On May 21, 2020, the Department of the Treasury published in the Federal Register a proposed rule to modify certain regulations of the Committee on Foreign Investment in the United States (CFIUS) pursuant to the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). While the CFIUS notification process remains largely a voluntary process with respect to most transactions, CFIUS currently mandates the filing of a declaration where there is a covered transaction in a U.S. business that develops, manufactures or produces “critical technology” and where a foreign government has a “substantial interest” in a foreign person that will invest in certain types of U.S. businesses. The proposed rule will amend the mandatory filing requirements in these two areas. The public may file comments on this rulemaking no later than June 22, 2020.
Certain Transactions Involving U.S. Businesses with Critical Technologies
In October 2018, CFIUS published interim regulations that mandated the filing of a declaration for certain foreign investment transactions involving U.S. businesses engaged in critical technology industries. At the time, filings were mandated where the U.S. business produced, developed, or manufactured “critical technology” that was utilized in 27 specific industries identified by reference to the North American Industry Classification System (NAICS). See Trump and Trade Update of October 15, 2018. This interim rule was continued in large part in the final rules that went into effect February 13, 2020. See Trump and Trade Update of January 22, 2020.
This proposed rule will narrow the mandatory declaration requirement and align it more closely with U.S. export controls instead of NAICS codes. Specifically, a declaration would only be mandated if certain U.S. government authorizations would be required to export, re-export, transfer (in country), or retransfer the critical technology or technologies produced, designed, tested, manufactured, fabricated, or developed by the U.S. business to certain foreign parties to the transaction. The foreign parties could trigger a declaration mandate if the foreign person would control the U.S. business, have a covered investment in the U.S. business, and or in simplified terms, a direct or indirect voting interest of more than 25% in a person that would have a controlling or covered investment interest in the U.S. business.
The proposed rule intends to leverage “the national security foundations of the established export control regimes, which require licensing or authorization in certain cases based on an analysis of the particular item and end user, and the particular foreign country for export, re-export, transfer (in country), or retransfer.” Note that this proposed rule does not seek to modify the definition of “critical technologies.”
Amendment to Definition of “Substantial Interest”
The proposed rule also seeks to clarify the definition of “substantial interest” for purposes of determining whether a foreign government has a substantial interest in a foreign person that will acquire certain types of U.S. businesses. In particular, the proposed rule clarifies that the definition of substantial interest applies, for example, ”where a general partner, managing member, or equivalent primarily directs, controls, or coordinates the activities of the entity.” Other edits intended to clarify calculations of indirect interests are also proposed.
FIRRMA also requires notifications for certain covered transactions in which a foreign government has a “substantial interest” in a foreign person that will acquire a substantial interest in certain types of U.S. businesses. The proposed rule clarifies the definition of “Substantial Interest” at 31 C.F.R. 800.244(b) and (c). This provision explains how to determine the percentage of interest an entity indirectly holds in another entity. The proposed rule clarifies that paragraph 800.244(b) “applies only where a general partner, managing member, or equivalent primarily directs, controls, or coordinates the activities of the entity.”
Public Comment Period
Written comments by interested parties on this proposed rule must be filed no later than June 22, 2020. Comments may be submitted electronically or by mail. Comments may be submitted electronically through the federal eRulemaking portal at https://www.regulations.gov on Docket no. TREAS-DO-2020-0012. Comments submitted via mail should be addressed to U.S. Department of the Treasury, Attention: Meena R. Sharma, Deputy Director of Investment Security Policy and International Relations, 1500 Pennsylvania Avenue NW, Washington, D.C. 20220, citing “Provisions Pertaining to Certain Investments in the United States by Foreign Persons.”