On September 15, 2020, the Department of the Treasury published in the Federal Register a final 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). As discussed in our previous update dated May 26, 2020, on May 21, 2020, the Treasury Department had issued the initial proposed rule seeking public comment on the changes to the CFIUS disclosure requirements. The final rule implements the proposed rule’s changes and modifies the mandatory declaration provisions for certain transactions involving critical technologies and amends the definition of “substantial interest.” The final rule will become effective 30 days after publication, on October 15, 2020.

Previously, CFIUS mandated the filing of a declaration in connection with a covered transaction involving a U.S. business that develops, manufactures or produces “critical technology,” where a foreign government has a “substantial interest” in a foreign person that will invest in one or more of the 27 industries identified by reference to the North American Industry Classification System (NAICS) codes. Like the proposed rule, the new final rule will narrow the mandatory declaration requirement and align it more closely with U.S. export controls instead of NAICS codes.

Under the new rule, 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 would 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. There is a carve-out to the declaration requirement if the export would be covered by certain license exceptions under the Export Administration Regulations (EAR).

Additionally, the new rule sets forth how to determine the percentage interest held indirectly by one entity in another for purposes of determining whether a foreign person obtains a “substantial interest” in a U.S. business where a foreign government in turn holds a “substantial interest” in the foreign person. 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. Under the rule, a foreign government will be considered to have a substantial interest in an entity whose activities are primarily directed, controlled, or coordinated by or on behalf of a general partner, managing member, or equivalent, only if they hold 49% or more of the interest in that general partner, managing member, or equivalent.