On January 13, 2020, the US Department of Treasury released two sets of final regulations that, as provided for under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), formally expand the Committee on Foreign Investment in the United States' (CFIUS) jurisdiction to include certain non-controlling investments in US businesses related to critical technologies, critical infrastructure, or sensitive personal data of US persons, as well as certain real estate transactions.
Treasury, despite receiving numerous comments from impacted parties, generally elected not to modify the proposed rules it issued in September 2019, which were described in detail in our prior client alert. Treasury, however, made a number of substantive changes that are described in more detail below, including the identification of countries eligible for excepted status and modifications to the pilot program.
The new final rules are not effective until February 13, 2020. With regard to transactions proposed or pending on that date, the old rules will continue to apply to any transaction for which any of the following has occurred prior to February 13: (1) the transaction has closed; (2) the parties have executed a binding written agreement establishing the material terms of the transaction; (3) a party has made a public offer to shareholders to buy shares of a US business; or (4) a shareholder has solicited proxies in connection with an election of the board of directors of a US business or an owner or holder of a contingent equity interest has requested the conversion of the contingent equity interest.
As of February 13, 2020, parties will now have the option to file a short-form declaration in lieu of a full notification for all covered transactions, including covered control transactions, covered non-controlling investments, and real estate transactions. CFIUS plans to make a standard template form for voluntary declarations available on its website prior to February 13.
Key differences between the proposed rules and the final rules
Sensitive personal data
The Treasury Department received many comments on the specified categories of "sensitive personal data" that will require CFIUS review of a transaction. However, the Department opted to make only one material revision. Under the new rule, the definition of "genetic information" was "recalibrated" to focus on "genetic tests," including any related genetic sequencing data, and is limited to results that constitute identifiable data with the exclusion of genetic testing data derived from databases maintained by the US Government and provided to private parties for the purpose of research.
Excepted foreign states and investors
The proposed rules did not identify which countries would qualify as an "excepted foreign state." In the final rules the Committee identified those countries to include Australia, Canada, and the United Kingdom. As such, foreign investors in non-real estate-related transactions who are nationals of these three countries and satisfy other specific criteria will be exempt from certain mandatory filing requirements, but will remain subject to CFIUS' traditional jurisdiction to review transactions where a foreign national obtains control over a US business.
Critical technology investments and the end of the pilot program
The final rules require that the pilot program for critical technology businesses originally enacted in November 2018 end on February 12, 2020. While the pilot program will end on that date, the final rules include a new requirement for mandatory declarations in similar transactions involving US critical technology businesses that operate in identified industries (according to their North American Industry Classification System (NAICS) code), but provide for certain exceptions that did not exist under the pilot program. Such exceptions include transactions: (i) in which the foreign investors qualify as "excepted investors" (as discussed above); (ii) in which the US business's sole "critical technology" is encryption technology eligible for License Exception ENC; (iii) investments from investment funds managed exclusively by, and ultimately controlled by, US persons; and (iv) transactions involving certain FOCI-mitigated entities. Additionally, the Treasury Department anticipates issuing a separate proposed rule to replace these mandatory filing requirements with a requirement based on export control licensing requirements.
Mandatory filing for foreign governments
Under both the proposed rules and the final rules, declarations (or a full notification in lieu of a declaration) are mandatory in covered transactions (excluding transactions solely involving real-estate) when a foreign government has a "substantial interest." "Substantial interest" in the proposed rules was defined as at least a 25 percent direct or indirect voting interest in the covered US business, or in the case of a partnership, "substantial interest" was defined as when the foreign government held a direct or indirect 49 percent or more voting interest in the general partner or as a limited partner held 49 percent or more of the voting interest of the limited partners. The final rule opts to disregard limited partnership interests, instead focusing on the general partner, which is responsible for day-to-day decision-making regarding investment funds. Additionally, governments of excepted foreign states are excluded from mandatory filing.
Interim rule for definition of "principal place of business"
The proposed rules did not define the term "principal place of business," which is relevant for the definition of the term foreign entity and the rules for excepted investors. The final set of regulations include, in the form of an interim rule, a proposed definition that would define "principal place of business" as "the primary location where an entity's management directs, controls, or coordinates the entity's activities, or, in the case of an investment fund, where the fund's activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent." However, if an entity in its most recent submission to the US government identified its principal place of business as outside the US, then this location with remain its principal place of business unless the entity can demonstrate that the location has changed to within the US.
Real estate transactions
The final rules regarding real estate transactions largely track the proposed rules, but do modify certain key provisions. For example, the new final rule identifies that "excepted real estate foreign states" include Australia, Canada, and the United Kingdom. Investors from those countries that are involved in solely real estate transactions and meet the requisite criteria will be exempt from CFIUS' certain mandatory filing requirements.
The regulations also clarify the ports (both air and maritime) that will be subject to CFIUS' jurisdiction and provide additional clarification regarding the application of CFIUS' expanded jurisdiction to specific missile fields. CFIUS also indicated that it plans to publish a web-based tool on its website to help parties evaluate the geographic coverage of its expanded jurisdiction over real estate transactions.
Contingent equity interest
CFIUS clarified that the mere acquisition of a contingent equity interest alone is not a covered transaction until the contingent interest is converted into actual control or other specified rights or involvement.
The final regulations do not create filing fees. However the Treasury Department plans to publish a separate proposed rule implementing CFIUS' fee authority at a later date.
The publication of these final rules mark a major milestone in CFIUS' multi-year effort to implement the provisions of FIRRMA expanding its jurisdiction. These rules do not, however, constitute the end of the process, as additional milestones remain, including the issuance by the US Department of Commerce of rules regarding emerging and foundational technologies that will have a direct bearing on what transactions will ultimately be subject to CFIUS' expanded jurisdiction.
We will continue to monitor developments in this area closely and issue additional updates, as appropriate.