Scrutiny for inbound US investments
By Amanda Rosenberg
Acquisitions of non-controlling interests in certain power projects by foreign investors are now subject to review by the Committee on Foreign Investment in the United States or CFIUS.
Filings are voluntary in some cases, but mandatory in others.
CFIUS also has the right for the first time to force foreign companies acquiring or leasing US land to sell in cases where there are national security concerns.
The US Treasury filled in more detail in proposed regulations in September. It is collecting comments through October 17.
CFIUS is an interagency committee of 16 federal agencies that reviews foreign acquisitions of US companies for national security issues.
Acquisitions of non-controlling interests were not subject to review in the past.
However, new legislation enacted in the summer 2018 called the Foreign Investment Risk Review Modernization Act (FIRRMA) extended the committee’s reach and made filings mandatory for certain acquisitions.
Many significant changes in FIRRMA to the CFIUS process did not become effective upon enactment, but have been awaiting issuance of regulations. They will still not take effect until the regulations are reissued in final form.
In the past, a foreigner acquiring a US company could voluntarily notify CFIUS. The risk if it failed to make a filing is that CFIUS could require the acquired company be divested. The US government has ordered five divestitures since CFIUS was formed in 1975, with four of out the five occurring in the last seven years, but from 2008 to 2015, roughly 35% of acquisitions that CFIUS reviewed moved into an investigation phase and 7% of proposed deals were withdrawn. (For more data on CFIUS reviews, see “CFIUS” in the October 2017 NewsWire.)
FIRRMA expanded CFIUS authority to include the review of “covered investments” in companies dealing with critical technologies, critical infrastructure and sensitive personal data. The proposed regulations provide guidance on the scope of this new authority.
A covered investment is one in which the investor does not gain control over a US business, but that gives the foreign person access to material nonpublic technical information, membership or observer rights on the board of directors or any involvement in the substantive decision-making of a covered US business.
Covered US businesses include businesses that perform certain functions with respect to types of critical infrastructure listed in an appendix to the proposed regulations. There are 28 categories of critical infrastructure listed. They include businesses that “own or operate any system, including facilities, for the generation, transmission, distribution or storage of electric energy comprising the bulk-power system” as that term is defined in the Federal Power Act.
The Federal Power Act defines the bulk-power system to include “facilities and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof) [and] . . . electric energy from generation facilities needed to maintain transmission system reliability.”
It does not include facilities used for local distribution of electricity.
Thus, the acquisition of non-controlling interests in projects that are critical to the operation of the transmission grid, either due to their size or location or the provision of ancillary services, is now subject to review by CFIUS.
There is no size threshold that will cause a project to be part of the bulk-power system. A determination will need to be made based on all of the facts and circumstances. This is similar to the analysis of whether a power project is critical infrastructure under the pre-FIRRMA framework where whether a project involved critical infrastructure was based on similar factors.
Also covered are the ownership or operation of batteries and other energy storage facilities that are physically connected to the bulk-power system and any project that provides power generation, transmission, distribution or storage directly to or is located on a military installation. A business that owns or operates LNG terminals or oil and natural gas pipelines also is considered a covered business.
A company will be also considered a covered business if it produces, designs, tests, manufactures, fabricates or develops a critical technology.
Critical technologies generally are those subject to US export controls. The US Treasury chose to leave in place a pilot program it initiated last fall that requires mandatory filings for non-controlling investments in US businesses that operate in 27 specified industries. Covered industries include nuclear power projects and the manufacturing of transformers, turbines and batteries.
There are a number of different types of sensitive personal data the maintenance or collection of which could cause a company to be a covered business, including financial, biometric and health information.
Potential white list
Congress directed the Treasury to come up with criteria to limit the expanded CFIUS jurisdiction to certain types of investors.
There is no “black list” of countries that raise national security concerns. However, the proposed regulations suggest that Treasury plans to issue a “white list” of countries whose companies and citizens would not be subject to the expanded CFIUS review of non-controlling interests.
Whether a foreign investor is an excepted investor will depend on several factors including its place of business, ownership, prior compliance with CFIUS and sanction laws and association with a white-listed country. Criteria for evaluating whether a country should be listed on the white list include whether the foreign country has a robust foreign investment review process and coordinates with the United States on investment security issues. An excepted investor is required to continue to meet the criteria for three years after the transaction closes.
No countries are named to the white list under the proposed regulations, and it may be some time before CFIUS releases the list. The CFIUS chairperson and at least two-thirds of CFIUS must approve of the designation.
Being an excepted investor does not limit general CFIUS authority to review a transaction in which the investor gains control of the US business. The exception avoids review only of non-controlling interests.
FIRRMA requires mandatory filings for certain transactions in which a foreign company acquires a 25% direct or indirect voting interest in a covered US business.
The foreign company must be owned partly by a foreign government before the mandatory filing requirement comes into play.
A foreign government must have at least a 49% direct or indirect voting interest in the foreign company. If the foreign company is a partnership, then the foreign government must have at least a 49% interest in the general partner or be itself a limited partner and hold at least 49% of the voting rights of the limited partners.
Where a mandatory filing is required, the filing must be made at least 30 days before the deal closes. The filing required is a short-form declaration rather than a full notice.
Acquisitions of covered US businesses by foreign companies acquiring at least a 25% interest that are themselves owned at least 49% by a foreign government — plus acquisitions of some types of critical technologies — are the only types of transactions subject to mandatory filings under the proposed regulations. All other filings remain voluntary. However, that could change when final regulations are issued.
The mandatory filing is called a declaration. Declarations are subject to a 30-day review period rather than the 45-day review period for a full notice that a foreign company might file voluntarily. Any filing is made by both the buyer and the seller in the acquisition. Parties to voluntary filings also have the option of filing a declaration rather than a full notice.
The parties may stipulate that a transaction is a “covered transaction” or a “foreign government control transaction,” meaning they acknowledge CFIUS jurisdiction over the transaction, to further streamline the review.
CFIUS may take one of four actions in response to a declaration: it may request that the filing a full notice, inform the parties that CFIUS cannot complete action on the basis of the declaration and they may file a full notice, initiate a unilateral review of the transaction without waiting for a full notice, or notify the parties that CFIUS plans no further action.
While many uncontroversial deals may benefit from filing a declaration, complex and sensitive transactions will probably lead to the filing of a full notice.
Real estate transactions
FIRRMA also expanded CFIUS authority to review certain real estate transactions.
CFIUS may review the purchase or lease of “covered real estate” by a foreign person if the transaction provides the foreign person three out of the four following rights: the right to physical access, the right to exclude others from access, the right to improve or develop the site or the right to affix structures or objects to the site.
Covered real estate includes land that is part of an airport or seaport, near certain military installations or near other sensitive US government facilities. An appendix to the proposed regulations includes a list of military and sensitive sites. Different sites have different standards for determining whether land is near enough to fall within CFIUS jurisdiction, from one mile away to within the same county or part of a US Navy off-shore range or operating area.
There are no mandatory filing requirements for real estate transactions. In other words, CFIUS has the right to unwind real estate purchases or leases that present national security issues, but filings are voluntary.