Recent changes by the Committee on Foreign Investment in the United States (CFIUS) warrant a close review of the parties and business target, if you are embarking on an acquisition or venture that involves a foreign party. Specifically, on October 11, 2018, CFIUS announced a temporary pilot program pursuant to the Foreign Investment Risk Review Modernization Act (FIRRMA) relating to foreign investment in certain U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more "critical technologies."

The U.S. Department of Treasury, which chairs the Committee, issued a press release with the release of the regulations. According to the Committee, this new pilot program is driven by a concern that, prior to the new authorities granted by FIRMMA, CFIUS did not have authority to prevent a foreign entity from acquiring a non-controlling interest in a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies. New regulations relating to the pilot program are found at 31 C.F.R. Part 801.

This pilot program will begin on November 10, 2018. The pilot program does not apply to any transaction which is completed prior to November 10, 2018, or where the parties have executed a binding written agreement or taken similar action prior to October 11, 2018. The pilot program will end no later than March 5, 2020.

The pilot program is being rolled out on a global basis, with no exemptions for foreign investment coming from certain foreign countries.

Covered Transactions and Covered Industries

Transactions that are covered for the purposes of the pilot program include not only any transaction that could result in foreign control of a "pilot program U.S. business," but also any transaction that provides the foreign person:

  1. Access to any material nonpublic technical information in the possession of the U.S. business;
  2. Membership or observer rights on the board of directors or equivalent governing body of the U.S. business, or the right to nominate an individual to a position on the board of directors or equivalent governing body of the "pilot program U.S. business"; or
  3. Any involvement, other than through voting shares, in substantive decision-making of the pilot program U.S. business regarding the use, development, acquisition, or release of critical technology.

The new regulations coin the term "pilot program U.S. business" to describe a U.S. business that is involved in the industries covered by the pilot program. The Committee has identified 18 industries of concern by their North American Industry Classification System or NAICS code. Identified industries range from manufacturing operations for aircraft and space vehicles to certain high technology businesses focused on semiconductor machinery, computer storage devices and electronic computers; as well as operations in the energy field, to include petrochemical and nuclear electric power generation; along with more traditional defense manufacturing such as for military armored vehicles; and sensitive research and development operations, including those involving nanotechnology and biotechnology, among others.

Mandatory Declarations

In a significant departure from the prior rules under CFIUS, the Committee is requiring parties to a transaction covered by the pilot program to submit a mandatory declaration that provides information relating to the transaction. Alternatively, parties may still submit a written notice but this notice must contain additional information relating to critical technologies, as discussed in greater detail below.

Mandatory declarations must be submitted no later than 45 days before the completion date of the transaction, provided the completion date occurs after December 25, 2018. For those transactions where the completion date is between November 10, 2018 and December 25, 2018, the mandatory declaration must be submitted no later than November 10, 2018.

Mandatory declarations can be relatively short, no more than 5 pages. They must include, among other things, a general description of the transaction, the transaction value and closing date, a specific statement as to whether the transaction is a pilot program covered transaction and why, a statement as to the nature of involvement of the foreign person in the "pilot program U.S. business," information on the "pilot program U.S. business," a statement regarding the critical technologies in which the "pilot program U.S. business" is involved, and more, as outlined at 31 C.F.R § 801.403(c).

A thirty-day clock begins once the CFIUS Staff Chairperson accepts the declaration and notifies the Committee. If the declaration is incomplete, then the Staff Chairperson will provide an explanation of how the declaration is materially incomplete.

If the declaration is not a pilot program covered transaction, the Committee must notify the parties of this fact. Prior to taking final action on a declaration, the Committee may also reject the declaration under certain circumstances, including if the Committee determines that the declaration does not follow the content requirements specified in the regulations, if there is a material change in the covered transaction after submitting the declaration, or if information comes to light that contradicts material information in the declaration.

Otherwise, provided that the declaration relates to a pilot program covered transaction, the Committee must take final action on the declaration within a 30-day window. As final action, the Committee may notify the parties that it has concluded its review, request that the parties submit a written notice, inform the parties that the Committee is unable to reach a conclusion on the basis of the declaration but leave it up to the parties whether to file a written notice, or initiate a unilateral review by way of an agency notice.

Written Notices

Alternatively, parties to a transaction covered by this pilot program may elect to submit a traditional written notice to CFIUS, in accordance with 31 C.F.R. § 800.401(a), rather than submit a declaration. If the parties elect to do so, they must provide additional contents in the written notice relating to the concerns outlined in the pilot program, including a list of any critical technology related to the pilot program U.S business and its relevant NAICS code.

Additional Revisions to CFIUS Regulations

On October 11, 2018, the same day that CFIUS issued new regulations relating to its new pilot program, CFIUS also updated its regulations at 31 C.F.R. § 800 to make technical corrections and bring the regulations into conformity with provisions of FIRRMA that became immediately effective upon its enactment. CFIUS has made the following changes, among others:

  • Provided a definition of "critical technologies" at 31 C.F.R. § 800.209.
  • Made revisions to the definition of "transaction" at 31 C.F.R. § 800.224.
  • Updated the scope of transactions that are covered and not covered at 31 C.F.R. §§ 800.301 and 800.302.
  • Implemented the new 45-day review period (rather than 30 days) and related changes, such as a potential additional 15-day extension during the investigation period for "extraordinary circumstances" (described as circumstances which make an extension of the investigation necessary as the proper course of action due to a force majeure event or to protect the national security of the United States).

Because some of the changes made by FIRRMA were effective immediately, these changes have already begun to affect the review process for written notices submitted to the Committee.