The U.S. Department of the Treasury issued temporary regulations establishing a partial pilot program implementing two key changes to the jurisdiction and review of transactions by the Committee on Foreign Investment in the United States (CFIUS). The pilot program (1) expands the scope of transactions subject to review by CFIUS to include certain “other investments” involving foreign persons and critical technologies (though not critical infrastructure or companies with personal identifier information); and (2) makes effective a mandatory declaration provision for all transactions that fall within the specific scope of the pilot program. The pilot program will largely impact investments in companies involved in critical technologies pertaining to a specified list of industries by NAICS code, including the aircraft, semiconductor, nuclear, and telecommunications sectors. It also makes filing declarations a mandatory requirement for covered transactions involving these companies, which include acquisitions of control as well as non-controlling investments (including investments of less than 10%) that afford the foreign investor certain rights.
Importantly, the pilot program will commence on November 10, 2018 and will apply on a global basis (i.e., there is no country exemption at this time). The pilot program will not apply to transactions completed prior to November 10 or to transactions for which the parties have executed a binding written agreement or other document establishing the material terms of the transaction prior to October 11, 2018.
Pilot Program Covered Investments
The pilot program is consistent with the Foreign Investment Risk Review Modernization Act (FIRRMA) expansion of CFIUS’s jurisdiction to allow review of certain investments by foreign persons that do not constitute an acquisition of control of a U.S. business (referred to in FIRRMA as “other investments”). Consistent with FIRRMA, covered investments under the pilot program would have to give the foreign investor:
- Access to any material nonpublic technical information in the possession of the US business;
- Membership or observer rights on the board of directors or equivalent governing body of the US business (or the right to nominate an individual to such position); or
- Any involvement, other than through voting of shares, in substantive decision making of the US business regarding the use, development, acquisition, or release of critical technology.
- A new example in the CFIUS regulations explains this can include where the foreign person has approval rights with respect to the U.S. business licensing its technology to third parties.
To be a covered pilot program investment, the foreign investor must be afforded one or more of the rights above. An investment that does not provide these rights (or result in “control” of the U.S. business as that term is defined) is not a covered transaction subject to review.
The pilot program institutes FIRRMA’s clarification for investment funds. Specifically, covered investments do not include investments by US managed funds in which foreign persons are limited partners provided the foreign person does not have the ability to control the fund, as outlined in more detail in the regulations.
Pilot Program US Businesses
In addition, the investment must involve a pilot program US business. This means that the target company produces, designs, tests, manufactures, fabricates, or develops a “critical technology” that is utilized or designed for use in connection with the U.S. business’s activity in one or more specified Pilot Program Industries. Annex A lists 27 covered industries, identified by their respective North American Industry Classification System (NAICS) code. The full list is available at https://home.treasury.gov/system/files/206/FR-2018-22182_1786904.pdf and includes among other industries:
- Aircraft Manufacturing as well as Aircraft Engine and Engine Parts Manufacturing (NAICS Codes: 336411 and 336412)
- Computer Storage Device Manufacturing and Electronic Computer Manufacturing (NAICS Codes: 34112 and 334111)
- Nuclear Electric Power Generation (NAICS Code 221113)
- Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing (NAICS Code 334220)
- Semiconductor and Related Device Manufacturing (NAICS Code 334413); and
- Semiconductor Machinery Manufacturing (NAICS Code 333242).
To be considered a pilot program US business, the company must also produce, design, test, manufacture, fabricate or develop a “critical technology” in connection with its activity in a Pilot Program Industry. As defined, critical technologies essentially include any items subject to US export controls beyond the more limited Anti-Terrorism (AT) control category. Critical technologies also include emerging and foundational technologies to be identified pursuant to the Export Control Reform Act of 2018.
For purposes of the pilot program, a transaction will be reviewable irrespective of the fact that an emerging and foundational technology became controlled after the pilot program commences, unless the parties have executed a binding written agreement prior to the emerging technology becoming controlled.
Pursuant to the pilot program, covered investments in pilot program US businesses will be subject to a mandatory declaration requirement. Declarations must be filed at least 45 days prior to a transaction’s expected completion date, though parties can choose to file a formal notice in lieu of a declaration.
A key aspect of the new mandatory declaration framework is that it contemplates unilateral declarations. However, CFIUS in its discretion may request that the parties file a notice if there is insufficient information in order to assess a transaction.
The regulations outline the information to be provided in this abbreviated filing. Many of the data points mirror the requirements of a formal notice but mandate fewer details.
CFIUS will have 30 days to act on a declaration. However, although FIRRMA requires CFIUS to act “promptly,” CFIUS may take some time to formally initiate the 30 day review period, similar to CFIUS’s current practice in accepting formal notifications. During this time, CFIUS may invite the parties to meet in order to discuss or clarify issues regarding the transaction.