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On April 21, 2008, the U.S. Department of Treasury issued proposed new regulations governing the Committee on Foreign Investment in the United States (CFIUS). CFIUS is charged with reviewing mergers, acquisitions, and takeovers of U.S. businesses by foreign entities where national security is implicated. Practitioners should be aware of the proposed changes and should expect to incorporate CFIUS-specific terms into the transactions documents for any agreement involving a foreign buyer.
The new regulations propose far-reaching changes to current CFIUS practice, including an extended investigation period (i.e., 45 days after the initial 30-day review) for (1) any transaction that threatens to impair U.S. national security where the threat has not been mitigated within 30 days; (2) transactions involving foreign government control; (3) transactions resulting in foreign control over U.S. critical infrastructure that CFIUS determines threaten national security, unless that threat is mitigated; and (4) where the lead agency for any particular transaction recommends a full investigation and CFIUS concurs. Exceptions to the mandatory investigation period are available, but high-level government approval is required for an exception to apply if any of the above-listed conditions are met. The CFIUS filing requirement itself remains voluntary.
Procedurally, the steps for making a voluntary CFIUS filing in the proposed regulations are largely unchanged, with the exception that the informal practice of notifying CFIUS prior to making a voluntary filing is now explicitly encouraged. These pre-notice consultations are intended to ensure efficiency in the CFIUS process. Additionally, CFIUS has included in its formal notification format certain information, such as personal identifier information for the individual persons implicated in the transaction – such information was previously only requested on an ad hoc basis. Finally, CFIUS has established procedures and factors under which it may reject or defer acceptance of a notice. The overall effect of these changes is to significantly increase the burden of preparing a voluntary notice for filing with CFIUS.
Substantively, the new regulations clarify, and in some cases expand, the key definitions that are essential to determining whether CFIUS has jurisdiction to review a transaction. These key terms include:
Covered transaction – the new regulations continue to define a covered transaction as a merger, acquisition, or takeover, and expressly exclude greenfield investments. The new regulations also acknowledge that in limited circumstances, some long-term leases may be covered. Joint ventures are also covered to the extent that they involve the contribution of a U.S. business. Where transactions that would otherwise be covered are deliberately structured to avoid CFIUS jurisdiction, the structure will be disregarded and CFIUS will assert jurisdiction pursuant to the underlying substance of the deal.
Control – Control has always been a key concept for determining CFIUS jurisdiction, as the law expressly requires that the transaction in question must result in foreign control over a person engaged in U.S. interstate commerce in order for CFIUS review to be warranted. In the past, some parties had interpreted the old regulations to require an ownership interest in excess of 10 percent before even a rebuttable presumption of control could be found. The new regulations make it clear that there is no ownership threshold below which a foreign investor is exempt from CFIUS jurisdiction. Rather, the proposed rule specifies that control is not defined in terms of percentage of shares or number of board seats. All relevant factors should be considered in terms of their potential impact on a foreign person’s ability to “determine, direct or decide important matters affecting a company.” Influence falling short of control will not subject a transaction to CFIUS jurisdiction.
U.S. business – In order for a transaction to be subject to CFIUS review, it must involve an entity engaged in interstate commerce in the United States. This concept has led to some confusion in the past, and should not be interpreted to mean that one of the parties to the transaction must be a U.S. person.[1] Indeed, an entity need not have a separate legal personality, and may include branches, partnerships, groups or sub-groups, associations, estates, trusts, corporations or corporate divisions, organizations, governments, or assets operated by any one of the foregoing.
Foreign entity – A new concept, “foreign entity,” has been added to the new regulations. This term refers to organizations considered to be foreign because they are substantially foreign-owned, even though no single foreign entity individually controls the entity.
Critical infrastructure – The critical infrastructure concept was put forth in the Foreign Investment and National Security Act of 2007 (FINSA), the reform legislation that preceded the new regulations. The definition in the regulations for critical infrastructure tracks the statutory language and refers to “system and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of the particular systems or assets of the entity over which control is acquired . . . would have a debilitating impact on national security.”
Critical technologies – the regulations add a definition of critical technologies to include any 1) International Traffic in Arms Regulations (ITAR) controlled articles or services, 2) export controlled items, 3) certain regulated nuclear equipment, parts, materials, software or technology, and 4) certain agents and toxins.
Finally, the new regulations aim to establish substantial civil penalties for intentional or grossly negligent (1) material misstatement or omission in a notice or false certification or (2) violation of a mitigation agreement. According to the proposed regulations, penalties can reach $250,000 per violation, or in the case of a mitigation agreement violation, $250,000 or the value of the transaction.[2] Importantly, the regulations allow for mitigation agreements to include liquidated damages provisions in the event of a violation. In addition to the penalties for inaccurate certification, or a breach of mitigation, the regulations establish that a party who discloses information contained in a CFIUS notice may be subject to fines or imprisonment.
Comments on the new regulations are due 45 days after their publication in the Federal Register, which means comments will be due approximately the first week of June 2008. A public meeting on the regulations will be held on May 2, 2008, and requests to appear at this meeting must be received by April 25, 2008.
To receive further information on this topic, please contact:
Daniel L. Porter | +1 (202) 912-2001
Daniel.Porter@HellerEhrman.com
Valerie Ellis | +1 (202) 912-2013
Valerie.Ellis@HellerEhrman.com
Paul D. Downs | +1 (212) 847-8767
Paul.Downs@HellerEhrman.com
Sylwia A. Lis | +1 (202) 912-2524
Sylwia.Lis@HellerEhrman.com
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[1] The most famous example of a transaction involving two “foreign” persons where CFIUS had jurisdiction may be the proposed takeover of P&O Steam Navigation, a U.K. company, by Dubai Ports World, a state-owned company of the Government of Dubai. Although the target of that proposed transaction was a U.K. company, that company operated several critical ports in the United States via long-term leases. Although the transaction was never officially blocked by CFIUS, the deal ultimately fell apart because of U.S. resistance to the takeover of U.S port operations by an entity controlled by the Government of Dubai.
[2] At this time, the proposed rule does not include any limitation language on the choice between transaction value or $250,000 (e.g., “whichever is less”).
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