U.S. Foreign Investment Review continues to evolve

The Committee on Foreign Investment in the United States (CFIUS) has remained active despite challenges presented by the COVID-19 pandemic.

What you need to know

• Since new rules went into effect in February expanding its jurisdiction, CFIUS has been reviewing a broader scope of transactions by foreign investors in U.S. businesses and real estate.
• Filing parties should build in additional time to account for delays attributable to remote operations.
• CFIUS recently implemented filing fees and will revise the scope of transactions subject to mandatory filing.

Reviews progressing at protracted pace during the pandemic

Although M&A activity has declined due to uncertainties raised by the pandemic, the Committee’s broader mandate and remote operations have delayed the review process.

Most notably, the time between parties’ submission of a formal written notice and CFIUS’s acceptance of the notice for review—period not governed by any regulation—reportedly has increased to as much as 30-45 days. Because the Committee’s threat assessment typically requires classified information, not accessible from unsecured home computers, it is also understood that CFIUS is clearing fewer transactions within the initial 45-day review period.

During the pandemic, the new short-form declaration, review of which is limited to 30 days, has been of limited value because CFIUS is informing most parties that it cannot conclude action within the timeframe. Under such circumstances, parties can proceed to close without the benefit of the “safe harbor” afforded cleared transactions or they can file a formal notice and work through the full, lengthier process.

Parties subject to CFIUS jurisdiction should consider these developments when assessing whether to submit a voluntary filing, and parties expecting, or required, to file are advised to account for delays in their transaction planning and documentation.

CFIUS implements additional new rules

The pandemic has not stopped CFIUS from implementing and refining its rules and procedures pursuant to 2018’s Foreign Investment Risk Review Modernization Act (FIRRMA).

1. Filing fees

Effective May 1, 2020, CFIUS now requires a filing fee for formal written notices, but not short-form declarations. The current fee scale is summarized below (in U.S. dollars):

2. Mandatory filing for certain critical technology transactions

CFIUS currently requires a filing for certain foreign investment transactions involving a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies in connection with one of 27 industries identified by North American Industry Classification System (NAICS) code. The enumerated industries include, for example, aircraft manufacturing, aluminum production, biotechnology R&D, and storage battery manufacturing.

On May 21, 2020, CFIUS proposed a revised rule, subject to public comment through June 22, 2020, that eliminates the list of 27 industries. A CFIUS filing will instead be mandatory for transactions involving a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies for which a foreign person to the transaction would need a license for the export, re-export, transfer, or re-transfer of the technology in accordance with U.S. export control rules under the International Traffic in Arms Regulations (ITAR) or Export Administration Regulations (EAR)¹. The new rule will oblige foreign investors to consider whether a CFIUS filing is required for any transaction involving a U.S. business with critical technologies.

This is not to suggest that all, or even most, transactions by Canadian investors in U.S. technology businesses will trigger a mandatory CFIUS filing under the revised rule. The mandatory filing provisions do not apply to transactions involving an “excepted investor”², which is defined to include the Canadian government, most Canadian individuals, and some Canadian entities that meet specific criteria. In addition, although U.S.-origin technology is subject to ITAR and EAR controls generally, the export of such technology to Canada may not require a license (contrasted, for example, with the export of the same technology to China).

Reflecting on the COVID-19 pandemic’s impact, which may prompt opportunistic foreign investment in weakened U.S. businesses, a U.S. Department of Defense official recently observed that CFIUS is “more important than ever”. Investors from outside the U.S., and their prospective U.S. targets, should contemplate CFIUS early in a transaction lifecycle and the new rules will require parties to engage in a careful analysis to determine whether a filing is mandatory.

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¹ The proposed rule also applies to critical technologies relating to atomic energy and nuclear equipment or material for which a license or authorization from the U.S. Department of Energy or Nuclear Regulatory Commission is required.

² See our bulletin, “CFIUS set to operate under new rules”.