6th July 2020
Allan Grauberd - Partner (Moses & Singer LLP)
The Committee on Foreign Investment in the United States (CFIUS) has adopted significant changes affecting the review of investments in US businesses by non-US persons. The new regulations, which came into effect in February 2020, affect both control transactions and non-control investments when certain access rights (such as a board observer seat) are given to the investor. This article by MSI’s NYC law member firm Moses & Singer LLP provides an overview of the current state of CFIUS regulations as a starting point for non-US persons considering investment in a US business.
What is CFIUS?
Established by Executive Order of President Ford in 1975, the Committee on Foreign Investment in the United States (“CFIUS”) is the government committee charged with protecting national security by reviewing economic transactions made in the United States by foreign entities. CFIUS operates under the auspices of the Department of the Treasury.
What does CFIUS do?
CFIUS is empowered to conduct national security reviews of various types of foreign investment including control transactions and non-control investments meeting certain specifications. Historically, until 2018, CFIUS examined only control transactions. While determining what is a control transaction is a question of fact, investments providing the holder under 10 percent of a company’s voting equity without the power to control significant corporate actions would generally not be deemed a control transaction.
For example, in May of 2019, CFIUS determined that the Grindr app posed a national security risk because of feared Chinese government access to the app user’s personal data, which resulted in its Chinese owner being forced to divest itself of its ownership interest.
How does CFIUS get involved?
CFIUS can examine control transactions and non-control investments on its own volition if it determines the potential exists of a national security risk, or as a result of a voluntary or mandatory short form declaration or long form notice by the parties to a transaction.
Until the adoption of the Foreign Investment Risk Review Modernization Act (“FIRMMA”) in October 2018, there was no concept of a mandatory filing for any acquisition or investment, controlling or non-controlling. FIRMMA established the requirement of a mandatory filing for investments, even non-control investments with certain access rights such as a board observer seat, in 27 specific industries (“pilot program industries”) involving so-called “critical technologies”. FIRMMA, as finally adopted in February 2020, also extended CFIUS jurisdiction to non-controlling investments in certain U.S. businesses when the investment is accompanied by certain rights such as a board nomination right, board observer seat or other substantive decision making or access rights.
Other regulations adopted since October 2018 call for mandatory filings for certain investments by foreign government controlled entities making substantial investments in a so-called TID U.S. business (see below). Also a May 2020 proposed modification of the mandatory filing regime for businesses involved in critical technologies focuses on the need for export licensing to the investor’s country, rather than an industry specific analysis, to determine whether a mandatory filing is to be made. In addition, voluntary filings can be made for any other transaction under CFIUS oversight.
Effective February 13, 2020, the final FIRMMA regulations expanded CFIUS’ jurisdiction to include (a) certain real estate transactions (discussed further below) and (b) non-controlling, non-passive investments in businesses performing certain activities involving critical technologies, critical infrastructure, and sensitive personal data.
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