- CFIUS Mandates Filings for Range of Foreign Investments in Critical Technology Companies
- October 22, 2018 | Authors: Mark D. Herlach; Ginger T. Faulk
- Law Firms: Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - Washington Office
Earlier than expected, the Committee on Foreign Investment in the United States (CFIUS) has announced new interim rules—effective November 10, 2018, pursuant to the recently enacted Foreign Investment Risk Reduction Modernization Act of 2018 (FIRRMA)—that:
- Expand the scope of transactions subject to review by CFIUS to include certain non-controlling investments made by foreign persons in US critical technology companies; and
- For the first time in its history, mandate the filing with CFIUS—at least 45 days before closing—of a short form declaration for a range of foreign investments, both controlling and non-controlling, in US critical technology companies (with parties having the option of filing a full notification in lieu thereof).
The New Requirements Apply to a Broad Range of Transactions. As discussed below in detail, under the definitions used in the new regulations, mandatory filings will be required in a broad range of transactions involving even very small percentage investments in US firms that either: (1) are utilizing a range of technologies deemed critical (including defense, dual use, nuclear, and a range of other “emerging and foundational” technologies to be designated) in one of 27 industrial sectors specified by CFIUS; or (2) have designed such technologies specifically for use in one of these sectors. The industrial sectors include major parts of the economy, including, among others, aerospace, aluminum production, ball bearings, computers, defense, nanotechnology, nuclear, petroleum, semiconductors, wireless communications, and other specified sectors.
Thus, when contemplating investments or collaborative arrangements like joint ventures, participants in the investment community as well as firms in numerous affected high-tech industries and traditional sectors should carefully review the new rules.
The New 45 Day Rule. Moreover, because the declaration must be filed 45 days before the complete date of the transaction (effectively, the closing), its filing becomes a gating element that will affect the timing of numerous transactions.
Why Now? While FIRRMA delayed the effectiveness of certain provisions for at least 18 months, including those relating to non-controlling investments and declarations, CFIUS has announced the new changes as a “pilot program” that addresses “the need to immediately assess and address significant risks to national security posed by some foreign investments.” As such, the new rules are temporary in nature (time limited to no more than 570 days); they will be put in effect unchanged without notice and comment.
However, CFIUS can make these regulations permanent at a later time (after public notice and comment) and it is expected that the pilot program experience will inform final regulations adopted subsequently under FIRRMA. Written comments on the interim rules can be submitted to CFIUS no later than November 10, 2018.
What Types of Transactions Are Now Subject to Mandatory Filings? The pilot program’s requirement for short-form mandatory declarations applies to investments: (1) both investments that could result in “control,” including transactions carried out through joint ventures, and certain “other investments” that could not result in control (referred to as “Pilot Program Covered Investments” in the new rules); (2) by all foreign persons from all countries, without exception; and (3) in “Pilot Program US Businesses.”
What is a “Pilot Program Covered Investment”? An investment (i.e., the acquisition of an equity interest, including a contingent equity interest), direct or indirect, by a foreign person in an unaffiliated Pilot Program US Business that affords the foreign person:
- Access to any material nonpublic technical information in the possession of the Pilot Program US Business, not available in the public domain, that is necessary to design, fabricate, develop, test, produce, or manufacture critical technologies, including processes, techniques, or methods;
- Membership or observer rights on the board of directors or equivalent governing body of the Pilot Program US Business, or the right to nominate an individual to a position on the board of directors or equivalent governing body of such business; or
- Any involvement, other than through voting of shares, in substantive decision-making of the Pilot Program US Business regarding the use, development, acquisition, or release of critical technology.
Is There a Minimum Level of Investment for a Transaction to be Covered? No. CFIUS has made it clear, in the examples in the regulations, that as long as the foreign person investing meets one of the three criteria noted above, even the acquisition of a small equity interest – in the range of 4% of equity – would constitute a Pilot Program Covered Investment.
What is a “Pilot Program US Business”? Any US business that produces, designs, tests manufactures, fabricates, or develops a critical technology that is: (1) utilized in connection with the US business’s activity in one or more Pilot Program Industries; or (2) designed by the US business “specifically for use in” one or more Pilot Program Industries.
What are Critical Technologies? These are: (1) defense articles or services subject to the US Munitions List under the State Department’s International Traffic in Arms Regulations (ITAR); (2) certain dual-use items on the Commerce Department’s Control List under the Export Administrational Regulations; (3) certain specially designed nuclear equipment, parts and components, materials, software, and technology covered by 10 CFR 110; (4) nuclear facilities, equipment and materials covered by 10 CFR 110; (5) select agents and toxins covered by various federal rules; and (6) “emerging and foundational technologies” to be designated under the Export Control Reform Act of 2018, a companion law to FIRRMA.
While there is today no list of “emerging and foundational technologies,” such a list is expected to be developed and implemented in the coming months by the Commerce Department. A transaction related to such technology that becomes controlled after the effective date of the new rules (i.e., November 10, 2018) is still covered by the declaration requirement as long as the technology was controlled before the date upon which the written agreement establishing the material terms of the transaction was executed.What are Pilot Program Industries? Annex A to the new rules sets forth a list of 27 covered industries for which, according to CFIUS, “certain strategically motivated foreign investment could pose a threat to US technological superiority and national security.” The industries are defined with reference to North American Industry Classification System (NAICS) categories.