New Rules on CFIUS Mandatory Filings

On September 15, 2020, the U.S. Department of the Treasury published a final rule modifying the types of foreign investments that would trigger a mandatory filing before the Committee on Foreign Investment in the United States (CFIUS). The final rule largely tracks a proposed rule published by CFIUS on May 21, 2020. The final rule will come into effect on October 15, 2020, and will apply only to transactions that take place on or after that date. It is not retroactive.

The Final Rule Ties the Filing Requirements for Investments in U.S. Critical Technology Businesses to Export License Requirements

CFIUS has jurisdiction to review foreign investments in U.S. businesses and mitigate any potential national security concerns.1 While CFIUS notifications are usually voluntary, certain covered transactions involving U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies (“U.S. critical technology businesses”) are subject to a mandatory filing requirement.

  • Filings Apply to Investments in All Industries: Currently, filings are mandatory for certain covered transactions involving U.S. critical technology businesses that use the critical technology or design such technology for use in any one of 27 specified industries.2 Under the new rule, filings will be required for covered transactions involving U.S. critical technology businesses in any industry.
  • Mandatory Filings Tied to Export Licenses: A filing will be required when the critical technologies in question would require the foreign persons involved in the transaction or, in some cases, to foreign persons that have invested in the party involved in the transaction, to secure certain U.S. “regulatory authorizations” (i.e., export licenses). The determination of whether a U.S. regulatory authorization is required will be based on the foreign person’s principal place of business.
  • Export License Exceptions Do Not Generally Apply: In determining whether a U.S. regulatory authorization is required for purposes of a mandatory filing, license exemptions available under the International Traffic in Arms Regulations do not apply, and only three license exceptions available under the Export Administration Regulations (EAR) apply:3 

– Technology and Software Unrestricted: authorizes exports of, inter alia, operation technology and software, sales technology and software, software updates (bug fixes), and certain mass market software. Countries and end users authorized for export under this exception vary by item, with many items available to all countries other than Cuba, Iran, North Korea, Sudan, Syria, and Crimea.

 Encryption Commodities, Software, and Technology: authorizes exports of specified commercial commodities, software, and technology subject to encryption controls. Countries and end users authorized for export under this exception vary by item, with many items available to all countries other than Cuba, Iran, North Korea, Sudan, Syria, and Crimea.

– Strategic Trade Authorization: authorizes certain exports to the 37 countries listed in the EAR’s Country Group A:5, which currently includes Argentina, Australia, Austria, Finland, India, Ireland, Japan, South Korea, New Zealand, Sweden, and Switzerland as well as all NATO member states other than Albania, Montenegro, and North Macedonia.

  • Mandatory Filings Apply to Indirect Investments Only in Limited Circumstances: The new rule makes a CFIUS filing mandatory when a foreign person (a) makes a direct investment, or acquires a direct interest, in a U.S. business that is a covered transaction in a U.S. critical technology business or (b) individually holds, or is part of a group of foreign persons that in the aggregate holds, a direct or indirect 25% or more voting interest in the foreign investor identified in (a).4 When the foreign investor is a partnership that is controlled by a general partner, then the 25% share referenced in (b) is based on the foreign person’s share in the general partner. A parent5 is deemed to own 100% of the interest held by its subsidiary.

CFIUS Makes Minor Modifications to Mandatory Filing Requirements Involving Foreign Government Investments in TID U.S. Businesses

Under current rules, CFIUS also requires filings for certain covered transactions where a foreign government has a “substantial interest” in a foreign person that will acquire a substantial interest in “TID U.S. businesses,” that is, U.S. businesses involved in “critical infrastructure,” “critical technology,” or storage/maintenance of sensitive personal information. The final rule modifies certain aspects of this requirement.

  • The “substantial interest” test applies to the general partner, rather than the partnership, but only when the general partner primarily controls, directs, or coordinates the partnerships: Under the current rule, a foreign government will have a substantial interest in an entity with a general partner (or managing member or equivalent) if the foreign government holds a ≥49% interest (either voting or economic) in the general partner. Under the new rule, this requirement is limited to cases where the activities of the entity are primarily directed, controlled, or coordinated by or on behalf of the general partner. Though the implications of this change are not yet clear, CFIUS clarified that a general partner does not cease to primarily direct, control, or coordinate such activities simply by contracting a third party to perform such services.
  • Technical changes made to the definition of “substantial interest”: The final rule clarifies how indirect interests in a general partner (or managing member or equivalent) will be calculated. Under the current rule, for purposes of calculating substantial interest, a parent is deemed to hold 100% of only the voting interest of its subsidiary. Under the new rule, a parent will be deemed to hold 100% of the voting and economic interest of its subsidiary.

1 CFIUS has jurisdiction over two types of “covered transactions”: (a) “covered control transactions,” i.e., transactions in which a foreign person acquires control of a U.S. business, including, but not limited to a U.S. business involved in “critical infrastructure,” “critical technology,” or storage/maintenance of sensitive personal information (a “TID U.S. business”); and (b) “covered investments,” i.e., certain investments by a foreign person in “TID U.S. businesses” that give the foreign person certain noncontrol rights (i.e., the right to appoint a board director/observer, the right to access material nonpublic technical information, or the right to be involved in substantive decision-making).

2 These industries were identified by North American Industry Classification System codes.

3  To be “eligible” for a license exception within the meaning of these regulations, an exporter must satisfy all requirements imposed by the EAR that must be satisfied prior to export even if no export is to occur (e.g., submitting a self-classification report).

4 The new rules also apply in certain situations where a foreign person seeks to circumvent CFIUS jurisdiction and where a foreign person has a direct interest in the U.S. business and there is a change in the person’s rights that results in a covered transaction.

5 The term parent means, with respect to an entity: (1) A person who or which directly or indirectly: (i) Holds or will hold at least 50 percent of the outstanding voting interest in the entity; or (ii) Holds or will hold the right to at least 50 percent of the profits of the entity, or has or will have the right in the event of dissolution to at least 50 percent of the assets of the entity; or (2) The general partner, managing member, or equivalent of the entity. Any entity that meets the aforementioned conditions of with respect to another entity (i.e., the intermediate parent) is also a parent of any other entity of which the intermediate parent is a parent.