The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee that reviews mergers, acquisitions, and takeovers by foreign persons of U.S. companies and assets that have the potential to pose risk of harm to U.S. national security. CFIUS has the authority to block such transactions, require mitigation to eliminate the national security risk, or, in those instances where CFIUS was not given notice of the transaction, unwind the transaction without regard to the contractual rights of the parties. On August 13, 2018, President Trump signed the Foreign Investment Risk Review Modernization Act (FIRRMA) into law, expanding CFIUS’ jurisdiction to review the acquisition by foreign parties of minority interests in U.S. business in strategic industries that “produce, design, test, manufacture, fabricate, or develop” critical, emerging, and foundational technologies. On January 13, 2020, CFIUS issued its final regulations, which went into effect on February 13, 2020.
Among the most important changes are mandatory filing requirements, a review process for real estate transactions that do not involve the acquisition of an interest in a U.S. business, and an abbreviated disclosure process that can, potentially, provide a quick clearance of a proposed transaction. Corporate and real estate attorneys, when advising on a transaction involving foreign parties, will have to consider whether a filing with CFIUS needs to be completed under these new rules and the timetable for this new CFIUS process—these new rules could delay a transaction by as much as 105 days.
The new mandatory filing obligations for foreign investors apply when foreign governments have a “substantial interest” in the foreign investor and involve transactions in U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies, defined under the regulations as a TID (Technology, Infrastructure, or Data) U.S. businesses and are identified in Appendix A to the regulations, which list the “Covered Investment Critical Infrastructure,” and in Appendix B, which lists “Critical Industries” by reference to NAICS codes. See attachment “A” to this article. Understanding whether a U.S. business is also a TID business requires referencing a number of other regulatory regimes, including the export control regulations enforced by the Department of State and the Bureau of Industry and Security.
Real Estate Transactions
CFIUS will now have jurisdiction to review real estate transactions involving property that is in close proximity to U.S. military installations, airports, marine ports or other facilities or property of the U.S. Government that implicates national security. (See Exhibit B for a list of those U.S. government installations.) Appendix A to these new regulations provides a “List of Military Installations and Other U.S. Government Sites” considered to implicate national security. Real estate within one mile of any of these listed sites could require a CFIUS filing, and for those governmental sites that implicate army combat training centers, major military ranges, and test facilities, the areas of concern could extend for a range of 99 miles. There are exceptions for real estate transactions within urbanized areas or urban clusters, housing units, and other transactions that relate to foreign air carriers and port concessions for the purposes of retail sale of consumer goods or services to the public. Careful examination of the exceptions is needed to determine if these exemptions apply to the transaction at issue. A more detailed discussion of these regulations can be found here.
Pre-FIRRMA CFIUS Continues to Apply to Control Transactions
While these new regulations make some changes to the existing CFIUS framework for transactions where a foreign party acquires control of a U.S. Business, the existing pre-FIRRMA regulations remain in place. Thus if the transaction involves control of a TID U.S. business or a U.S. business that owns “covered real estate” a traditional CFIUS filing may be required, and these new regulations will not apply. The increased detail regarding the definition of TID U.S. business and “covered real estate” do provide more guidance in determining whether a transaction involves “critical infrastructure” as defined under the pre-FIRRMA CFIUS regime thus providing parties a clearer understanding of when a CFIUS filing is advisable. Parties should study the industries and federal installations listed in appendices to the new regulations and attached here to determine whether or not the U.S. business or real estate at issue is one that CFIUS believes implicates national security concerns.
Exceptions From Coverage
There are important exceptions to these new disclosure rules. First, in an effort to encourage U.S. allies to adopt similar foreign investment controls, the regulations create the terms “Exempted Foreign States” and “Exempted Foreign Investors.” While this category of countries and investors is expected to grow, initially only three such countries/investors were selected: Canada, Australia, and the United Kingdom, including Northern Ireland. Foreign investors from these countries may, if they are not disqualified by certain provisions, qualify as “Excepted Investors” and these new regulations would not apply to them. Note, however, if the transaction involves control over a TID U.S. business, a traditional pre-FIRRMA disclosure may be required of an Exempted Foreign Investor as this exception only applies to minority interest investments described in the February 13, 2020, regulations.
Another important exclusion relates to investments by an investment fund if the fund is managed exclusively by a U.S. general partner, managing member, or an equivalent, and foreign investors in the fund do not have certain listed rights to control the investment fund or do not have access to non-public information of the businesses the investment fund invests in. There is also a requirement that the investment fund itself not be implicated in violations of U.S. laws that implicate national security such as those that are promulgated by the Office of Foreign Assets Control.
A more detailed analysis of these exemptions is found here.
Abbreviated Filing Procedure
In an effort to allow a path for a quick review, the new regulations create a new shortened version of the traditional CFIUS disclosure. A declaration allows for a 30-day review of the transaction and does not exceed five pages in length. By comparison, a traditional CFIUS disclosure requires a disclosure that can, depending on responses to the regulatory inquiry, easily exceed 50 pages and could, with new extended review periods, require a 105-day review process. While this abbreviated timetable appears to be a good strategy for shortening the review time – because this process doesn’t require CFIUS to approve or block the transaction, and CFIUS could require the parties to file the more lengthy notice submittal – careful analysis needs to be completed to guard against the possibility that the declaration process could enlarge the timetable for CFIUS review.
New Amendments on the Horizon
New amendments to these new regulations are expected in the near term, including amendments addressing: (a) a fee for filing notices and disclosures; (b) guidance on penalties for making inaccurate statements or material omissions in a CFIUS filing or violating the terms of a mitigation agreement with CFIUS; and (c) new technologies defined as “emerging and foundational technologies,” designated by the Bureau of Industry and Security which will expand CFIUS’ jurisdiction to cover industries that develop or use these newly designated technologies.
A careful review of the technologies, assets, and real property in any proposed transaction involving foreign investors is required to adequately advise and plan on a transaction’s timeline. Careful study of the CFIUS regulations will be required in order to select the CFIUS filing strategy that could provide the parties the fastest review process.