The Committee on Foreign Investment in the United States Proposes Rules to Amend Mandatory Declaration Requirements for Foreign Investment Transactions.

2024-09-24 22:43:01

On May 21, 2020, the Committee on Foreign Investment in the United States (CFIUS) issued a proposed rule to amend the mandatory declaration requirements for foreign investments in U.S. businesses engaged in certain activities related to critical technologies. Under the current regulations, the following two types of transactions must be mandatorily declared to CFIUS: (1) transactions involving the acquisition of a "substantial interest" (defined as 25% or more of voting rights) in certain U.S. businesses by foreign companies or individuals in which a foreign government holds a "substantial interest" (defined as 49% or more of voting rights). This mandatory declaration requirement applies only to investments in sensitive U.S. businesses involving critical technologies, critical infrastructure, and sensitive personal data (referred to as "TID U.S. businesses"); (2) transactions involving U.S. businesses that produce, design, test, manufacture, assemble, or develop "critical technologies" used or designed for use in 27 sensitive industries (as defined by the North American Industry Classification System ("NAICS") codes).

Under the proposed rule, determining whether a foreign investment involving critical technologies requires a declaration to CFIUS will no longer be based on the 27 sensitive industries defined by NAICS codes. Instead, the proposed rule aligns closely with export control regulations, focusing on whether the U.S. company involved in critical technologies requires "U.S. regulatory authorization" to export such technologies to the principal place of business of the foreign investor and its parent company (for entity investors) or the country of nationality (for individual investors). The proposed rule will not take effect immediately. After the public comment period, the Department of the Treasury will issue a final rule.

The proposed rule states that any foreign investment transaction involving a TID U.S. business that produces, designs, tests, manufactures, assembles, or develops one or more critical technologies must be mandatorily declared to CFIUS if the export, re-export, transfer, or re-transfer of such critical technologies to the foreign investor requires "U.S. regulatory authorization," provided that the foreign person:

• Gains direct control over such TID U.S. business through a covered transaction;

• Directly acquires an interest constituting a covered investment in the TID U.S. business;

• Has a direct investment in the TID U.S. business, and the foreign person's rights in the TID U.S. business change (gaining new or additional rights), resulting in a control transaction or covered investment;

• Is a party to any transaction, transfer, agreement, or arrangement aimed at evading CFIUS rules; or

• Holds, individually or as part of a group of foreign persons, "voting rights" in another foreign person falling within the scope of the above four categories. Voting rights are defined as 25% or more. For entities controlled by general partners, managing members, or similar entities, such as most investment funds, only the interests held by the general partner are considered "voting rights"; limited partner or similar interests are disregarded.

"U.S. regulatory authorization" includes:

• Licenses or other approvals issued by the U.S. Department of State under the International Traffic in Arms Regulations;

• Licenses issued by the U.S. Department of Commerce under the Export Administration Regulations;

• Specific or general authorizations by the U.S. Department of Energy under 10 CFR Part 810 regarding assistance to foreign atomic energy activities, excluding general authorizations described in 10 CFR 810.6(a); or

• Specific licenses issued by the U.S. Nuclear Regulatory Commission under 10 CFR Part 110 regarding the export or import of nuclear equipment and materials.

Thus, the proposed rule strengthens the connection between CFIUS review and the U.S. export control system. Under the proposed rule, foreign investors and U.S. companies must conduct due diligence early in the transaction process to understand the classification and control of the U.S. company's products under export control regulations. The parties should identify all products, software, and technologies produced, designed, tested, manufactured, or developed by the U.S. business (whether sold to third parties or not), the export control status of all relevant jurisdictions related to the investor, and the corresponding licensing requirements before closing the transaction.

The effective date of the proposed rule remains unclear. CFIUS will accept public comments on the proposed rule until June 22, 2020, and is expected to issue a final rule thereafter. The MagStone team will continue to provide updates on the status of these new regulations affecting CFIUS and U.S. export controls.