As reported in the May 29, 2008 Sentinel, on April 21, 2008 the Treasury Department (”Treasury”) released proposed regulations to implement the Foreign Investment and National Security Act of 2007 (“FINSA”), which codified, defined, and expanded the role of the Committee on Foreign Investment in the United States (“CFIUS”) in reviewing foreign direct investment in the United States. After receiving approximately 200 written and oral comments, Treasury promulgated Final Regulations Nov. 14, 2008. As discussed below, the Final Regulations are substantively very similar to the proposed regulations, and make formal many features that have long been a part of CFIUS practice.
The Exon-Florio/FINSA Regime
Under the Exon-Florio Amendment of the Defense Production Act of 1950, the president is authorized to suspend or prevent any acquisition or other transaction that poses a risk to national security. The president, originally by Executive Order, delegated to CFIUS the power to review potential foreign investment transactions for national security concerns. With the passage of FINSA in 2007, Congress codified CFIUS’ role in the review and analysis of inbound investment. CFIUS is chaired by the Secretary of the Treasury and is currently composed of members from 12 executive agencies.
In order to promote a greater degree of certainty regarding potential acquisitions and other investment transactions by foreign entities, one or more parties to a proposed deal may voluntarily petition CFIUS for an advance determination regarding whether the proposed transaction may implicate national security concerns. The first step is for CFIUS to undertake a 30-day review to determine if a voluntary notice needs further investigation. If CFIUS believes that there is credible evidence to support the belief that a proposed acquisition may threaten national security, CFIUS may initiate a 45-day investigation. After completing the investigation, CFIUS submits a recommendation to the president, who then has 15 days to decide whether to allow the acquisition to move forward. The process must be completed within 90 days.
As required by FINSA, Treasury has now completed the process of providing revised implementing regulations. The new regulations reflect the major changes contained in FINSA and are discussed in detail in the context of the proposed regulations in Sentinel Vol. V, No. 2. Among the most significant changes are: (1) a formal expansion of CFIUS’ review of “covered transactions” to include investment interests beyond mergers, acquisitions, and takeovers; (2) guidance regarding when a CFIUS investigation will be necessary because a proposed transaction could result in foreign control of “critical infrastructure” or “critical technologies”; (3) formalization of CFIUS’ rights to initiate a review, re-open a review, and continue to monitor a transaction following voluntary withdrawal; (4) expansion of the factors considered by CFIUS in reviewing a transaction; and (5) the addition of civil penalties of up to $250,000 per violation for material misstatements, omissions, or false statements made in connection with a CFIUS filing. These provisions are largely designed to increase the level of transparency and predictability in the CFIUS review process.
The Final Regulations retain these key features and add some additional details to the definitions of terms and concepts in the regulations. Some examples of these revisions are as follows:
- A more detailed definition of the important concept of “control,” including examples of circumstances where the power to influence does not rise to the level of the power to control
- Expansion of the listed minority shareholder protections that do not constitute “control”
- Clarification of when parties without a distinct legal personality may constitute an “entity” for the purposes of the regulations
- Further detail regarding the definition of “foreign entity,” including the clarification that an entity will not be a “foreign entity” if it can demonstrate that U.S. nationals own a majority of the equity interest in the entity (provided that no foreign person controls the entity)
- Addition of the word “passive” to clarify the meaning of the safe harbor for persons owning less than 10 percent of an entity “solely for the purposes of passive investment”
- Changes to the regulations governing the required content of a voluntary notice, including the way in which the value of the transaction is described
- Expansion of the confidentiality provisions to materials provided during prefiling communications
The Final Regulations make official the expanded role of CFIUS in reviewing potential inbound investment. It will be important for parties to understand these detailed regulations in order to (1) determine whether the submission of a voluntary notice is advisable; and (2) predict and prepare for the CFIUS review process.