Masuda, Funai, Eifert & Mitchell, Ltd. recently filed a voluntary declaration under the new regulatory framework with CFIUS for one of our clients.

On January 13, 2020, the Office of Investment Security, Department of Treasury published its final regulations implementing the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA"), which defines the jurisdiction and authorities of the Committee of Foreign Investment in the United States ("CFIUS") and modernizes CFIUS's review process of certain transactions that fall under its jurisdiction. The final regulations became effective on February 13, 2020. CFIUS issued its regulations in two parts: (1) Provisions Pertaining to Certain Investments in the United States by Foreign Persons; and (2) Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate.

Part 1, Provisions Pertaining to Certain Investments in the United States by Foreign Persons (31 C.F.R. part 800), replaces the current regulations in the Code of Federal Regulations ("C.F.R.") and applies changes FIRRMA made to CFIUS's expanded scope of authority with respect to foreign investments, as well as the establishment of a mandatory review process for transactions that afford a foreign person certain access in businesses involved with critical technology, critical infrastructure, or certain sensitive data.

Part 2, Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate (31 C.F.R. part 801), creates a new part in the C.F.R. and produces new regulations that implement CFIUS's new authority under FIRRMA to review the concession to, or purchase or lease by a foreign person of certain real estate in the United States.

This article will (1) address and summarize the main changes of CFIUS regulations in Part 1; (2) explain a sample analysis on whether a mandatory declaration or voluntary notice should be filed under Part 1; and (3) provide a flowchart illustrating a decision tree on whether a transaction is a covered transaction and whether a mandatory declaration is required, or if a mandatory declaration is not required, whether a voluntary notice may be recommended under Part 1.

1. Main Changes

The Defense Production Act of 1950 ("DPA") charges CFIUS to "review any covered transaction to mitigate any risk to the national security of the United States that arises as a result of such transaction." FIRRMA significantly expanded the definition of "covered transaction" and with its expanded definition broadened CFIUS jurisdiction to review other transactions, previously not included to address national security concerns arising from certain non-controlling investments and real estate transactions. Specifically, under the new definition covered transactions include:

(i) "covered control transactions;" (ii) "covered investments;" (iii) any change in a foreign person's rights regarding an existing investment in a U.S. business that could result in a "covered control transaction" or a "covered investment;" (iv) or any other transaction, transfer, agreement, or arrangements designed or intended to evade or circumvent CFIUS review. Lastly, FIRRMA established a new class of transactions for which filing with CFIUS is mandatory, as opposed to voluntary, and made changes to the timeline of the CIFIUS review process.

a) Covered Control Transaction

Prior to FIRRMA, DPA charged CFIUS solely with the review of transactions which could result in foreign control of a U.S. business. The new regulations did not change CFIUS existing jurisdiction over transactions that could result in foreign control and did not significantly modify the existing definition of "control." Section 800.210 defines a covered control transaction as "any transaction that is proposed or pending... by or with any foreign person that could result in foreign control of any U.S. business, including transactions carried out through joint ventures." A U.S. business with respect to CIFIUS's regulations is "any entity engaged in interstate commerce in the United States." This includes branch offices or subsidiaries of foreign corporations. Importantly, a foreign corporation without a branch office, subsidiary, or fixed place of business in the United States that provides remote services or the exports of goods but does not have any assets or personnel located in the United States is not a U.S. business under CFIUS's jurisdiction.

CFIUS's regulations define "control" as "the power... to determine, direct, take, reach, or cause decisions regarding" important matters affecting an entity, including sales of principal assets, organizational changes of the entity and its facilities, major financial actions and commitments, pursuit of new business lines and ventures, significant contracts, policies and procedures with respect to certain non-public information, appointment and dismissal of officers, senior managers, or general partners, amendments to organizational or formation documents, and the appointment and dismissal of employees with access to critical technology, such as defense articles or products relating to nuclear equipment, and other sensitive or classified U.S. government information.

Notably, with respect to CFIUS's authority to review certain transactions, it does not matter whether the foreign person's power to influence these matters is direct or indirect, formal or informal, or whether the foreign person chooses to exercise this power. If the transaction could result in the control by a foreign person of a U.S. business, CFIUS has jurisdiction to review the transaction.

b) Covered Investment

CFIUS's expanded jurisdiction to include non-controlling investments and to require mandatory declaration filings are the most significant changes under FIRRMA. Specifically, this new authority applies to controlling and non-controlling investments in U.S. businesses that fall under the definition of "TID U.S. businesses." A TID U.S. business is a business that:

  • Produces, designs, tests, manufactures, fabricates, or develops one or more "critical technologies," which definition includes specific items that are subject to export controls and other regulatory frameworks, such as defense articles or defense services, as well as emerging and foundational technologies regulated according to the Export Control Reform Act of 2018; or

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.