- Regulatory Obligations Imposed by the Agricultural Foreign Investment Disclosure Act: Often Unknown and Overlooked by Foreign Investors Come Deal Time
- September 28, 2011 | Author: Margaret E. Krawiec
- Law Firm: Skadden, Arps, Slate, Meagher & Flom LLP - Washington Office
Foreign investors with interests in United States agricultural land (which, among other things, includes acquisitions involving any land of more than 10 acres with 10 percent or more tree cover) may be subject to broad disclosure requirements imposed by the Agricultural Foreign Investment Disclosure Act (AFIDA), 7 U.S.C. §§ 3501-3508. If not complied with, AFIDA authorizes Draconian penalties of up to 25 percent of the fair market value of the foreign investor's interest in the property. Foreign acquisitions relating to renewable energy companies, wind farms, timber companies, solar power plants, golf courses, paintball ranges or industrial factories located on large tracts of land may question whether they are subject to AFIDA's broad definitions and vaguely defined disclosure regime - that is, if they are even aware that AFIDA exists. In light of the severity of the penalties that the government can impose under AFIDA, foreign investors should be cautious not to overlook filing obligations imposed by AFIDA come deal time to guard against the assessment of a potentially crippling penalty.
AFIDA's Current Relevance
Today, only a small percentage of privately held agricultural land in the United States is held by foreign persons; however, statistical information released by the United States Department of Agriculture Farm Service Agency indicates that foreign ownership interests in U.S. agricultural land is on the rise. In the past, a weak U.S. dollar sparked foreign investors to make large land acquisitions in U.S. agricultural land. In fact, there is good reason to believe Chinese investment in the U.S. may shift in favor of agricultural holdings, especially as China's sovereign wealth funds and state-controlled companies have begun focusing on acquisitions tied to natural resource companies in the mining, timber and energy sectors. Moreover, renewable energy companies - such as those in the wind sector - continue to be hot acquisition targets in light of tax incentives afforded by federal and state governments and United States regulatory and legislative policies favoring the growth of the U.S. renewable energy market.
AFIDA's Disclosure Requirements: Sometimes Vague, Often Overbroad
For the foreign investor acquiring U.S. real property, the theoretical threat that AFIDA will take away a quarter of the interest in the land can present a serious concern. Further, although AFIDA and its disclosure requirements appear simple, they may be quite complicated. AFIDA requires that "[a]ny foreign person who acquires or transfers any interest, other than a security interest, in agricultural land" must disclose that interest to the Secretary of Agriculture "not later than 90 days after the date of such acquisition or transfer." 7 U.S.C. § 3501 (a). The Secretary of Agriculture is empowered to "prescribe regulations for the purposes of carrying out the provisions" of AFIDA, 7 U.S.C. § 3507, which the secretary has promulgated at 7 C.F.R. 782.1 et seq. Taken together, the statute and regulations are the sole source of authority concerning AFIDA's disclosure requirements. No court has addressed any aspect of AFIDA's disclosure requirements or harsh civil penalties.
An "interest," the simplest element of the test for AFIDA's disclosure requirement, is defined as "all interest acquired, transferred or held in agricultural lands by a foreign person," with certain exceptions. The listed exceptions are (1) security interests; (2) leaseholds of less than 10 years; (3) contingent future interests; (4) noncontingent future interests that do not become possessory upon the termination of the present possessory estate; (5) surface or subsurface easements and rights of way used for a purpose unrelated to agricultural production; and (6) an interest solely in mineral rights. 7 C.F.R. 781.2(c).
"Foreign persons" includes foreign individuals, i.e. persons who are not citizens or permanent residents of the United States; foreign governments; and foreign corporations that are registered or incorporated abroad. In addition, certain classes of U.S. corporations - those with headquarters abroad and those sufficiently owned or controlled by foreign persons - also may be subject to AFIDA's disclosure requirements. In this regard, a domestic corporation is subject to AFIDA's disclosure regime if its "principal place of business [is] located outside of all the [U.S.] States." Id. 781.2(g)(2). Similarly, a U.S. corporation is subject to AFIDA if a foreign person has a "significant interest or substantial control" over the corporation. Id. 781.2(g)(4)(ii). As defined by the AFIDA regulations, "significant interest or substantial control" is met when a single foreign person holds 10 percent or more of an ownership interest in the domestic corporation; when a combination of foreign persons, acting in concert, hold an interest of 10 percent or more in the domestic corporation; or when a combination of foreign persons, regardless of how they are related, hold an interest of 50 percent or more in the domestic corporation. In determining whether a foreign person has a "significant interest or substantial control" in a domestic entity, commentators have suggested that an investor need only look at the three levels of corporation ownership (i.e., at the owner of the interest in the land, its parent and its parent's parent); this suggestion, moreover, closely mirrors current instructions on AFIDA filing provided by the Farm Service Agency.
Agricultural land includes "land in the United States . . . currently used for, or, if currently idle, land last used within the past five years, for farming, ranching, or timber production," unless the land is less than 10 acres and does not produce more than $1,000 in gross receipts from agricultural activity. Id. 781.2(b). In addition to land used for farming, ranching or timber production, AFIDA also requires disclosure of interests in land "used in forestry production." Id. This is the most overbroad and ambiguous of AFIDA's disclosure requirements. Specifically, "[l]and used for forestry production" is now defined as "land exceeding 10 acres in which 10 percent is stocked by trees of any size, including land that formerly had such tree cover and that will be naturally or artificially regenerated," which, both in practice and theory, covers vast landholdings in the United States. It does not matter whether the foreign person ever intends to cut and sell the trees. See Id.
Should I File?
Foreign investors most likely will view the information sought by the reporting form, referred to as the FSA-153, as highly invasive, and some will be reluctant to disclose such information. In this regard, the FSA-153 requires, among other things, disclosure of the name, address and citizenship of the foreign investor, the legal description of the land and acreage at issue, type of legal interest held or transferred in the land, purchase price of the land, estimated current value or selling price of the land if a disposition, how the land was acquired (i.e., cash transaction, credit or installment transaction, etc.), current land use and the intended use of land as of the date of the reporting. Id. 781.3(e). Of particular note, and as noted above, the first-, second- and third-tier ownership of a foreign landholding must be disclosed, resulting in a foreign investor potentially having to disclose information regarding its parent and affiliated entities. The Department of Agriculture makes all filed FSA-153s available for public inspection within 10 days after the FSA-153s are filed. See 7 U.S.C. § 3506.
Before filing, a foreign investor should consider the following factors: (i) if five years have lapsed since the date when the filing was required, a foreign investor may have a statute of limitations defense; and (ii) foreign entities conducting business in the U.S. may be entitled to the certain treaty-based rights, including the right to own or lease real property; protection against expropriation; protection against discriminatory treatment (or a guarantee of national treatment); protection from arbitrary treatment; and most-favored nation treatment.
Given the severity of any potential penalty, a foreign investor should comply with AFIDA's filing obligations. The penalty for submission of an incomplete report or a report containing misleading or false information, failure to submit a report or failure to maintain a submitted report with accurate information is as follows: "25 percent of the fair market value, as determined by the FSA, of the foreign person's interest in the agricultural land with respect to which such violation occurred." See 7 C.F.R. 781.4 (b)(2). For late-filed reports, the penalty is as follows: one-tenth of one percent of the fair market value, as determined by the FSA, of the foreign person's interest in the agricultural land, with respect to which such violation occurred, for each week or portion thereof that such violation continues, but the total penalty imposed shall not exceed 25 percent of the fair market value of the foreign person's interest in such land. See Id. § 781.4 (b)(1).
Penalties are subject to downward adjustments based upon the following factors: total time the violation existed; method of discovery of the violation (generally, voluntary admissions of failure to file are viewed as a significant mitigating factor); extenuating circumstances concerning the violation; and the nature of the information misstated or not reported. See Id. § 781.4 (b)(3).
Mechanics of an AFIDA Filing
In order to make an AFIDA filing, an FSA-1531 must be completed within 90 days after the date of acquisition or transfer of the interest in the agricultural land and typically is filed with the FSA county office where the land is located. The FSA Handbook provides helpful insight regarding filing requirements and should be consulted when making a filing.2 The foreign investor should ensure that relevant documents from the transaction at issue are readily available for purposes of completing the FSA-153.
1 An FSA-153 may be downloaded at http://forms.sc.egov.usda.gov/efcommon/eFileServices/eForms/FSA153.PDF or may be obtained from the county office of the Farm Service Agency in which the land is located.
2 The FSA Handbook is available at http://www.fsa.usda.gov/Internet/FSA&under;File/1-afida&under;r02&under;a02.pdf.