After over a year of anticipation, in January the U.S. Treasury Department released its final regulations that revise the jurisdiction and rules for the Committee on Foreign Investment in the United States’ (CFIUS), following statutory changes to CFIUS under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). Although the full impact of these regulations will be seen in the years to come, they have the potential to materially impact investments into the advanced reactor industry in the United States. The new rules will take effect on February 13, 2020.
In August 2018, Congress enacted FIRRMA, which significantly reformed the CFIUS review process, into law as part of the 2019 John S. McCain National Defense Authorization Act (NDAA). For background information on FIRRMA, please refer to our previous blog entry, entitled CFIUS/Export Controls Reform to Affect Foreign Investment for Advanced Reactors. The implementing regulations from the Treasury Department, among other things, expand CFIUS’ jurisdiction to include non-controlling investments and create a mandatory declaration process for certain foreign entities.
- Expansion of CFIUS Jurisdiction to Certain Non-Controlling Foreign Investments in TID Businesses
CFIUS’ jurisdiction was originally limited to reviewing transactions where a foreign entity would acquire a controlling investment in the U.S. entity. However, the recently-released final regulations expanded CFIUS’ reach by creating review protocols for both direct and indirect non-controlling investments. CFIUS initially experimented with evaluating non-controlling transactions as part of a “pilot program” following FIRRMA, but now this expansion has been made permanent.
The non-controlling investment must involve a “TID” business (defined below) and result in the investing entity gaining access to material nonpublic technical information, membership or observer rights on the board of directors, or substantive decision making of the business (similar to thresholds established under the prior CFIUS pilot program). TID businesses are those that either “design, test, manufacture, fabricate or develop . . . critical technologies,” perform specified functions “with respect to critical infrastructure across subsectors such as . . . energy,” or “maintain and collect sensitive personal data.”
Particularly of interest to advanced reactor innovators, the “T” in TID, “critical technologies”—extends to “specially designed” nuclear equipment, parts, components, materials, software, and technologies that are exported pursuant to the nuclear export control regulations found in 10 CFR Parts 110 and 810; and “emerging and foundational” technologies under the Export Control Reform Act of 2018 that have yet to be fully defined. As to the “I” in TID, the Department of Homeland Security designated certain sectors that would fall under the definition of “critical industries,” and “nuclear reactors, materials, and waste,” are considered “critical infrastructure.” Although few advanced reactor innovators invest in personal data, that is nonetheless also something to watch for.
In short, mandatory declarations to CFIUS will be required for transactions involving much of the U.S. nuclear and advanced reactor industry, similar in scope to what was established under CFIUS’s earlier pilot program.
- Mandatory Filings for Investment in Nuclear and in Other Critical Technologies
Traditionally, filings with CFIUS were purely voluntary actions. Although many or most filings will remain voluntary, FIRRMA and CFIUS’ implementing regulations now require mandatory CFIUS filings in multiple situations. These include: (1) when the transaction involves a controlling or non-controlling foreign investment of a TID business involving “critical technologies,” and (2) when a government-backed foreign investment would result in acquisition of a “substantial interest” of a TID U.S. business.
The mandatory filing requirement related to “critical technologies” may include much of the U.S. nuclear industry. A declaration to CFIUS may be required when a transaction could result in foreign control of a U.S. business that produces, designs, tests, manufactures, fabricates, or develops a critical technology used in connection with “nuclear electric power generation,” among other listed industries in the CFIUS regulations (this listing may change in future rulemakings, but is still likely to include nuclear technology).
To note, the final regulations exempt certain transactions from the mandatory filing requirement, including those involving certain “excepted” foreign states (initially only Australia, Canada, and the UK), certain indirect investments, certain U.S.-managed investment funds, and others. This provides a helpful relief valve, but the scope of this exception will be tested over time.
The new rules will take effect on February 13, 2020, at which point companies across almost all high-value industries, including nuclear power, will need to consider and comply with the new CFIUS process. To determine whether non-controlling investments would fall under CFIUS’ jurisdiction, businesses in the nuclear industry must be prepared to ask, among other things: (1) is the investor considered a “foreign person” and is not exempt under the rules, (2) is the business considered a “TID business” (i.e. does it produce a critical technology, operate critical infrastructure, or collect sensitive personal data), and (3) is the foreign entity afforded material information or a substantive decision-making role?
Furthermore, to establish if a mandatory declaration is required, a company must assess, among other things: (1) if the foreign investor is government-backed and has a substantial interest in the transaction, or (2) whether the transaction is one involving “critical technologies.” In both of these cases, the company may end up having to file a mandatory declaration.
While these new rules may appear daunting, if companies take appropriate steps to adjust to these changes, it can help ensure a smooth process moving forward.