On November 10 of this year, major changes were made to the rules set by the Committee on Foreign Investment in the United States (CFIUS) to create what is now being called “new CFIUS.” The changes combine two powerful provisions — targeted mandatory filing and restrictions on non-controlling investments—to prevent foreign access to sensitive US business, government, and citizen information. While changes are still being piloted and are still at times ambiguous, some elements are clear, including the stiff penalties for those who don’t file.
When acquisitions or equity investments from foreign investors occur in the US, it’s not uncommon for investors to bypass the voluntary CFIUS filing before close.
They can’t anymore. As of November 10, 2018, foreign investors must file their transactions with CFIUS for approval as it is now mandated by President Trump’s Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).
Reasons for the change include a pressing need for the US to address its national security concerns over China. But this measure extends beyond just Chinese investors. It limits all foreign controlling and non-controlling investments, including US funds with foreign limited partners under certain circumstances, as outlined below.
Transactions are already under scrutiny
“New CFIUS” recently blocked two major deals because of rising security concerns: Singapore-based Broadcom Limited’s takeover of Qualcomm and China’s HNA’s bid to buy SkyBridge Capital. The committee’s expanded powers allow it to increase its scrutiny of deals that involve personal data and critical technologies, and that expose sensitive information about US businesses to foreign acquirers.
Though filing will now be more time-consuming and require companies to be more meticulous, it doesn’t mean your goals need to change. In this article, we discuss which investments require mandatory filing, how to file correctly, and what “new CFIUS” means for industry.
Changes for New CFIUS
The new rules still apply to all controlling investments, but now also cover non-controlling investments from any country in select industries and technologies. There is no minimum investment to trigger filling. Triggering a mandatory filing, or “declaration,” involves the following transactions:
Non-controlling investments, or “other” investments that give foreign persons:
- access to any “material nonpublic technical information” possessed by the US business;
- membership, observer or nomination rights for the board (or equivalent) of the US business; or
- any involvement, other than through voting of shares, in decision-making related to sensitive personal data, critical technologies or critical infrastructure.
Real estate investments near sensitive government property, but only if a foreign person could take control over a US business. CFIUS can now restrict the purchase, lease, or concession of any US real estate that may give foreign persons access to US intelligence or is located within or is a part of air or maritime ports.
Investment in one of 27 covered industries where foreign investment could threaten US national security and technological superiority. Defense-related industries including aircraft or military tank manufacturing are covered. However, “new CFIUS” also covers broad areas such as biotech, semiconductor manufacturing, nanotech, computer storage manufacturing, and more.
Critical technology investments, where a “critical technology” is defined as any technology or R&D listed on an export control list. These include:
- The US Munitions List (USML), which covers defense technology and sensitive military items;
- The Commerce Control List (CCL), or commercial, dual-use and less sensitive items; and
- “Emerging and foundational” technology, under the Export Control Act of 2018.
Exceptions for Investment Funds
Foreign limited partners in an investment fund are exempt from filing where:
- The fund is managed entirely by a US general partner or equivalent;
- The foreign partner on the advisory board or committee does not have the ability to approve, disapprove, or control an investment decision;
- The foreign partner does not control the fund or determine the compensation of the general partner; or
- The foreign partner does not have access to nonpublic technical information.
What happens if you’re in the middle of a deal?
Any transaction that closed before November 10, 2018, is not subject to filing. If you signed a binding agreement on material deal terms before October 11, 2018, you do not need to apply. But every transaction moving forward must be filed.
What happens if you don’t file?
If you don’t file a mandatory declaration, you could be subject to a penalty equal to the amount of your transaction. CFIUS is also empowered to force divestment of your investment.
Filing Your Transaction
Companies whose transactions are covered under “new CFIUS” must file a joint voluntary notice or declaration. These declarations are new, shortened forms in relation to the past voluntary notice.
When to file?
Your filing date depends on when you plan to close. Transactions expected to close between today and December 25 should be filed as soon as possible.
For transactions expected to close after December 25, 2018, declarations should be filed 45 days before closing.
What to include in your declaration?
There is precise information about what needs to be put in a declaration. You can file more easily by preparing this material ahead of time:
- All parties involved;
- A brief description of the transaction including total value, financing sources, and percentages of voting and economic interest acquired;
- What rights the foreign person will have in the business;
- Any information on the business’s government contracts and grants; and
- Whether parties (including parents and subsidiaries) have been convicted of a crime in the past 10 years, under any jurisdiction.
What CFIUS means for the future
Since “new CFIUS” is still in its infancy, there is ambiguity around certain provisions. Future updates may well expand what is considered potentially threatening to US national security.
The emphasis on critical and emerging technologies raises flags for the future of the industry. As progress is made in areas such as self-driving vehicles, AI, and more advanced robotics, what impact will excluding foreign partners have on development? And what advancements will become subject to stricter regulation next?
We’ve seen the addition of sensitive real estate, non-controlling investments, critical tech and mandatory filing under the FIRRMA update. Further updates could introduce more restrictions and larger volumes of files.
If you have questions or need help navigating the new and evolving CFIUS requirements, please get in touch with us here.
