February 13, 2020 was the effective date (the “Effective Date”) for final regulations issued by the U.S. Department of the Treasury (“Treasury”) on behalf of the Committee on Foreign Investment in the United States (“CFIUS”). Certain transactions closing on or after the Effective Date are now subject to the expanded power of CFIUS. CFIUS may review, impose modifications, terminate or even unwind certain transactions if the national security of the U.S. may be jeopardized. The final CFIUS regulations may be accessed here (the "CFIUS Regulations").
We bring the CFIUS Regulations into sharper focus in this summary and invite you to attend our program on February 27, 2020 at Seyfarth’s New York office. Attendees will hear from keynote speaker Assistant Secretary of the Treasury for Investment Security, Thomas P. Feddo (who leads the CFIUS rulemaking effort), former Treasury, CFIUS and government officials, as well as the author and other practitioners. Our program is co-sponsored by Kroll, a division of Duff & Phelps. Click here to register.
The CFIUS Regulations implement the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”)1 and generally apply to transactions which raise national security concerns due to the involvement of a foreign resident, government or party and certain businesses, data or assets in U.S. commerce. Today we have clarity insofar as mandatory filing requirements are concerned. For transactions involving certain U.S. technology, infrastructure and/or sensitive data businesses (“U.S. TID Businesses”), a filing with CFIUS is required. A mandatory filing obligation also exists if the transaction involves foreign investment in a lengthy list2 of U.S. business activities and industries within the scope of a CFIUS pilot program (which began in November 2018 and ends on March 5, 2020; hereinafter, the “CFIUS Pilot Program”), whose features are incorporated into the CFIUS Regulations. Certain real estate and infrastructure transactions as well as passive and non-controlling, minority investments are also within the CFIUS Regulations, which (in the absence of exemptions) either permit or require a notice or declaration for review and handling by CFIUS. The failure to make a mandatory CFIUS filing may result in the assessment of a civil monetary penalty against the foreign investor or party, the U.S. business (or both), up to USD250,000 or the value of the transaction whichever is greater.
CFIUS (pronounced “SIFFie-us”) is a federal inter-agency committee chaired by Treasury and is comprised of representatives from 16 departments and agencies. CFIUS is directed and the President is permitted by statute to make adjustments to, bar or even unwind covered transactions with national security implications in certain circumstances.
After President Gerald Ford created CFIUS by executive order in 1975, the committee operated like a think tank by reviewing inbound foreign investments and by making recommendations to Congress primarily with respect to mergers and acquisitions and investments resulting in outright control of a U.S. business by a foreign party. Concerns in the 1980’s involving primarily Japanese investments in the U.S. led Congress to pass in 1988 the Exon-Florio Amendment to the Defense Production Act3, which effectively gave CFIUS broad powers to advise the President on transactions involving non-U.S. parties, along with the power to recommend that some transactions be delayed, altered, suspended, blocked or even unwound.
President Donald Trump signed FIRRMA into law in 2018. This act further lengthened the jurisdictional reach of CFIUS and strengthened its remedial powers to include not only transactions giving foreign parties’ outright control but transactions involving passive investments, non-control equity and other investments, real estate transactions (i.e., leases, purchases, sales and concessions discussed below) as well as transactions involving data, certain technologies and industries of importance from a national security perspective.
FIRRMA also authorized rulemaking in a somewhat novel way via the CFIUS Pilot Program. A mandatory filing requirement, as an important part of the CFIUS Pilot Program, is triggered by an expanded scope of covered transactions, including direct or indirect, non-controlling investments by a foreign party in any one of many enumerated industries, technologies and businesses.4 The focus of the CFIUS Pilot Program is on the rights and access of a foreign transaction participant in substantive decision making involving critical technologies -- and the ability of that participant to use, develop, acquire or distribute critical technologies in a way that affects national security. The CFIUS Pilot Program is scheduled to end no later than March 5, 2020. Many of the regulatory features of the CFIUS Pilot Program are incorporated into the CFIUS Regulations, which implement key parts of FIRRMA, provide clarity as well as bright line tests, new definitions and examples.
CFIUS plays an important role in U.S. foreign economic policy today. Virtually any foreign person or entity is potentially within CFIUS’ regulatory reach so long as the business is engaged in U.S. interstate commerce, critical national security concerns are implicated and no exception or exemption applies.
Before the enactment of FIRMMA in 2018 (that is, in the 43 years leading up to FIRRMA) CFIUS’ attention was primarily drawn to transactions in which a foreign party acquired or otherwise controlled a U.S. business of national security importance. FIRMMA and now the CFIUS Regulations further empower CFIUS to review real estate and noncontrolling foreign investments, among other transactions, on the basis that certain of these transactions trigger or infringe upon national security interests.
CFIUS Regulations include those that focus exclusively on real estate transactions (codified at part 802 of title 31 of the Code of Federal Regulations, or the “CFR”) and those that address more generally mergers, acquisitions, takeovers, non-controlling inbound foreign investments and other transactions whereby foreign parties obtain access to information, critical technologies, infrastructure or certain personal data (codified at parts 800 and 801 of 31 CFR). For CFIUS jurisdiction to be triggered, the transaction must involve a foreign party, affect U.S. commerce and be either a “covered transaction” or in the case of Part 802, a “covered real estate transaction.”5
Given the end of the CFIUS Pilot Program on March 5, 2020, the new CFIUS Regulations hardwire mandatory filing requirements for transactions involving critical technologies going forward. For transactions closing on and after February 13, 2020, a mandatory declaration is required for transactions that could result in control of a U.S. TID Business. A mandatory declaration is required where a non-U.S. transaction participant is involved in certain transactions involving a US TID Business which provides, designs, tests, manufactures, fabricates or develops one or more critical technologies used by the U.S. TID Business within one or more industries identified by its North American Industry Classification System (NAICS) code, all of which is a part of the CFIUS Regulations.6
Real Estate Transactions
FIRRMA and the CFIUS Regulations are unique because for the first time in the 45-year history of CFIUS, certain real estate transactions are reviewable by CFIUS. For purely real estate transactions, Part 802 of the CFR provides a principally geographic focus of CFIUS’ review authority. The CFIUS Regulations extend CFIUS’ jurisdiction to certain real estate transactions in close proximity to airports or maritime ports, as well as military installations or U.S. government facilities (or even other property or installations which are important to the national security of the U.S.).
Some real estate transactions get a “pass” from CFIUS action as excepted real estate transactions, which include transactions involving: (i) certain real estate investors (i.e., those investors having a substantial connection to certain foreign countries and who have not violated U.S. laws); (ii) residential housing units; (iii) properties located in urbanized areas and urban clusters as those terms are defined by the Census Bureau (there are exceptions); (iv) commercial office space; (v) retail trade, accommodation, or food service establishments; or (vi) real property held by Native Americans and some Alaskan natives; however, there are other exceptions which must be considered to the foregoing six categories of exempt transactions. For example, even though properties located in urbanized areas are generally exempt from CFIUS review, the location of a property within certain geographic proximity to a federal military installation (or other government or national security-sensitive property) may bring an otherwise exempt transaction back within CFIUS’ review authority.
The important takeaway is that Part 802 does not require the filing of a notice or declaration for purely real estate transactions. However, if a real estate transaction is related in any way to (that is, if real estate is connected, related or necessary for) a U.S. TID Business or if the parties use a real estate transaction to circumvent FIRRMA or CFIUS Regulations, then CFIUS obligations may conceivably be triggered under Part 800 of CFR.
Notwithstanding the lack of a mandatory filing requirement within Part 802, that part also makes clear that CFIUS retains review jurisdiction over transactions involving the purchase or lease by, or concession to, a foreign person of real estate in certain sensitive areas (e.g., real estate located within or connected or a part of) an airport, maritime ports or in “close proximity”7 to a U.S. military installation or anything that is sensitive to the national security of the U.S.
Additionally, if a foreign person or party obtains rights with respect to real property (that is, through default or other development after closing), CFIUS would in that case have review authority.
Perhaps the most important takeaway from Part 802 of the CFR is that real estate transactions trigger CFIUS review authority (without the existence of an applicable exemption or exception) if the transactions involve property that is geographically sensitive from a national security perspective or entail the foreign person’s or non-U.S. party’s receiving at least three of the following “key rights”: (i) the right to physically access the covered real estate; (ii) the right to exclude others from the covered real estate; (iii) the right to improve or develop the covered real estate; and (iv) the right to attach fixed or immovable structures or objects to the covered real estate.
Funds and Investments
The final CFIUS rules released by Treasury apply to foreign investment in U.S. private equity, venture capital and other transactions primarily involving critical technologies, infrastructure and operations as well as data which may have national security implications.
Even though no filing requirement is included in the CFIUS Regulations, CFIUS has the power to review any transaction that could result in control of a US. business by a foreign party (as well as certain real estate transactions discussed above). The concept of “control” is quite broad to include in certain circumstances minority investments; however, transactions resulting in a foreign person holding 10% or less of the outstanding voting interest in a U.S. business “solely for the purpose of a passive investment” are outside of CFIUS’ regulatory scope under the CFIUS Regulations.
Even if participants in an investment structure are participating as limited partners or passive investors, if critical technologies and a U.S. TID Business are involved or if a foreign government acquires a substantial interest in the technologies, a mandatory filing is required. On the other hand, certain indirect investments by a foreign person (that is, investments that occur indirectly through a fund that is managed exclusively by a U.S. general partner or U.S. managing member) will not be a covered investment, provided that certain prerequisites are satisfied (e.g., a non-U.S. limited partner cannot be vested with certain control rights or access to material non-public technical information). Non-passive investments in a US. TID Business by a foreign investor (even in the absence of control by that investor) are reviewable if that investor has access to material non-public information, certain membership or observer rights and involvement (other than through the voting of equity) in substantive decision making.
In summary, CFIUS Regulations continue to exclude certain non-controlling, indirect investments in U.S. TID Businesses including those where (i) the fund is managed exclusively by a U.S. general partner (or equivalent); (ii) the foreign entity or person lacks the ability to control investment decisions through a decision making body such as an advisory board or committee; (iii) the foreign person or entity lacks the ability to otherwise control the investment; (iv) the non-U.S. person lacks certain other (e.g., observer) rights.
The final rules include exemptions and a “white list” that relieve certain transaction parties and structures from CFIUS-related obligations. CFIUS’ otherwise expanded jurisdiction is subject to exceptions for investments by “excepted investors,” which are individuals who are nationals exclusively of excepted foreign states and investments by the foreign governments of “excepted foreign states” (Australia, Canada and the UK have been, for the time being, identified by CFIUS as excepted foreign states).
Certain transactions with non-U.S. participants now must be evaluated to confirm compliance with FIRRMA and CFIUS Regulations now in effect. With this relatively new body of statutory law and regulation it is hoped that incoming investment will continue while CFIUS addresses national security concerns with foreign involvement in certain investment structures, technologies, and industries in U.S. commerce. In the event that there are questions, feel free to contact the author or others at Seyfarth and attend our program on February 27, 2020 by registering here (space is limited).
1 Foreign Investment Risk Review Modernization Act of 2018, Subtitle A of Title XVII of P.L. 115-232 (Aug. 13, 2018), with became effective on November 11, 2018.
2 Readers are encouraged to access the appendices to the CFIUS Regulations; the appendices are comprised of Appendix A to Part 800 (“Covered Investment Critical Infrastructure and Functions Related to Covered Investment Critical Infrastructure”) and Appendix B (“Industries”), which sets forth each national security-sensitive industry and its assigned NAICS Code (e.g., Aircraft Manufacturing (NAICS Code 336411)). The CFIUS Regulations (which include an interim rule and proposed definition of “principal place of business,” together with these appendices, are linked in the first paragraph of this alert or may be found at https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius and within the link in the first paragraph of this alert.
3 The Exon-Florio amendment, P.L. 100-408, Title V, Section 5021, August 23, 1988 (50 U.S.C. Appendix Section 217), amended the Defense Production Act and was included as Section 5021 of the Omnibus Trade and Competitiveness Act of 1988. By executive order President Ronald Reagan implemented certain provisions of the Omnibus Trade Act and delegated presidential authority to administer the Exon-Florio provisions by conducting reviews, undertaking investigations and making recommendations and so in this way, CFIUS evolved from more of an administrative think tank to an important component of foreign policy.
4 See supra, endnote ii.
5 These terms, in quotations, are defined in the CFIUS Regulations, see supra, endnote ii.
6 See supra, endnote ii.
7 The final rules include annexes listing military and other installations and facilities and state that “covered real estate” is real estate which is located within certain zones (e.g., real estate is “covered real estate” if it is in “close proximity,” or one mile from the boundary of the facility listed in the annex to Part 802, as well as real estate that is located within an “extended range,” that is, 99 miles from the outer boundary of “close proximity,” or real estate that is located within 12 nautical miles from the coastline of a military installation listed in Part 802); see supra, endnote 2.
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.