Mandatory Filings Under CFIUS New RulesClient Alert
On September 15, 2020, the Committee on Foreign Investment in the United States (“CFIUS”) promulgated a final rule modifying its mandatory declaration requirements for certain foreign investment transactions involving “TID US businesses” (sensitive U.S. businesses dealing in critical technologies, critical infrastructure and sensitive personal data) dealing in “critical technologies” – i.e., U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies. The new rule also makes amendments to the definition of the term “substantial interest” (used to determine whether a foreign government has a substantial interest in an entity). The final rule became effective on October 15, 2020.
For background purposes, CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States and certain real estate transactions by foreign persons, in order to determine the effect of such transactions on the national security of the United States.
The new rule renders it critical for parties to a potentially covered transaction to conduct due diligence with legal counsel regarding the classification of the technology of a U.S. company under export control laws.
Prior to the new rule, filings were mandatory for covered transactions involving 27 sensitive industries (31 C.F.R. Part 801 – Annex A). [i] By eliminating the requirement that the critical technology falls within one of 27 industries identified by CFIUS, a filing will now be required for a covered transaction involving a TID US business that deals in critical technologies for which a “U.S. regulatory authorization” would be required to export, re-export, transfer (in-country) or retransfer the technologies to a certain foreign person.
Under the former rule, a foreign government would have a substantial interest in an entity with a general partner (or managing member or equivalent) if the foreign government held a 49% or greater interest (either voting or economic) in the general partner. Under the new rule, this requirement pertains to instances where the activities of the entity are primarily directed, controlled, or coordinated by or on behalf of the general partner. Note that a general partner is deemed to direct, control, or coordinate such activities by contracting a third party to perform such services.
The new rule clarifies how indirect interests in a general partner (or managing member or equivalent) will be calculated. Under the current rule, for purposes of calculating substantial interest, a parent is deemed to hold 100% of only the voting interest of its subsidiary. Under the new rule, a parent will be deemed to hold 100% of the voting and economic interest of its subsidiary.
CFIUS filing is mandatory when a foreign person (a) makes a direct investment, or acquires a direct interest, in a U.S. business that is a covered transaction in a U.S. critical technology business or (b) individually holds, or is part of a group of foreign persons that in the aggregate holds, a direct or indirect 25% or more voting interest in the foreign investor identified in clause (a). If the foreign investor is a partnership that is controlled by a general partner, then the 25% share referenced in clause (b) is based on the foreign person’s share in the general partner. A parent is deemed to own 100% of the interest held by its subsidiary.
Based on the foregoing, it will be important for a U.S. company contemplating a potentially covered transaction to review with legal counsel the effects of the new CFIUS rule.
[i] (31 C.F.R. Part 801 – Annex A)
List of Pilot Program Industries 1. Aircraft Manufacturing (NAICS Code: 336411) 2. Aircraft Engine and Engine Parts Manufacturing (NAICS Code: 336412) 3. Alumina Refining and Primary Aluminum Production (NAICS Code: 331313) 4. Ball and Roller Bearing Manufacturing (NAICS Code: 332991) 5. Computer Storage Device Manufacturing (NAICS Code: 334112) 6. Electronic Computer Manufacturing (NAICS Code: 334111) 7. Guided Missile and Space Vehicle Manufacturing (NAICS Code: 336414) 8. Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing (NAICS Code: 336415) 9. Military Armored Vehicle, Tank, and Tank Component Manufacturing (NAICS Code: 336992) 10. Nuclear Electric Power Generation (NAICS Code: 221113) 11. Optical Instrument and Lens Manufacturing (NAICS Code: 333314) 12. Other Basic Inorganic Chemical Manufacturing (NAICS Code: 325180) 13. Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing (NAICS Code: 336419) 14. Petrochemical Manufacturing (NAICS Code: 325110) 15. Powder Metallurgy Part Manufacturing (NAICS Code: 332117) 16. Power, Distribution, and Specialty Transformer Manufacturing (NAICS Code: 335311) 17. Primary Battery Manufacturing (NAICS Code: 335912) 18. Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing (NAICS Code: 334220) 19. Research and Development in Nanotechnology (NAICS Code: 541713) 20. Research and Development in Biotechnology (except Nanobiotechnology) (NAICS Code: 541714) 21. Secondary Smelting and Alloying of Aluminum (NAICS Code: 331314) 22. Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing (NAICS Code: 334511) 23. Semiconductor and Related Device Manufacturing (NAICS Code: 334413) 24. Semiconductor Machinery Manufacturing (NAICS Code: 333242) 25. Storage Battery Manufacturing (NAICS Code: 335911) 26. Telephone Apparatus Manufacturing (NAICS Code: 334210) 27. Turbine and Turbine Generator Set Units Manufacturing (NAICS Code: 333611)