Key Takeaways

• On April 29, 2020, the U.S. Treasury Department, as chair of the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”), published an interim rule establishing filing fees for CFIUS reviews of notices of transactions (“Interim Rule”).

• The filing fees range from $750 to $300,000, depending on the size of the transaction, and will take effect for any formal written notice filed on or after May 1, 2020. There remains no filing fee for short-form declarations filed with the Committee.

• The Committee chose to publish an Interim Rule in lieu of a final rule in order to balance dual considerations: allowing CFIUS to begin collecting filing fees for review of notices of transactions and allowing additional time for public comment due to disruptions caused by COVID-19. The extended deadline for interested parties to submit comments is now June 1, 2020.

This Interim Rule follows the Proposed Rule on filing fees published by the Committee on March 9, 2020, which we cover in our previous OnPoint here. The Interim Rule also implements one of the last remaining changes to the CFIUS process initiated by the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”).

The Interim Rule is substantially similar to the Proposed Rule except for certain changes made by the Committee in response to public comments already received. We describe these changes, and those changes the committee declined to make, below.

Background

CFIUS, an interagency committee principally comprising nine members and chaired by the Secretary of the Treasury, has broad powers to review foreign investments in and acquisitions of U.S. businesses to determine the potential impact on U.S. national security. CFIUS has the authority to impose mitigation measures, suspend transactions and, where appropriate, recommend that the President block or unwind transactions.

The Interim Rule implements an important change to the CFIUS process under FIRRMA by adding filing fees for certain notices pertaining to “covered transactions” and “covered real estate transactions” (as these terms are defined in the recent final regulations for transactions involving critical technology, critical infrastructure and sensitive personal data (“TID Final Regulations”) and the final regulations pertaining to provisions of FIRRMA that expand CFIUS jurisdiction over certain real estate transactions (“Real Estate Final Regulations”)). Our coverage of the TID Final Regulations and the Real Estate Final Regulations is respectively available here and here. Notably, the Interim Rule does not create filing fees for short-form declarations filed with the Committee. The proposed filing fees are intended to allow the Committee to recoup a portion of the costs associated with its review of transaction notices.

Filing Fee Structure

Similar to the Proposed Rule, the Interim Rule sets forth a tiered fee structure. In each case, the fee amount is no more than 0.15% of the transaction’s value. Filing fees are calculated based on the value of the transaction (e.g., in most cases, the total value of all consideration that has been paid or will be paid in the context of the transaction by or on behalf of the foreign person). The Interim Rule clarifies that consideration includes intangible assets in any form, such as intellectual property.

Transactions valued under $500,000 would not be assessed a filing fee. For all other transactions valued higher than $500,000, the proposed fee structure is as set out below.

In order to encourage parties to file with the Committee, there is one exception to the above for transactions where the value of the U.S. business relative to the value of the global business is relatively small. The filing fee for transactions with a value equal to or greater than $5,000,000 but where the value of the interests or rights acquired in the U.S. business is less than $5,000,000 will be $750 as opposed to $7,500.

The Interim Rule also discusses potential exemptions and alternative fee structures. For example, the Committee considered, but did not permit, a separate fee structure for transactions involving nationals of “excepted investors” from “excepted foreign countries.” In addition the Committee considered, but did not include, a separate fee structure for transactions involving low or pre-revenue companies in which the measure of the value of a transaction would be based on a company’s revenue, not the consideration paid.

Areas to Monitor and Additional Considerations

1. Joint Ventures

It will be important to monitor how the Committee proceeds with respect to valuation of joint ventures. The Interim Rule makes clear that this is an area for further review by the Committee. Currently, for joint ventures, the value of the transaction is the collective value of each U.S. business contributed.

CFIUS is considering two alternative approaches to the above: one based on the foreign person’s proportional ownership interest in the joint venture and another based on the contribution made by the foreign person to the joint venture.

2. Multiple-Phase Transactions and Contingent Equity Interest Transactions

The Interim Rule also clarifies how to value multiple-phase transactions and transactions involving contingent equity interests. For multiple-phase transactions, the value of the transaction includes the total value of each transaction phase as may be reasonably determined on the date a notice is filed with CFIUS.

For transactions involving contingent equity interests, the Interim Rule provides guidance on how to value the consideration for the acquisition of contingent equity interest as well as the consideration for the interest upon conversion.

3. Considerations Relating to Declarations and Formal Notices

While there is no filing fee associated with a short-form declaration, submitting a declaration does not guarantee parties will receive clear guidance from CFIUS on how to proceed. CFIUS may respond to a declaration by informing parties that it: (1) has cleared the transaction, (2) is initiating a unilateral review, (3) is requesting that the parties submit a full formal notice, or (4) is unable to reach a decision regarding clearance on the basis of the declaration alone.

Under the last option, parties do not have the investment “safe harbor” that accompanies formal CFIUS clearance under a voluntary notice. As a result, parties should consider whether it is preferable to submit a full formal notice from the outset so as to be guaranteed a final response from CFIUS that will provide certainty, even if this requires payment of a filing fee. In addition, should the Committee request that parties submit a full formal notice following a short-form declaration, a filing fee will be required with the submission of that notice.

Conclusion

The Interim Rule marks an important change in the CFIUS process: CFIUS reviews of transaction notices are no longer free. Although the Interim Rule provides guidance on how filing fees will be assessed and how transaction value should be calculated, it adds yet another level of complexity to the calculus of the CFIUS review process. The changes reinforce the importance of considering CFIUS implications early in the development of plans to pursue investments in and acquisitions of U.S. businesses.