A newly published proposed rule would make two important modifications to the mandatory filing requirements of the Committee on Foreign Investment in the United States (CFIUS), the US government interagency committee responsible for reviewing inbound foreign direct investments for national security risks. The proposed rule would change the scope of the mandatory filing requirement for covered transactions involving US critical technology companies, and would clarify how “substantial interest” is calculated for certain transactions involving foreign government investors.
Changes to scope of covered “critical technology” transactions
CFIUS currently requires filings for certain investments involving US critical technology companies, and for investments where a foreign government holds a “substantial interest” in a foreign investor who obtains a “substantial interest” in a US critical technology, critical infrastructure, or sensitive personal data business (known as a “TID US business”).
The current CFIUS regulations, contained at 31 C.F.R. Part 800, mandate the filing of a notice or declaration for “covered investments” in US companies that produce, design, test, manufacture, fabricate, or develop one or more “critical technologies” involving certain specifically enumerated industries based on North American Industry Classification System (NAICS) codes.
Critical technologies, defined at 31 C.F.R. § 800.215, include items included on the United States Munitions List, items included on the Commerce Control List pursuant to a multilateral regime or for reasons related to regional security or surreptitious listening, certain nuclear-related items, select agents and toxins, and emerging and foundational technologies controlled under Section 1758 of the Export Control Reform Act of 2018.\
The proposed rule would eliminate the use of NAICS codes in determining whether a filing is required. Instead, a filing would be mandated for covered transactions “involving a TID US business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies for which a US regulatory authorization would be required for the export, re-export, transfer (in-country), or retransfer of such critical technology to a foreign person that is a party to the covered transaction,” when the foreign person:
- Could directly control such TID US business as a result of the covered transaction;
- Is directly acquiring an interest that is a covered investment in such TID US business;
- Has a direct investment in such TID US business, the rights of such foreign person with respect to such TID US business are changing, and such change in rights could result in a covered control transaction or a covered investment;
- Is a party to any transaction, transfer, agreement, or arrangement described in § 800.213(d) [transactions designed to evade or circumvent CFIUS rules] with respect to such TID US business; or
- Individually holds, or is part of a group of foreign persons that, in the aggregate, holds, a voting interest for purposes of critical technology mandatory declarations in a foreign person described [above].
The term “voting interest for purposes of critical technology mandatory declarations” is defined at Section 800.256 of the proposed rule to mean “a voting interest, direct or indirect, of 25 percent or more.” For foreign persons whose activities are “primarily directed, controlled, or coordinated by or on behalf of a general partner, managing member, or equivalent, a foreign person will be considered to have a voting interest for purposes of critical technology mandatory declarations in such entity only if it holds 25 percent or more of the interest in the general partner, managing member, or equivalent of the entity.”
The proposed rule also clarifies that “[f]or purposes of determining the percentage of voting interest for purposes of critical technology mandatory declarations held indirectly by one person in another, any interest of a parent will be deemed to be a 100 percent interest in any entity of which it is a parent.”
The proposed rule defines the term “US regulatory authorization” to mean (1) a license or approval issued under the International Traffic in Arms Regulations (ITAR), (2) a license under the Export Administration Regulations (EAR), (3) certain specific or general authorizations issued by the Department of Energy related to foreign atomic energy activities, and (4) a specific license from the Nuclear Regulatory Commission related to the export or import of nuclear equipment and material. The proposed rule further explains that a mandatory filing is required even if an exemption or exception under the ITAR or EAR applies with the exception of a limited number of specifically listed EAR license exceptions. In determining whether such an authorization is required, the determination should be “[b]ased on such foreign person’s principal place of business (for entities) … or such foreign person’s nationality or nationalities (for individuals)” and should be made “[a]s if such foreign person is an ‘end user’ under the applicable US regulatory authorization.”
Clarification on “substantial interest”
The proposed rule makes changes to clarify the “substantial interest” definition contained at Section 800.244 of the current CFIUS regulations. First, the proposed rule adds language to Section 800.244(b), which includes special rules for calculating interest “[i]n the case of [an] entity with a general partner, managing member, or equivalent.” The proposed rule clarifies that Section 800.244(b) “applies only where the general partner, managing member, or equivalent primarily directs, controls, or coordinates the activities of the entity.” Second, the proposed rule clarifies that Section 800.244(c), which explains how to calculate indirect ownership, applies to Section 800.244(b) – for general partners, managing members, or the equivalent – and to Section 800.244(a), the rule applicable in all other circumstances.
Short-form declarations: still authorized for mandatory filings
Parties subject to a mandatory filing requirement under the proposed rule would continue to be able to utilize a short-form “declaration” rather than a full-length “notice” at their discretion. In addition to being shorter and less burdensome to complete, declarations have the advantage of not being subject to CFIUS’s new filing fees. However, CFIUS can, and often does, require parties submitting a declaration to submit a full notice or inform the parties that while such a full notice is not required the Committee is unable to complete action (i.e. provide the statutory safe harbor) on the basis of a declaration alone.
The proposed rule will be officially published in the Federal Register on May 21, 2020 and interested persons will have 30 days to submit comments. Steptoe will continue to monitor these developments and assist clients in participating in the rulemaking process.