On November 14, 2008, the Treasury Department’s Office of Investment Security published muchanticipated final regulations implementing the reporting and review process of the Committee on Foreign Investment in the United States (“CFIUS”) of mergers, acquisitions and takeovers by foreign persons. The final regulations, which become effective on December 22, 2008, make several changes to the proposed rules published in April 2008.
Non-U.S. investors should pay close attention to the requirements of the final rules and plan accordingly prior to effecting a transaction in a U.S. company.
The Foreign Investment and National Security Act of 2007 (“FINSA”) was passed by Congress in July 2007 and became effective on October 24, 2007. The act was passed following the controversial proposed acquisition of U.S. port facilities by UAE-owned Dubai Ports World in 2006. FINSA empowers the President and his designee, CFIUS, a multi-agency group chaired by the Secretary of the Treasury that includes, to name a few, the Secretaries of State, Defense, and Homeland Security, to review “any merger, acquisition, or takeover…by or with a foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.”
Summary of Final Rule
As an initial matter, for CFIUS to have jurisdiction over a particular foreign investment, a foreign investor must be acquiring “control” over a U.S. business. The final regulations specify that CFIUS will continue to consider all relevant facts and circumstances, rather than applying a bright-line test, to determine whether a transaction results in foreign control.
Under the regulations, “control” is defined as the “power, direct or indirect, whether or not exercised…to determine, direct, or decide important matters affecting an entity.”
The final rules provide several examples to clarify the difference between “control” and the lower threshold of “influence” wielded by foreign investors. A specific list of 10 examples provides guidance and demonstrates what constitutes a potential ability to exercise “control,” which may in turn prompt a CFIUS review of a particular transaction. Examples include the lease, sale, or transfer of principal assets, the relocation, closing, or substantial alteration of facilities, and major expenditures.
The rules also allow customary minority shareholder protections that commonly would not be deemed to constitute control over an entity, such as the authority in a voluntary bankruptcy to stop the sale of assets, to prevent an entity from guaranteeing commitments of majority investors or from entering into certain contracts with majority investors.
With respect to procedural concerns and the notification and review process, the final regulations:
- Promote pre-filing discussion to assist parties in preparing information;
- Expand confidential treatment to pre-filed information; and
- Mandate prompt action throughout the review process with deadlines for reviews (30 days) and investigations (45 days).
The final rules provide for the imposition of civil penalties in certain circumstances. A civil penalty of up to $250,000 per violation may be imposed against persons who intentionally or through gross negligence, submit a material misstatement or omission in a notice, make a false certification to CFIUS or violate a mitigation agreement. CFIUS is also empowered to seek liquidated or actual damages in the event of breach of a mitigation agreement.
With final rules now promulgated, parties interested in making investments in the United States must plan appropriately and comply with these rules and with the CFIUS review process as a whole.