Articles Posted in CFIUS

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On June 12, 2022, a bipartisan group of Senate and House lawmakers announced agreement on a new draft of the National Critical Capabilities Defense Act of 2022 (NCCDA), which would establish an expansive outbound review mechanism for investments and other transactions in specified countries of concern, including China. The draft is based on a bill introduced in the Senate last year that ultimately was not included in the US Innovation and Competition Act (USICA), which passed, while the House included a similar measure in its America COMPETES Act, which also passed, and the two bills are now in conference.

If enacted, the NCCDA would establish a new interagency panel to review and potentially prohibit outbound transactions on national security grounds. The Committee on National Critical Capabilities (CNCC) would function in a manner similar to the Committee on Foreign Investment in the US (CFIUS), which reviews inbound foreign investment. Both US persons and foreign entities that engage in or plan to engage in a “covered activity” would be required to submit a mandatory written notification 45 days before engaging in the activity.  It is not clear how the requirement would apply to a foreign entity that does not have a connection with the United States.

“Covered activities” include an extraordinarily wide range of transactions including any activity by a US person or a foreign entity or their affiliates that:

  • Builds, develops, produces, manufactures, fabricates, refurbishes, expands, shifts, services, manages, operates, utilizes, sells, or relocates a national critical capability to or in a country of concern;
  • Shares, discloses, contributes, transfers, or licenses to an entity of concern any design, technology, intellectual property, or knowhow, including through open-source technology platforms or research and development, that supports, contributes to, or enables a national critical capability by an entity of concern or in a country of concern; or
  • Invests in, provides capital to, or consults for, or gives any guidance, related to enhancing the capabilities or facilitating access to financial resources for a national critical capability for an entity of concern or a country of concern.”

Covered activities would also include transactions by certain entities that receive financial assistance pursuant to the Bipartisan Innovation Act (the presumed name of the legislation that emerges from conference), as well as activities by entities that benefit from government contracts over a certain amount (to-be-determined) with a US national security agency with respect to an entity of concern or a country of concern.

In addition to China, “countries of concern’ include Russia, Iran, North Korea, Cuba, and Venezuela. The term “entity of concern” is broadly and vaguely defined to include entities “affiliated with” or “influenced by” a country of concern. Covered activities would not include de minimis value transactions, as well as “ordinary business transactions,” which generally include transactions involving the sale or license of a finished product.

“National critical capabilities” are defined as those identified necessary for supply chains identified pursuant to the supply chain review mandated by Executive Order 14017, including:

  • semiconductor manufacturing materials,
  • large capacity batteries,
  • critical minerals and materials,
  • pharmaceuticals and active pharmaceutical ingredients, and
  • “critical and emerging technologies,” such as artificial intelligence, bioeconomy, and quantum information science and technology.

Once a notification is submitted, the CNCC would undertake a review to determine if the activity is likely to result in “an unacceptable risk to one or more national critical capabilities.” If it determines such a risk exists, it will make a recommendation to the President to address the risk, including imposing mitigation measures, potentially including disinvestment. The Committee would also have the authority to initiate investigation of a covered activity if a notification is not submitted.

Although the lawmakers announcing the agreement characterized the bill as a “refined proposal,” it is still extremely broad. Key terms and concepts are vague and ill-defined or left to regulators to fill in the blanks, and industry groups including the US China Business Council and the US Chamber are raising their voices in opposition.

 

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On September 14, 2021, the Kingdom of Saudi Arabia’s (KSA’ s) Cabinet of Ministers launched a new Permanent Ministerial Committee for Examining Foreign Investments (CEFI) that would review foreign investments for potential national security threats. This development comes at an important time as the Kingdom opens its doors for foreign investments in pursuit of the Vision 2030 plan. The Ministry of Investment recently reported that foreign investment licenses in the KSA rose 108% in the first half of 2021 in comparison the preceding year. The committee is expected to function in a manner similar to the Committee on Foreign Investment in the United States (CFIUS), and the proposed UK National Security and Investment Bill, although its future role and implementation remain to be determined.

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The CFIUS process itself requires close strategic consideration in getting to deal certainty. Navigating the review process can be a daunting task, especially as CFIUS appears to be moving quickly and proactively to stop risky deals from closing. Join our colleagues Nancy Fischer and Patrick Hovakimian in The Deal’s September 23 webinar, “Structuring M&A and Private Equity Deals: The CFIUS Challenge in Getting Deals Done” for a discussion of the advance planning and deal structuring needed to anticipate and navigate CFIUS. Nancy and Patrick will be joined by panelists Alex Darden (EQT Partners), Kevin Hutchins (Juniper Networks), Sirisha Kadamalakalva (DataRobot) and David Lam (Atlantic Bridge Ventures).

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On January 19, 2021, the Commerce Department issued an interim final rule to implement the Executive Order on Securing the Information and Communications Technology and Services Supply Chain (E.O. 13873), which was issued on May 15, 2019. The interim rule comes after the November 2019 proposed rule implementing E.O. 13873.

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On September 18, 2020, the U.S. Commerce Department published two rules defining the scope of prohibited transactions related to the mobile applications, WeChat and TikTok. The scope of prohibited transactions clarified the two parallel executive orders (EOs) issued by the Trump administration on August 6, 2020, which required the Commerce Department to impose restrictions on both platforms.

The scope of prohibited transactions are the same for both WeChat and TikTok. Prohibited transactions do not include individual use of these mobile platforms to exchange personal or business information. However, the rule would effectively shut down WeChat and TikTok within the United States via mobile application storefronts (e.g., Apple Store and Google Play), and additional restrictions would further impair the apps’ functionality and user experience.

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GettyImages-478409256-Treasury-300x261On September 15, 2020, the U.S. Department of Treasury published a final rule that removes the mandatory declaration requirement for filings to the Committee on Foreign Investment in the United States (CFIUS) based on North American Industry Classification System (NAICS) code and replaces it with a determination based on U.S. export control criteria. The final rule largely adopts the changes outlined in the proposed rule that was published on May 21, 2020, and which we discussed previously, with some added clarifications. The final rule will be effective on October 15, 2020.

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On May 21, 2020, the U.S. Department of the Treasury published a proposed rule that would revise the mandatory declaration requirement for foreign investments involving a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies.

Currently, a key element of the mandatory declaration requirement is whether the U.S. business engaged in the specified activities involving critical technologies utilizes that critical technology, or designs the technology specifically for use in, one or more industries identified by North American Industry Classification (NAICS) codes.

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The COVID-19 pandemic has generated a renewed focus on biotechnology and life sciences companies. Non-U.S. investors need to be aware of the potential that the Committee on Foreign Investment in the United States (CFIUS) may have jurisdiction to review, and possibly disallow certain investments in U.S. companies. In particular, new rules enacted this year expand CFIUS jurisdiction to include non-controlling investments in certain U.S. businesses dealing in “critical technologies,” which includes certain products and technologies in the biotechnology sector. Moreover, the COVID-19 pandemic has resulted in the expansion of biotech-type businesses that might be considered sensitive from a national security perspective even if they do not rise to the level of “critical technologies,” which could trigger mandatory CFIUS filings. CFIUS risk assessments will be an important part of any transaction involving foreign investors in the biotech sector.

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Beginning on May 1, 2020, the Committee on Foreign Investment in the United States (CFIUS) will require a fee for any joint voluntary notice of a “covered transaction” or “covered real estate transaction.” This requirement also applies to (i) voluntary notices filed after CFIUS has completed its assessment of a declaration, (ii) voluntary notices filed for transactions subject to mandatory declarations, and (iii) voluntary notices filed in lieu of a declaration when the transaction is not subject to a mandatory declaration. There is no fee to submit a declaration with CFIUS or if CFIUS initiates a unilateral review. Continue reading →

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The COVID-19 pandemic and the resulting economic turmoil have the potential to shake up the U.S. real estate market due to an anticipated influx of real estate investors looking to purchase heavily discounted, distressed assets and an expected increase in real estate foreclosures. Non-U.S. real estate lenders and investors need to be aware of the potential that the Committee on Foreign Investment in the United States (CFIUS) may have jurisdiction to review, and potentially disallow certain investments in real estate and mortgage default remedies where foreign persons are involved.

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