CFIUS set to operate under new rules

The Committee on Foreign Investment in the United States (CFIUS) has published the final version of rules proposed in September 2019 to implement the Foreign Investment Risk Review Modernization Act (FIRRMA) adopted in August 2018¹. The new rules take effect on February 13, 2020.

What you need to know

• New rules governing the U.S. foreign investment review process largely track those proposed in September 2019.
• Investors based in Canada, Australia and the United Kingdom will be exempt from some of the provisions applicable to investments in U.S. businesses and real estate.
• Filings with CFIUS will be mandatory for some foreign government-related investors—outside of Canada, Australia and the UK—and for investments in U.S. businesses involving “critical technologies” in certain industries.

Notable updates from proposed to final

CFIUS has made several notable revisions to the final rules, most in response to comments received from the public, including a number of Canadian pension plans, by:

• identifying Canada, Australia, and the United Kingdom of Great Britain and Northern Island as the only “excepted foreign states”, for which certain exemptions from the new rules will apply; 
• broadening the scope of entities that can qualify for “excepted investor” status by revising the nationality criteria for board members or observers and foreign ownership;
• defining, for the first time, an entity’s “principal place of business” to mean the “primary location where an entity’s management directs, controls, or coordinates the entity’s activities”;² and
• continuing the mandatory filing requirement, first introduced in the FIRRMA “Pilot Program”, for foreign investments in U.S. businesses that produce, design, test, manufacture, fabricate, or develop “critical technologies” with respect to a specific list of industries³.

“Excepted foreign states”

The most significant aspect of the final rules is the identification of Canada, Australia and the UK as “excepted foreign states” (and “excepted real estate foreign states” for purposes of the new real estate regulations). CFIUS selected these countries due to their “robust intelligence-sharing and defense industrial base integration mechanisms with the United States”. To retain “excepted” status beyond February 2022, CFIUS will determine whether each country “has established and is effectively utilizing a robust process to analyze foreign investments for national security risks and to facilitate coordination with the United States on matters relating to investment security”. CFIUS may identify additional “excepted foreign states” in the future but gave no indication as to the timing of such potential expansion.

Exemptions for excepted foreign states

“Excepted” status will exempt the governments, nationals and many entities associated with Canada, Australia or the UK from various elements of CFIUS’s expanded jurisdiction, including that:

• non-controlling investments in U.S. businesses by qualified “excepted investors” from these countries will not fall within CFIUS jurisdiction;
• transactions involving entities in which any of these governments have a “substantial interest” will not be subject to FIRRMA’s mandatory filing requirements; and
• investments in U.S. real estate by qualified “excepted real estate investors” from these countries will not be subject to CFIUS review.

It’s important to note that “excepted” status does not bear on CFIUS’s jurisdiction to review any acquisition that could result in foreign control of a U.S. business and, therefore, Canadian, Australian and UK investors must still consider a voluntary submission to CFIUS in connection with such transactions. It stands to reason, however, that excepted investors, and other persons from an “excepted foreign state”, will weigh their status as such among the factors that go into the decision whether to voluntarily file with CFIUS.

“Principal place of business”

Under both the old and new regulations, a “foreign entity” has been defined to mean an entity that is organized under the laws of a foreign state and either: a) its principal place of business is outside the U.S.; or b) its equity securities are primarily traded on one or more foreign exchanges. Yet “principal place of business” was, up to now, never defined, which has yielded uncertainty for numerous companies including multinationals and U.S. private equity managers of offshore funds.

CFIUS proposes “principal place of business” to mean the “primary location” where an entity’s management “directs, controls, or coordinates” its activities. Although this definition is subject to a 30-day comment period, it will be effective with the new rules on February 13 but may be amended based on comments received.

CFIUS also makes clear that, in the case of a fund, the principal place of business is where the fund’s activities and investments are primarily directed, controlled or coordinated by or on behalf of the general partner, managing member, or equivalent. Therefore, a limited partnership fund organized in the Cayman Islands, for example, would not be a “foreign entity” if the fund’s manager is located in the U.S.⁴

A caveat: in the event an entity identifies its principal place of business as outside the U.S. in a filing or submission to another government agency, CFIUS will deem it to be outside the U.S. unless the entity can demonstrate that such location has changed to the U.S. since such filing or submission.

Conclusion

The rules and procedures CFIUS first adopted in November 2008 to govern its process were static for nearly 10 years until FIRRMA’s enactment. This time around, that’s unlikely to be the case, as several facets of the new rules are subject to periodic review and adjustment, including the list of “excepted foreign states”, the critical technologies industries that comprise the scope for mandatory filing, and the specific military and government facilities identified in connection with “covered real estate”. We will continue to provide updates on CFIUS developments as they arise.

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¹ See our bulletin, “CFIUS publishes proposed regulations”.

² Because this definition was not included in the September 2019 proposed rules, it is subject to a 30-day comment period and, although effective on February 13, may be amended based on comments received.

³ See our bulletin, “CFIUS Expands Mandate With First Pilot Program”.

⁴ Note, however, that such a limited partnership would be a “foreign person” under CFIUS rules if control over it is exercised or exercisable by a foreign government, foreign national, or foreign entity.