This summer, Congress expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), which is responsible for screening foreign investment for national security concerns. Perhaps the most significant reform is that CFIUS filings are now mandatory for certain foreign investments. Regulations for a mandatory filing pilot program go into effect on Nov. 10. Failure to submit a mandatory declaration when required under the pilot program can result in significant penalties, up to the value of the transaction.
Below is a basic guide for spotting potential CFIUS issues under the pilot program. For any specific transactions that may require a CFIUS filing, we recommend consulting with a legal professional who focuses on this area of the law.
What investments trigger mandatory filing?
Existing CFIUS rules for review of controlling investments that have a national security or critical infrastructure implication in any industry remain in place. The new mandatory filings (called “declarations”) are broadly applicable to even non-controlling investments from any country, but only in certain industries and technologies. So even a Canadian investor taking a 5% stake in a U.S. company, for example, now requires a CFIUS declaration if the other elements of access/control and sensitive technology (outlined below) are met. The declaration requirements are a stripped-down version of previous CFIUS procedures, so should be less labor-intensive and more quickly reviewed.
There are three main variables to review as possible CFIUS triggers, based on the rights of the foreign investor and the nature of the U.S. business. If all are met, a CFIUS declaration is likely required:
- Investment + some access or governance role There is no minimum investment that triggers CFIUS review. Controlling investments are automatically covered. Non-controlling investments are covered if the foreign investor will have:
- Access to any material, nonpublic technical information in possession of the U.S. business;
- Membership or observer rights on the board or right to nominate an individual to the board; or
- Any involvement, other than through voting of shares, in substantive decision-making of the U.S. business regarding the use, development, acquisition, or release of critical technology.
- The target is in a specific industry
The U.S. Government has identified 27 covered industries for which “strategically motivated foreign investment could pose a threat to U.S. technological superiority and national security.” For the most part, they are traditional defense-related industries, such as aircraft or optical instrument manufacturing. However, there are also some more general areas on the list, including biotech R&D, nanotechnology R&D, computer storage manufacturing, and chemical manufacturing. The full list of covered industries is at the end of this bulletin.
The target has critical technology The final CFIUS declaration trigger is if the company has “critical technology” which means technology or R&D related to the following areas:
- Defense technology covered by ITAR export controls.
- Dual-use technology covered by EAR export controls (with some exceptions that are too complex to cover here).
- Nuclear equipment/technology.
- Certain controlled agents and toxins.
- Emerging and foundational technology controlled by the Export Control Act of 2018. We are still waiting for this list from the Commerce Department. For now, a reasonable rule of thumb is to assume it covers anything “cutting edge.”
I’m in the middle of a deal—do I have to make a CFIUS declaration?
The pilot program does not apply to transactions that close prior to Nov. 11, 2018. It also does not apply to transactions for which the parties signed a binding agreement establishing material deal terms prior to Oct. 11, 2018. Otherwise, it does apply. Furthermore, the mandatory declaration must be filed at least 45 days before the expected closing date of the investment (or as soon as possible for deals that will not close before Nov. 10).
Is there an investment fund exception?
Yes. Any foreign limited partner investment or advisory board or committee participation in an investment fund is exempted from the pilot program if:
- The fund is exclusively managed by a U.S. general partner or equivalent.
- The foreign LP on the advisory board or committee does not have the ability to approve or control an investment decision.
- The foreign LP does not have the ability to approve or control investment decisions, have access to non-public technical information, or otherwise control the investment fund.
What happens after we determine a CFIUS declaration is required?
The application process and timeline is faster than for traditional CFIUS filings. There is a standard set of information that must be included in a declaration, which cannot exceed five pages in length. So the declaration preparation itself should not significantly slow down a transaction. CFIUS is then required to complete review of declarations within 30 days of acceptance (it can take about a week for CFIUS to first confirm the application is complete). CFIUS will then either (1) clear the investment with no further action; (2) block the investment; or (3) require a more complete, traditional CFIUS filing with an extended review period.
Do I really need to make a declaration?
Some ambiguity remains for certain aspects of the declaration triggers and process, and we don’t know how strict the Treasury Department will be in applying penalties for failure to file declarations. However, given the serious proposed penalties, almost any foreign investment in a covered industry should be reviewed to determine whether a CFIUS declaration is required.
What other CFIUS changes are planned?
More reforms are planned. However, most other CFIUS changes outside of this pilot program will not go into effect until 2019 or 2020 and will be covered in a later law update.
For reference, the 27 covered industries are as follows:
- Aircraft Manufacturing NAICS Code: 336411
- Aircraft Engine and Engine Parts Manufacturing NAICS Code: 336412
- Alumina Refining and Primary Aluminum Production NAICS Code: 331313
- Ball and Roller Bearing Manufacturing NAICS Code: 332991
- Computer Storage Device Manufacturing NAICS Code: 334112
- Electronic Computer Manufacturing NAICS Code: 334111
- Guided Missile and Space Vehicle Manufacturing NAICS Code: 336414
- Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing NAICS Code: 336415
- Military Armored Vehicle, Tank, and Tank Component Manufacturing NAICS Code: 336992
- Nuclear Electric Power Generation NAICS Code: 221113
- Optical Instrument and Lens Manufacturing NAICS Code: 333314
- Other Basic Inorganic Chemical Manufacturing NAICS Code: 325180
- Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing NAICS Code: 336419
- Petrochemical Manufacturing NAICS Code: 325110
- Powder Metallurgy Part Manufacturing NAICS Code: 332117
- Power, Distribution, and Specialty Transformer Manufacturing NAICS Code: 335311
- Primary Battery Manufacturing NAICS Code: 335912
- Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing NAICS Code: 334220
- Research and Development in Nanotechnology NAICS Code: 541713
- Research and Development in Biotechnology (except Nanobiotechnology) NAICS Code: 541714
- Secondary Smelting and Alloying of Aluminum NAICS Code: 331314
- Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing NAICS Code: 334511
- Semiconductor and Related Device Manufacturing NAICS Code: 334413
- Semiconductor Machinery Manufacturing NAICS Code: 333242
- Storage Battery Manufacturing NAICS Code: 335911
- Telephone Apparatus Manufacturing NAICS Code: 334210
- Turbine and Turbine Generator Set Units Manufacturing NAICS Code: 333611