The US government will vet more foreign investments in US companies and assets starting February 13.

Foreigners taking controlling interests in US companies had to consider in the past whether to make a filing with the Committee on Foreign Investment in the United States — CFIUS, for short. The filings were voluntary, but failure to file could lead later to an order to unwind the investment. CFIUS is an inter-agency committee of 16 federal agencies that reviews foreign acquisitions for any national security issues. (For data on how often acquisitions run into issues in practice, see “CFIUS” in the December 2019 NewsWire.)

CFIUS now has broader authority to review acquisitions of non-controlling interests in US businesses, and certain filings are mandatory for acquisitions closing on or after February 13, 2020.

Legislation enacted in the summer 2018 called the Foreign Investment Risk Review Modernization Act (FIRRMA) expanded the committee’s authority. However, many key changes to existing law did not become effective until final regulations were issued. The final regulations were released in January with a February 13 effective date.

Mandatory filings

CFIUS will require mandatory filings in two scenarios.

The first is a transaction in which a foreign government acquires a “substantial interest” in US businesses involving critical technologies, critical infrastructure or sensitive data.

The foreign government will have a substantial interest in the business if a foreign company or investment fund has a 25% or greater voting interest, directly and indirectly, in the US business, and the foreign government owns at least a 49% voting interest in the foreign company or fund. If the foreign investment fund is a partnership, or the US business is a partnership, then only general partner or managing member interests count. The fact that a foreign government holds a substantial interest directly or indirectly as a limited partner will not bring mandatory filings into play.

Certain foreign governments — called “excepted foreign states” — have been put on a “white list.” Investments by them do not trigger mandatory filings. Australia, Canada and the United Kingdom will be excepted foreign states until February 13, 2022 at which time the US will revisit the list. Other countries may be added at a later date if the US government is comfortable that the foreign government has adequate processes for analyzing foreign investments for national security risks and coordinates with the United States on investment security matters.

Mandatory filings also are required when foreigners acquire interests in businesses that make critical technologies for use in any one of 27 specific industries. The industries include nuclear power generation and manufacturing transformers, turbines or batteries. Filings have been mandatory for these types of investments under a pilot program that has been in place since the fall 2018.

In either scenario, the mandatory filing is a short-form declaration that requires less information and has a shorter review period than a regular filing.

Certain investments are exempted from the mandatory filing requirement, including investments by funds that are controlled and managed by US nationals and investments by certain “excepted investors.”

An excepted investor is an investor with strong ties to an excepted foreign state. Such an investor must jump through many hoops, so the bar to qualify as an excepted investor is high.

Non-controlling interests

FIRRMA gave CFIUS authority to review non-controlling interests in a new class of “covered investments” in companies dealing with critical technologies, critical infrastructure and sensitive personal data.

Covered investments by excepted investors are not subject to CFIUS review.

A covered investment is one in which the investor does not gain control over a US business, but that gives a foreign person access to material non-public technical information, membership or observer rights on the board of directors or allows 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 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 base. A business that owns or operates LNG terminals or oil and natural gas pipelines is also considered a covered business.

Real estate

FIRRMA expanded the CFIUS authority to review certain real estate transactions. The final regulations implement that authority.

A bare acquisition of real estate was not subject to CFIUS review in the past because it did not involve the acquisition of a US business. Now, 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.

However, not all sites are “covered real estate.” The site must be part of an airport or seaport or be near certain military installations or other sensitive US government facilities. The final regulations include a list of military and sensitive sites. Different sites have different standards for determining whether land is near enough to fall within CFIUS jurisdiction. CFIUS plans to publish a web-based tool that will help parties understand the geographic coverage of its expanded jurisdiction over real estate transactions.

Certain investors from Canada, Australia and the United Kingdom are “excepted real estate investors” and do not have to vet site purchases or leases.

Filings related to real estate investments remain voluntary. All real estate transactions — whether or not they involve “covered real estate” or an “excepted real estate investor” — remain potentially of interest to CFIUS under its broad authority to review acquisitions of controlling interests in US businesses by foreigners.

Other changes

The mandatory filings and need to vet acquisitions of non-controlling interests do not apply to any transaction that closes or is significantly advanced before February 13, 2020.

A transaction is considered significantly advanced if the parties signed a binding written agreement establishing the material terms of the transaction or an investor has made a public offer to shareholders to buy shares of a US business.

In cases where filings are only voluntary, they will be easier to do in the future. Short-form declarations will be accepted starting on February 13. Such 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 must be made by both the buyer and the seller in an acquisition.

Whether it makes sense to file a short-form declaration in place of a full filing depends on the complexity of the investment, the identity of the acquirer and the sensitivity of the assets. The abbreviated declaration is expected to streamline the CFIUS process for investors making investments that carry low risk of national security concerns.