The regulations implementing the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which significantly expanded the jurisdiction and authorities of the Committee on Foreign Investment in the United States (CFIUS), became effective on February 13, 2020. As we previously reported, FIRRMA also authorized CFIUS filing fees for the first time. On March 4, 2020, the Department of the Treasury, which chairs CFIUS, issued a proposed rule to establish such filing fees, which is described below.1 The White & Case CFIUS FIRRMA Tool will be updated to provide users with guidance in determining fees when the rule goes into effect.
Additionally, on March 6, 2020, President Trump issued an order requiring Beijing Shiji Information Technology Co., Ltd., a Chinese company, to divest all of its interests in StayNTouch, Inc., a US developer of cloud-based hotel management software tools. This marks the sixth presidential block in the history of CFIUS—the third for President Trump alone—and is another example of CFIUS’s increased aggressiveness in pursuing transactions involving the combination of Chinese acquirers and US businesses with access to potentially sensitive data.
FIRRMA authorized CFIUS to impose filing fees not to exceed the lesser of one percent of the value of the transaction or $300,000 (adjusted for inflation). Under the proposed rule, a filing fee, calculated pursuant to a set schedule, would apply to any voluntary notice filed under CFIUS’s investment regulations or its real estate regulations. This includes situations in which a notice is filed with respect to a transaction following CFIUS’s review of a declaration pertaining to the same transaction (for example, cases in which CFIUS responds to a declaration by requesting a notice be submitted). Filing fees would not be required, however, for declarations or agency notices (i.e., notices unilaterally initiated by a CFIUS member). Under the proposed rule, an additional filing fee is not required in cases where parties withdraw and resubmit their notice (which is typically done to allow more time for the CFIUS process, including to negotiate mitigation measures), unless the CFIUS Staff Chairperson determines that there has been a material change to the transaction or the parties made a material inaccuracy or omission. The Treasury Department states that “it believes [the proposed fee structure] will not discourage filings and will allow parties to continue the practice of determining whether to file a voluntary written notice based on an evaluation of the facts and circumstances of the transaction.”
The proposed fee structure is the same for both investment and real estate filings and is based on the value of the notified transaction, as follows:
The transaction value is the total value of all consideration that has been or will be provided in the context of the transaction by or on behalf of the foreign person that is a party to the transaction, including cash, assets, shares or other ownership interests, debt forgiveness, or services or other in-kind consideration.For purposes of determining the appropriate fee, the proposed rule provides that a transaction’s value would be calculated as follows:
- The proposed rule also provides additional guidance regarding consideration for purposes of determining transaction value:
- Where the consideration includes securities traded on a national securities exchange (i.e., deals in which stock is used to fund the transaction), the value of the securities is the closing price on the national securities exchange on which the securities are primarily traded on the trading day immediately prior to the date the parties file the notice, or if the securities were not traded on that day, the last published closing price.
- Where the consideration includes other non-cash assets, services, interests, or in-kind consideration, the value of the assets, services, interests, or in-kind consideration is their fair market value as of the date the parties file the notice.
- Where the transaction is a lending transaction, the value of the consideration is the cash value of the loan, or similar financing arrangement, made available or provided by or on behalf of the foreign person that is a party to the transaction.
- Where the transaction arises from the conversion of a contingent equity interest previously acquired by a foreign person that is a party to the transaction, the value of the transaction includes the consideration that was paid by or on behalf of the foreign person to initially acquire the contingent equity interest, in addition to any other consideration paid in connection with the conversion.
- In covered real estate transactions involving leases, the transaction value is the sum, as applicable, of (1) any fixed payments to be paid by the foreign person lessee to the lessor throughout the term of the lease, (2) any variable payments that depend on an index or a rate to be paid by the foreign person lessee to the lessor over the term of the lease, measured by the index or rate as of the date the parties file the notice, and (3) any non-cash or in-kind consideration to be provided by the foreign person lessee.
- In covered real estate transactions involving a concession, the transaction value is the sum of all rent, fees, and charges to be paid by the foreign person to the grantor and any non-cash or in-kind consideration to be provided to the grantor over the term of the concession agreement.
The proposed rule also provides exceptions to the above methodology under certain circumstances, such as where the transaction value is unknown at the time of the CFIUS filing (fair market value is used), where the transaction involves the contribution of a US business to a joint venture (the value of the US business is used), and in cases of transactions valued at over $5 million also involving non-US businesses where the value of the US business is less than $5 million (only a $750 fee applies).
Under the proposed rule, the filing fee must be paid to the Treasury Department prior to CFIUS accepting a notice for review. The proposed rule would also allow the CFIUS Staff Chairperson to waive the filing fee in “extraordinary circumstances relating to national security,” but this exception “is not intended to be used frequently.” In addition, the proposed rule requires parties to a notice to explain the methodology used to determine the transaction’s value for purposes of assessing the filing fee. If CFIUS were to determine that a notified transaction is not a covered transaction or a covered real estate transaction, it would refund the filing fee. Similarly, if CFIUS determines the parties overpaid the filing fee, it would refund the amount of the overpayment.
Interested parties may submit comments regarding the proposed rule to the Treasury Department electronically through the federal government eRulemaking portal at https://www.regulations.gov, or via mail. Comments must be submitted by April 8, 2020.
As previously announced, White & Case offers a free CFIUS FIRRMA Tool, which provides an online, step-by-step analysis of a contemplated transaction in order to assist users in determining whether the transaction could be subject to CFIUS's jurisdiction under FIRRMA and if mandatory filing requirements would apply. Upon publication of the final filing-fee rule, the CFIUS FIRRMA Tool will also guide the user in determining the appropriate filing fee for a given covered transaction or covered real estate transaction. Click here to access the CFIUS FIRRMA Tool.
Presidential Block of StayNTouch Transaction
On March 6, 2020, President Trump ordered Beijing Shiji Information Technology Co., Ltd. (Shiji), a Chinese publicly traded company, to divest all of its interest in StayNTouch, Inc. (StayNTouch), including StayNTouch’s assets (including customer data) and operations. This marks the sixth-ever presidential block of a transaction and the third for President Trump. Note that where CFIUS intends to recommend a presidential block, parties more typically voluntarily agree to abandon the transaction or, if post-closing, to divestment.
StayNTouch provides a Software-as-a-Service hotel property management system for hotels and their guests. Shiji provides software solutions and services for the hospitality, food service, retail, and entertainment industries. In the order, President Trump stated that there is credible evidence that leads him to believe that through acquiring the interest in StayNTouch, Shiji might take action that threatens to impair the national security of the United States. Although the order does not specify the national security risk presented by the transaction, it appears to pertain to hotel guest data managed and stored by StayNTouch. The order further states that until the divestment is completed, Shiji “shall refrain from accessing, and shall ensure that any of its subsidiaries or affiliates refrain from accessing, hotel guest data through StayNTouch.” Sensitivities regarding data have been a growing CFIUS concern in recent years and were a particular focus of FIRRMA, which authorized expanded authorities for CFIUS with respect to certain transactions involving US businesses that maintain or collect sensitive personal data of US citizens.
Shiji acquired StayNTouch in September 2018, and had previously invested in StayNTouch’s Series A financing in 2016. Given the time period between the 2018 closing and the presidential order, it is possible that CFIUS requested a post-closing filing as part of its “non-notified” authorities, which CFIUS has been ramping up under FIRRMA. Accordingly, it is more critical than ever that parties carefully assess potential CFIUS-related risks of a transaction at the outset of a deal to most effectively manage such risks and avoid potentially significant impediments.