2. FIRRMA leaves definition of “control” up to CFIUS
FIRRMA generally defines “control” as “the power, direct or indirect, whether exercised or not exercised, to determine, direct, or decide important matters affecting an entity,” subject to regulations prescribed by CFIUS. CFIUS may need to revise the current definition of “control” to address FIRRMA’s expansion of CFIUS jurisdiction and its overhaul of the definition of “covered transaction.”
3. FIRRMA overhauls definition of “covered transaction” to include certain real estate purchases, investments in critical technology and businesses with sensitive information
Under existing law a covered transaction includes mergers, acquisition, or takeovers with any foreign person that could result in foreign control of any U.S. business.
FIRRMA adds new types of covered transactions, subject to regulations, including certain real estate purchases or leases by foreign persons and “other investments” by a foreign person in any unaffiliated U.S. business, including:
Real estate1
- Maritime or airport real estate. Private or public real estate in the United States that is purchased, leased, or conceded to a foreign person and is, or is located in, or will function as part of an airport or maritime port.
- Close proximity real estate. Private or public real estate that is purchased, leased, or conceded to a foreign person that is (1) in close proximity to a U.S. military installation or other national security sensitive government property, or (2) could reasonably provide the foreign person with the ability to collect intelligence on activities being conducted at such property, or (3) could otherwise expose national security activities to the risk of foreign surveillance at such a property.
Other investments
- Critical infrastructure. Investments by a foreign person in any unaffiliated U.S. business that owns, operates, manufactures, supplies, or services critical infrastructure.
- Critical technology. Investments by a foreign person in any unaffiliated U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies.
- Sensitive personal data. Investments by a foreign person in any unaffiliated U.S. business that maintains or collects sensitive personal data of U.S. citizens.
Importantly, “other investments” are not investments that are mergers, acquisitions, or takeovers that could result in foreign control of a U.S. business. FIRRMA defines “other investments” more broadly, to mean an indirect or direct investment that affords the foreign person (1) access to any material nonpublic technical information in the possession of the U.S. business; (2) membership or observer rights on the board of directors or equivalent governing body of the U.S. business or the right to nominate an individual to a position on the board of directors or equivalent governing body; or (3) any involvement, other than through voting of shares, in substantive decision-making by the U.S. business regarding the use, development, acquisition, safekeeping, or release of sensitive personal data of U.S. citizens maintained or collected by the U.S. business; the use, development acquisition, or release of critical technologies; or the management, operation, manufacture, or supply of critical infrastructure.
Subject to further regulations by CFIUS, the term “material nonpublic technical information” means information that provides knowledge, know-how, or understanding, not available in the public domain, of the design, location, or operation of critical infrastructure; or is not available in the public domain, and is necessary to design, fabricate, develop, test, produce, or manufacture critical technologies, including processes, techniques, or methods. Material nonpublic technical information does not include financial information regarding the performance of a U.S. business.
The CFIUS implementing regulations will provide more guidance as FIRRMA directs CFIUS to provide such regulations on the (1) types of transactions that CFIUS considers to be “other investments” and (2) to further define and provide the types of critical infrastructure that is likely to be of importance to the national security of the United States.
Transactions that result in change in rights or are intended to evade
- Change in rights. In addition to the above new covered transactions, any change in the rights that a foreign person has with respect to a U.S. business if that change could result in a change of control or in a “other investment” described above, would also qualify as a covered transaction.
Transactions intended to evade. Any other transaction that is designed or intended to evade or circumvent the application of FIRRMA is also a covered transaction, subject to CFIUS regulations.
4. Definition of “foreign persons” may be broader for “other investments”
FIRRMA directs CFIUS to further define the term “foreign person” for purposes of the real estate and “other investments” clauses described above. CFIUS will have to specify criteria to limit the application of the real estate and “other investment” clauses to the investments of certain categories of foreign persons. Such criteria shall take into consideration how a foreign person is connected to a foreign country or foreign government, and whether the connection may affect the national security of the United States.
5. FIRMMA goes beyond export controls
FIRRMA defines “critical technologies” to include, among others, items subject to export control on the United States Munitions List (USML), 22 CFR Part 121, items on the Commerce Control List (CCL), Supplement No. 1 to 15 CFR Part 774, that are controlled for reasons including national security, chemical and biological warfare, nuclear nonproliferation, missile technology, regional stability and surreptitious listening and emerging and foundational technologies controlled pursuant to section 1758 of the Export Control Reform Act of 2018 (ECRA).
Emerging and foundational technologies will be identified through an interagency process between the Secretaries of Commerce, Defense, Energy, and State. FIRRMA’s inclusion of emerging and foundational technologies as critical technologies is significant because these technologies may or may not currently be controlled for export.
6. New declarations procedure
Subject to further regulations by CFIUS, FIRRMA sets out a voluntary abbreviated declaration process wherein parties may submit basic information not to exceed 5 pages in length and to be filed 45 days before the closing of the transaction. CFIUS may then decide whether to conclude the review on the basis of the declaration or require a full notice, not later than 30 days after receiving the declaration.
FIRRMA also sets out a mandatory declaration process for “other investment” transactions if a foreign government owns a substantial direct or indirect interest. “Substantial interest” is to be defined at a later date by CFIUS, but CFIUS will need to consider the means through which the foreign government can influence the foreign person, including through board membership, ownership interest, shareholder rights. Interest that is less than 10% or otherwise excluded by definition of other investment (for example, certain indirect investment fund investments resulting in membership as a limited partner or equivalent on an advisory board or a committee) is not substantial. CFIUS may also further require declarations for any transaction related to a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies.
Parties may elect to file a notice in lieu of a declaration. Importantly, FIRRMA directs CFIUS to establish a process to identify non-notified and non-declared transactions.
7. Timing
FIRRMA expands CFIUS’s review period from 30 to 45 days and allows an investigation to be extended for an additional 15-day period under extraordinary circumstances. In practice, deals involving critical infrastructure or technology are often subject to extended reviews where the parties must withdraw and refile notices for a period over a year or more.
8. Suspension of transaction
Under FIRRMA, CFIUS may suspend a transaction that is proposed or pending for the time it is under review or investigation.
9. Fees
FIRRMA imposes a new filing fee that cannot exceed the lesser of US$300,000 or 1% of value of transaction. Although the filing fee provision is for immediate authorization, CFIUS is not yet implementing the filing fee requirement. CFIUS will provide further guidance on implementing the filing fee.
1. Real estate covered transaction do not include single housing units or real estate in “urbanized areas.”
Client Alert 2018-172
