On December 22, 2008 final regulations adopted by the U.S. Department of the Treasury on national security reviews of acquisitions of U.S. businesses by foreign persons took effect. Although not as expansive as the proposed regulations published in April 2008, the final regulations still subject an expanded range of transactions and non-U.S. investors to review by the Committee on Foreign Investment in the United States.

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, and no other U.S. law provides adequate protection against the threat. The Final Regulations (Regulations), which implement changes initiated by the Foreign Investment and National Security Act of 2007 (FINSA), govern the process by which the Committee on Foreign Investment in the United States (CFIUS) reviews transactions to determine if such evidence exists. (For a review of the proposed regulations published in April 2008, see the Osler Update of May 30, 2008.)

Foreign Person

The Regulations define a “foreign person” to include a “foreign national,” a “foreign government,” a “foreign entity” or any entity over which control is exercised or exercisable by a foreign national, foreign government or foreign entity. The Regulations retain the proposed definitions for both a “foreign national” and a “foreign government.” A foreign entity is defined as any entity or organization organized in a non-U.S. state whose (a) principal place of business is outside of the United States or (b) equity securities are primarily traded on one or more foreign exchanges. However, any entity that can demonstrate to CFIUS that a majority of its equity securities is ultimately owned by U.S. nationals is excluded, although an entity that is majority-owned by U.S. nationals may still be deemed a foreign person if such entity is nevertheless controlled by a foreign person. The Regulations will likely capture many Canadian pension plans, similar government-sponsored plans and government pension fund managers as being either a foreign entity or controlled by a foreign government.

In an indication of the political sensitivity that investments by sovereign wealth funds and other state owned entities have generated in the United States, the Regulations provide that a “foreign government-controlled transaction” will be subject to a mandatory 45-day second stage investigation after the initial 30-day review unless both the Chairperson of CFIUS and the CFIUS agency designated to lead the transaction review determine, at the Deputy Secretary level or higher, that the transaction will not impair the national security of the United States (a Deputy Secretary Determination).


To determine the threshold concept of control, the Regulations require a broad facts and circumstances approach that views control as the power, directly or indirectly, to determine important matters regarding an entity. The indicia of control include:

  • the ability to cause enumerated corporate actions including reorganizations, mergers, dissolutions, plant closings, major expenditures, and the hiring and firing of officers or senior managers;
  • the power to block corporate actions, other than a limited list of exempt minority shareholder protections (the list includes the power to prevent bankruptcy filing, transactions with majority investors and their affiliates, and changes in the terms of a minority investor’s class of preferred stock); and
  • formal and informal arrangements to act in concert.  

In response to comments that the limited list of minority shareholder protections would subject a wide range of minority investments to CFIUS review, the Regulations expand, as compared to the initial Treasury Department proposal, the list of minority shareholder protections, absent other factors, that will not be deemed to confer control. In addition, the Treasury Department indicated CFIUS’s willingness to consider favorably, on a case-by-case basis, the argument that certain other common minority shareholder protections do not warrant a finding of control.

The Regulations clarify that the existing safe harbor for investments involving 10% or less of the outstanding voting interests in a U.S. business applies only to transactions “solely for the purpose of passive investment.” An investor that, in addition to an interest of 10% or less, also obtains board representation or contractual control rights cannot rely on the safe harbor. CFIUS may reopen its review of any transaction if (even after the closing) the foreign person possesses or develops any purpose other than passive investment, or takes any action inconsistent with acquiring or holding such interests solely for the purpose of passive investment.

National Security; Critical Infrastructure

Though “national security” itself remains undefined, FINSA and the Regulations expand the scope of industries that may have national security considerations requiring CFIUS review. Absent a Deputy Secretary Determination after the initial 30-day review, a mandatory 45-day investigation of a transaction that would result in foreign control of “critical infrastructure” would occur if CFIUS determines that such control could impair national security and the risk has not been mitigated. The Regulations also retain the proposed definition of “critical infrastructure,” which captures a broad and changing scope of industries.

While transactions in such diverse industries as transportation of natural resources, information technology and finance have been reviewed by CFIUS, recent Treasury Department Guidance emphasizes that just because “a transaction . . . presents a national security consideration does not necessarily mean that it poses a national security risk.” According to the Guidance, CFIUS considers a number of factors (outlined in the Guidance) when assessing such a risk, including whether a foreign person has the capability to take action to impair U.S. national security and might seek to do so. In addition, in the case of a foreign government-controlled transaction, CFIUS considers whether the basic investment management policies of the investor require decisions to be based solely on commercial grounds, and the degree to which, in practice, the investor’s management and investment decisions are exercised independently from the controlling government.

Covered Transactions; U.S. Business

CFIUS can review any transaction with or by any foreign person that could result in control of a U.S. business, and the Regulations apply without regard to the size of the business or the value of the investment. A U.S. business includes any entity that is engaged in interstate commerce in the United States. In addition to a wide range of legal forms, an entity includes groups of assets that are, or could be, operated as a going concern. A number of previously excluded transaction types will now be subject to CFIUS review, in particular, certain convertible instruments, proxy contests, long term leases, joint ventures and corporate reorganizations. Investment in start-up projects are exempt.

Impact on Non-U.S. Lenders

The proposed regulations raised the possibility that transactions in which foreign lenders make loans to U.S. businesses might also be subject to CFIUS review due to the negative covenants that are typically included in such transactions. The Regulations clarify that unless a loan to a U.S. business by a foreign lender involves acquisition of economic or governance rights characteristic of an equity investment as opposed to a loan (such as the right to board representation or dividends), a loan transaction will not ordinarily be viewed as a covered transaction because it does not convey control. While the acquisition of a security interest in securities or other assets of a U.S. business is expressly excluded from CFIUS review, CFIUS may review loans or financings by foreign persons, or such persons may voluntarily notify CFIUS of such loans, when, because of imminent or actual default, there is a significant possibility that the foreign person may obtain control of a U.S. business.

The Regulations attempt to mitigate the potential adverse impact on secured lending by foreign persons that the timing of this review may have. The Regulations allow CFIUS to grant foreign persons that make loans in the ordinary course of business adequate time to dispose of collateral, so long as arrangements are made to transfer management decisions and day-to-day control over such collateral to U.S. nationals.

Review Process

The review process remains generally based on voluntary notices to CFIUS by parties to the transactions, although CFIUS retains authority to review transactions of which it has not been notified. The Regulations make CFIUS’s current practice of encouraging parties to contact and engage with CFIUS before making a formal filing explicit. Note that voluntary notification requires the preparation of a submission that could be voluminous, given the breadth of the required information. The Regulations retain the proposed requirement for the provision of certifications of accuracy, completeness and transaction intent in a proscribed form as well as CFIUS’s authority to impose civil penalties, reject a notice, or reopen a concluded review.