Reed Smith Client Alerts

As foreshadowed in the preamble to its recent final rule implementing provisions of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the U.S. Department of Treasury’s Office of Investment Security published a proposed rule on May 21, 2020, that would modify certain mandatory declaration requirements of the Committee on Foreign Investment in the United States (CFIUS) under 31 C.F.R. part 800 for certain foreign investment transactions involving a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies. Specifically, under the proposed rule, mandatory declarations would no longer be based on the U.S. business’s nexus to specified industries identified by NAICS codes. Instead, these declarations would apply only if the critical technologies of the U.S. business require a license or other U.S. regulatory authorization to export, re-export, transfer (in-country), or retransfer to certain transaction parties and foreign persons in the ownership chain.

The proposed rule is subject to public comment and is not yet effective. Until the proposed rule is finalized and becomes effective, the existing critical technology mandatory declaration requirement based on NAICS codes will apply to transactions. The proposed modifications to the mandatory declaration provision will apply to transactions starting on the effective date of the final rule, unless specified actions with respect to the transactions occurred prior to the effective date, including completion, execution of a purchase agreement or other agreement establishing the material terms of the transaction, or the making of a public offer to shareholders to buy the U.S. business.

U.S. businesses engaged in critical technologies that may be subject to foreign investment in the future should take steps now to confirm or complete commodity jurisdiction and classification analyses under the International Traffic in Arms Regulations (ITAR) or the Export Administration Regulations (EAR) with respect to their technologies, as the proposed rule would eliminate their ability to rely upon the lack of a nexus to specified industries as a means of exemption from mandatory CFIUS filing requirements.

The proposed rule

Under the proposed rule, a mandatory declaration will be required for covered transactions involving a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies for which a “U.S. regulatory authorization” would be required for the export, re-export, transfer (in-country), or retransfer of such critical technology to a foreign person that is a party to the covered transaction and also purportedly to certain foreign persons in the ownership chain, although the practical application to parents and affiliates is uncertain as drafted.

The proposed rule removes the NAICS code criteria from mandatory declaration requirements and instead focuses on export control requirements for the critical technology or technologies involved in the transaction. In focusing on export control requirements, the Treasury Department seeks to leverage the national security foundations of long-established U.S. export control regimes, which require licensing or authorization in certain cases based on an analysis of the particular item and end user, and the particular foreign country for export, re-export, transfer (in-country), or retransfer. The proposed rule accordingly defines “U.S. regulatory authorization” to include licenses and other approvals (for example, approved technical assistance agreements or manufacturing license agreements required by the Directorate of Defense Trade Controls) for defense articles or defense services on the United States Munitions List pursuant to the ITAR, which is administered by the Department of State. It also includes licenses required for certain items on the Commerce Control List with respect to the EAR, which is administered by U.S. Department of Commerce.