After more than a year of anticipation, the U.S. Department of the Treasury (“Treasury”) has released proposed regulations to implement the Foreign Investment Risk Review Modernization Act (FIRRMA). These proposed regulations follow an initial round of FIRRMA-implementing regulations issued in October 2018, which most notably included the Committee on Foreign Investment in the United States (CFIUS) critical technologies pilot program imposing mandatory CFIUS filing requirements on certain foreign investments in U.S. technology and life sciences companies.
The draft regulations propose long-awaited answers to questions about how Treasury and the other CFIUS member agencies will conduct national security reviews of foreign investment under the “modernized” FIRRMA construct, and would amend and restate in entirety the existing rules at Part 800 of the Treasury Regulations. As with the October 2018 regulations, the new proposed rules include changes that will fundamentally alter how foreign investors and U.S. businesses approach mergers and acquisitions, equity investments, and real estate transactions going forward. In other ways, the new rules formalize practices that CFIUS has adopted over time to address the current national security and international trade policy environment.
This piece — highlighting some of the key takeaways from the sweeping proposal — is the first in a series of four client alerts. The next three will address in more detail the proposed regulations’ treatment of: (1) real estate transactions; (2) transactions involving U.S. businesses relating to critical technologies, critical infrastructure, and sensitive personal data; and (3) the type and composition of foreign investors.
Our key takeaways from the proposed CFIUS regulations are:
- Expanded Review of U.S. Technology, Infrastructure, and Data-Related Companies: One of the key aspects of FIRRMA was the expansion of CFIUS’s jurisdiction to review certain non-controlling foreign investments in U.S. businesses that involve critical technologies, critical infrastructure, and sensitive personal data. The critical technologies pilot program was the first step in implementing this change.
- The proposed rules expand many of the pilot program’s concepts to U.S. businesses performing critical infrastructure functions — which include more modern security concerns, such as internet protocol networks and exchange points, data centers, and core processing services for federal financial institutions — and collecting sensitive personal data pertaining to U.S. citizens.
- As with the pilot program, investors and U.S. companies will need to determine not only whether a target company falls within the definition of a “Technology, Infrastructure, and Data” (TID) U.S. business, but also whether the transaction will afford the foreign investor certain key rights, such as access to “material nonpublic technical information,” board membership or observer rights, or involvement in substantive decisionmaking regarding these TID assets.
- Notably, the new rules for TID U.S. businesses do not yet include any mandatory filing requirements similar to the current requirements of the critical technologies pilot program, unless there will be substantial foreign government ownership (see below).
- The proposed regulations do not modify the critical technologies pilot program regulations contained in Part 801 of the Treasury Regulations. These remain in effect, including the mandatory filing requirement for specified transactions, at least until Treasury issues the final CFIUS rules by February 2020.
- New Review Regime for Real Estate Transactions: The proposed rules include a new Part 802 to the Treasury Regulations governing CFIUS reviews of “covered real estate transactions,” including leases and the purchase of undeveloped land, which had previously been excluded from CFIUS’s jurisdiction under the “greenfield” exception.
- This review regime would apply to “covered real estate,” defined as real estate (1) in an airport or maritime port, (2) in close proximity (one mile) to certain military and government facilities, (3) within an extended range (up to 100 miles) of more sensitive facilities, (4) within certain counties and other geographic areas in the United States, or (5) within any part of certain additional military areas. The proposed rules include certain exceptions for property in urbanized areas, single housing units, and other acquisitions of interests in U.S. real estate.
- There are potential exclusions from this review regime based on the property rights the foreign investor acquires. For example, if the foreign investor cannot physically access the property or exclude others from access, the transaction is potentially excluded from CFIUS’s jurisdiction.
- The new rules for real estate transactions do not include any mandatory filing requirements at this point.
- Different Rules for Different Types of Foreign Investors:
- Mandatory Filings for Foreign Government Transactions: The proposed rules include a mandatory declaration requirement for transactions in which a foreign government holds a “substantial interest” in the foreign investor, and the foreign investor in turn obtains a “substantial interest” in a TID U.S. business. This rule applies when the foreign investor is acquiring a 25% or greater voting interest in the TID U.S. business, and a foreign government has a 49% or greater voting interest in the foreign investor. Because the relevant interest thresholds include both direct and indirect interests, these rules will impact a broad range of investments involving state-owned enterprises, sovereign wealth funds, and similar entities.
- “White List” Investors: Conversely, the new rules include the concept of “excepted foreign states,” and “excepted investors” with sufficient ties to such foreign states. Excepted investors are excluded from CFIUS’s expanded jurisdiction over non-controlling investments in the TID U.S. businesses discussed above. The rules do not specifically list these excepted foreign states, but rather establish a process through which these states will be identified at a later date by the CFIUS chairperson, with the agreement of two-thirds of the voting CFIUS members. The proposed rules also include numerous additional criteria that an investor must meet to become an “excepted investor,” making this exception narrower than many may have hoped.
- Investment Fund Clarifications: The proposed regulations also include additional clarifications for how indirect investments by foreign persons through investment funds will be treated under the new rules. These clarifications mirror the investment fund provisions of the CFIUS pilot program.
- Abbreviated Declarations for All Covered Transactions: The new rules allow parties to all transactions with CFIUS’s review jurisdiction to submit a short-form “declaration” filing instead of a full written notice. Declarations also come with an abbreviated 30-day review period, as opposed to the minimum 45-day review period associated with full written notices. The declaration process has been available since November 2018 for filings under the critical technologies pilot program. Although public statistics are not available, it appears from anecdotal evidence that, under the pilot program, few parties have been able to obtain CFIUS clearance of a transaction based on the declaration process alone. It remains to be seen whether this trend will continue once the new rules take effect, as CFIUS would, in theory, be more amenable to clear transactions not involving U.S. TID businesses based on the short-form declaration.
- New Regulations Will Not Have Retroactive Effect: The new regulations will not be applicable to a transaction in which one of the following occurred prior to the effective date of the final regulations: (i) the transaction closed, (ii) the parties executed a binding agreement establishing the material terms of the transaction, or (iii) a public offer or proxy solicitation has been made. Such transactions would be subject to CFIUS’s existing regulations and jurisdictional coverage.
- Opportunity for Public Comment: The proposed rules are not yet in effect; rather, they are open for public comment through October 17, 2019. Senior Treasury officials will also host two public teleconference briefings on September 27, 2019, to provide an overview of the proposed rules and answer questions. After this “notice and comment” period, Treasury will develop and publish final rules expected to take effect by February 2020.