On October 11, 2018, the Committee on Foreign Investment in the United States (CFIUS) announced a pilot program under the Foreign Investment Risk Review Modernization Act (FIRRMA) that, for the first time in the history of CFIUS, sets out specific transactions that require parties to specified transactions to file a declaration (Declaration) to the Committee and to do so 45 days prior to closing. This is a significant departure from prior CFIUS practice in two respects: (1) rather than having all “control” transactions be subject to a voluntary filing regime, it mandates filings prior to closing for certain transactions; and (2) it expands CFIUS review to cover specified non-controlling minority investments. While this may be a significant departure from prior practice, it was all anticipated by FIRRMA. Further expansions of the CFIUS jurisdiction are expected when CFIUS implements regulations required under FIRRMA.
The critical elements of the Pilot Program are: (1) a foreign person (2) obtains control or makes a non-controlling investment carrying specified rights (3) in a U.S. business that is involved with or manufactures critical technologies in specifically identified industries (“Pilot Program U.S. Businesses” or “PPUSBs”).
The Pilot Program comes into effect on November 10, 2018 and applies to all “Pilot Program Covered Transactions” (defined below), except for transactions:
- Closing prior to November 10, 2018; or
- In which any of the following has occurred before October 11, 2018:
- The parties to the transaction have executed a binding written agreement or other document establishing the material terms of the transaction;
- A party has made a public offer to shareholders to buy shares of a Pilot Program U.S. Business; or
- A shareholder has solicited proxies in connection with an election of the board of directors of a Pilot Program U.S. Business or has requested the conversion of convertible voting securities.
Thus, any of your current transactions that do not currently have a binding agreement and do not expect to close prior to November 10, are potentially subject to the Pilot Program.
Foreign person includes any individual that is not a U.S. citizen and does not owe permanent allegiance to the U.S. Foreign person also includes any foreign entity or foreign government or any entity over which control is exercised by a foreign person, foreign entity or foreign government. Thus, a Delaware limited liability company is foreign if it has a managing member that is foreign.
Control Transactions and Non-controlling Investment Carrying Specified Rights
The Pilot Program covers mergers, acquisitions, takeovers, equity investments and joint ventures, that result in a foreign person obtaining control of a U.S. business. “Control” is a key aspect of CFIUS jurisprudence. It includes the ability to affirmatively determine the direction of a U.S. business or investment fund and, for minority investors, the right to veto “important matters” of the U.S. business, such as budgets, liquidation events, issuances of equity, and other matters routinely considered to be standard minority protections. Please check with our V&E CFIUS team to review the applicable CFIUS control indicia.
The Pilot Program expands CFIUS jurisdiction to cover equity investments (including contingent equity investments, direct and indirect investments and non-controlling investments), that afford certain rights to a foreign person, even if the minority investor does not obtain control. This can apply to limited partners.
The relevant rights are:
- Access to any material non-public technical information in the possession of the PPUSB;
- Membership or observer rights on or the right to nominate a person to the board of directors or equivalent governing body of the PPUSB; or
- Any involvement, other than through voting of shares, in substantive decision-making of the PPUSB regarding the use, development, acquisition, or release of critical technology.
Regardless of the foregoing, the Pilot Program does not include non-controlling investments if all of the following apply:
- The fund is managed exclusively by a general partner or managing member (or equivalent),which is not the foreign person that is the party to the transaction;
- The advisory board or committee does not have the ability to approve, disapprove, or otherwise control:
- investment decisions of the investment fund; or
- decisions made by the general partner or managing member related to entities in which the investment fund is invested;
- The foreign person does not otherwise have the ability to control the investment fund, including the authority:
- To approve, disapprove, or otherwise control investment decisions of the investment fund;
- To approve, disapprove, or otherwise control decisions made by the general partner or managing member to entities in which the investment fund is invested; or
- To unilaterally dismiss, prevent the dismissal of, select, or determine the compensation of the general partner, managing member, or equivalent;
- The foreign person does not have access to material non-public technical information as a result of its participation on the advisory board or committee; and
- The investment otherwise meets the requirements of FIRRMA.
The Pilot Program also does not apply to a transaction in which the foreign person holds more than 50% of the voting interest of a PPUSB or the right to designate more than 50% of the directors or members of the governing body of the PPUSB.
Notably, any change in such rights can be a Pilot Program Covered Transaction. For example, a foreign person with observer rights that contributes additional capital and obtains involvement in the decision-making regarding critical technology is likely to be a Pilot Program Covered Transaction and subject to the mandatory Declaration process.
Material non-public technical information is not financial information but includes non-public information that “is necessary to design, fabricate, develop, test, produce, or manufacture critical technologies, including processes, techniques, or methods.”
Critical technologies are:
- military technologies subject to the International Traffic in Arms Regulations (ITAR);
- technologies subject to the export controls regulations that are regulated for export pursuant to multilateral regimes relating to national security, chemical and biological proliferation, nuclear nonproliferation or missile technology or otherwise regulated for export for reasons relating to regional stability or surreptitious listening;
- nuclear technologies subject to specified nuclear and atomic energy regulations;
- select agents and toxins subject to regulation; and
- emerging technologies that will be subject to export control.
Pilot Program U.S. Business
- “produces, designs, tests, manufactures, fabricates, or develops a critical technology” that is either:
- (a) used in connection with the PPUSB in one or more pilot program industries or (b) designed by the PPUSB specifically for the use in one or more pilot program industries.
The Pilot Program industries are listed below.
CFIUS requires the parties to a Pilot Program Covered Transaction to submit a Declaration:
- no later than 45 days prior to closing for transactions closing on or after December 25, 2018; or
- on (or shortly after) November 10, 2018 for transactions closing between November 10, 2018 and December 25, 2018.
The review period is 30 days. CFIUS can clear the transaction, request the parties to submit a formal CFIUS notice or initiate a review.
A Declaration contains about 18 questions covering the parties, the transaction, the relevant technologies, and contracts the PPUSB has with the U.S. government and a statement as to whether any party to the transaction or its parents have been convicted of any crime.
Careful consideration must be made to ensure that your transaction is a Pilot Program Covered Transaction and whether to submit a Declaration.
PILOT PROGRAM INDUSTRIES AND NAICS CODES
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