger a mandatory declaration and clarify that a "substantial interest" in the context of investment funds means that the foreign government must have a 49% or greater interest in the general partner, managing member, or equivalent of the entity.
- Foreign Investments in Critical Technology TID U.S. Businesses: Filings are required for certain foreign investments in TID U.S. businesses with critical technologies. The Regulations largely incorporate the provisions of the "pilot program," established on 10 November 2018, which requires mandatory filings for certain non-controlling and controlling investments in TID U.S. businesses that produce, design, test, manufacture, fabricate, or develop critical technologies within or for 27 identified industries. Importantly, the Regulations incorporate several exemptions or exclusions from these critical technology mandatory filings including ones for "excepted investors" (as discussed below), foreign ownership or control (FOCI)-mitigated entities, entities whose only critical technology is certain encryption technology, and investment funds that have completely passive foreign investors and are exclusively managed and ultimately controlled by U.S. nationals. The pilot program remains in effect through 12 February 2020.
- Treasury also plans to issue a separate notice of proposed rulemaking that revises the critical technologies mandatory declaration to replace the NAICS code prong of the analysis with one that is based upon export control licensing requirements.
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