US to review more inbound investments
By Amanda Rosenberg
Congress passed legislation in early August that will subject more in-bound US investments to review by CFIUS. The President is expected to sign the law.
CFIUS stands for the Committee on Foreign Investment in the United States, an interagency committee of 16 federal agencies, headed by the Treasury Department, that reviews foreign acquisitions of US companies and property for national security implications.
Previously, CFIUS only had authority to review deals in which a foreign person gained control over a US trade or business.
The new law gives it authority to review transactions where a foreign person takes a minority interest in a US company that owns or deals with critical infrastructure or critical technologies.
Critical infrastructure means systems or assets “so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.”
An example might be a section of the US utility grid.
The definition seems to set a high bar. However, in practice, any significant energy asset could be critical infrastructure. The aggregate significance of project portfolios is also considered.
A critical technology is one that has defense applications. Examples are technologies that are subject to US export controls.
To come under the new review authority, the minority interest being acquired must give the foreign person access to technical information of the US business that is material and not available to the public, membership or observer rights on the board of directors, including the right to nominate directors, or the authority to make substantive decisions about critical technologies or critical infrastructure. The mere voting of shares is not considered the right to make decisions for the business.
Indirect investments in critical technology or critical infrastructure companies through an investment fund as a limited partner that gives the foreign person membership on an advisory committee will not be subject to review if certain things are true. The fund must be managed exclusively by a general or managing partner that is not a foreign person. Neither the foreign person nor the advisory committee may have the ability to approve, disapprove or control investment decisions of the fund or decisions made by the general partner. The foreign person cannot unilaterally dismiss, prevent the dismissal of, select or determine the compensation of the general partner. The foreign person cannot have access to technical information of the US business that is material and not available to the public due to its participation on the advisory committee.
CFIUS will also have authority in the future to review any purchase or lease of land near sensitive sites, including airports, seaports and sensitive government or military locations, if the site access could allow the foreign person to collect intelligence on activities at the site or otherwise expose national security activities at the site to foreign surveillance.
The law has no bright lines on what is considered too close to a sensitive location. CFIUS will have to fill in detail in regulations. Congress asked CFIUS to focus in the regulations on the “distance or distances” within which the site access could pose a national security risk.
Congress directed CFIUS to focus on whether certain categories of foreign persons should not be caught in the wider net that it is casting over the types of transactions that will be subject to review. The criteria must take into account how a foreign person is connected to a foreign country or government and whether the connection could affect US national security. This is as close as the final law gets to allowing a “white list” of persons not subject to the latest expansion in review authority.
The new rules also attempt to streamline the filing process. Parties will have the option of submitting an abbreviated “declaration” that is limited to five pages. This applies to all filings, and not just filings in the new types of transactions being subjected to review. CFIUS will be able to approve the deal, request that the parties file a full notice or initiate a unilateral review. It will have 30 days to take an action on the declaration.
Declarations will be mandatory in some instances.
A declaration is required for an acquisition of a “substantial interest” in a US critical infrastructure or critical technology company by a foreign person in which a foreign government has a “substantial interest.” Thus, for example, a declaration would have to be filed if a European utility that is 51% government owned were to purchase a 40% interest in a US nuclear power plant or transmission grid.
Congress left it to CFIUS to decide in regulations what type of ownership or percentage interest by a foreign government should be treated as “substantial.” In developing the regulations, CFIUS is supposed to consider how and the extent to which the foreign government influences the actions of the foreign buyer, including through board membership, shareholder rights and ownership interests.
A less than a 10% voting interest will not be considered substantial.
CFIUS can waive the mandatory declaration requirement if investments by the foreign buyer are not directed by a foreign government and the foreign buyer has a history of cooperation with CFIUS.
CFIUS may make the filing of declarations mandatory for other types of investments.
The wider net and mandatory filings described in this article will not become effective immediately. They will become effective 18 months after President Trump signs the bill or, if earlier, 30 days after CFIUS publishes implementing regulations.
Other changes in the legislation are effective immediately.
CFIUS will have more time to review transactions. The initial review period will be 45 days rather than the current 30 days. In “extraordinary circumstances,” CFIUS can request an additional 15 days be added to the 45-day investigation that follows the review.
CFIUS will move into an investigation phase if there are unresolved national security issues at the end of the initial review period. Investigations generally will be mandatory for transactions in which a foreign government controls the foreign buyer. The overall effect is to lengthen the maximum potential review period from 90 days to 120 days. This does not include the time it takes to prepare the filing and any pre-filing CFIUS review.
CFIUS has a current backlog. Reviews today are taking four to five months, even in cases where the transaction does not move into an investigation phase.
CFIUS also will have the ability to suspend a transaction in the future while it is under review if CFIUS believes it poses a national security risk, meaning that the deal could not close until CFIUS completes its review.
The parties will be able to stipulate that the deal is a covered transaction that CFIUS has authority to review or a foreign government-controlled transaction. The effect of the stipulation is to focus CFIUS on the national security implications of the deal and not require it to spend time on whether CFIUS has the right to review the deal.
The new rules give CFIUS the authority to collect filing fees for processing submissions. It is unclear whether the fees will have to be paid when filing a five-page declaration or just a longer filing. Fees may be collected for all filings in the future and not just those involving sites near sensitive government facilities and critical infrastructure or technology companies and projects. The fees cannot exceed 1% of the transaction value or, if less, $300,000. The $300,000 will be adjusted for inflation.