CFIUS Modernization

Eric J. Kadel, Jr. and Christopher L. Mann are partners and Kathryn E. Collard is an associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Kaddel, Mr. Mann, Ms. Collard, John Evangelakos, Benjamin R. Weber, and Dharak V. Bhavsar.

The U.S. Department of the Treasury has issued proposed regulations to implement CFIUS reforms enacted under the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”). Certain provisions of FIRRMA went into effect immediately upon its adoption in August 2018, but many of the provisions of the legislation require regulations to be prescribed by CFIUS before becoming effective.

The proposed rules, which would implement most of the provisions of FIRRMA that have not already gone into effect, have been issued in two separate proposals, both of which are covered in this memorandum:

  • TID Businesses. The first set of regulations would replace the existing CFIUS regulations codified at part 800 of title 31 of the Code of Federal Regulations, and among other things would implement the provisions of the FIRRMA legislation pertaining to certain non-control but non-passive investments in critical technology, critical infrastructure and sensitive personal data businesses (so-called “TID” businesses).
  • Real Estate. The second set of regulations, to be codified at a new part 802 of title 31 of the Code of Federal Regulations, would implement the expansion of CFIUS jurisdiction under FIRRMA to certain real estate transactions.

The proposed rules flesh out the concepts of non-control but non-passive investments in businesses in the areas of critical technology, critical infrastructure and sensitive personal data that marked one of FIRRMA’s key expansions of CFIUS jurisdiction. Prior to FIRRMA, only control transactions (albeit broadly and flexibly defined) were subject to CFIUS jurisdiction, and FIRRMA expanded CFIUS jurisdiction to encompass non-passive investments in these three areas of sensitivity.

  • Critical technology. The CFIUS pilot program that has applied since November 10, 2018 to certain non-control investments in “critical technology” companies is not modified by the proposed rule and remains effective for now; however, the Treasury Department’s release notes that CFIUS received substantial comment on the previously released pilot program regulations, is still considering those comments and expects to address those comments in the final rules associated with these proposed rules.
  • Critical infrastructure. With respect to critical infrastructure, the proposed rules focus on electricity assets that connect to the grid; certain energy midstream assets, including interstate oil and gas pipelines, storage facilities and refineries, in each case of a certain size; all LNG liquefaction and regasification assets; most public water systems; certain financial infrastructure businesses; rail, port and airport assets of a certain size or importance; certain telecommunication assets, including certain fiber assets, all intercontinental submarine cable systems, certain internet assets, certain data centers, certain defense-related satellite systems and some but not clearly all telecommunications services (since there is ambiguity about whether such services are limited to those that directly serve a military installation); certain industrial resources; and certain specialty metals. Non-passive investments in such businesses are proposed to be subject to CFIUS jurisdiction but not to a mandatory filing regime, the same for control transactions.
  • Sensitive personal data. With respect to sensitive personal data, the proposed rules focus on identifiable data maintained or collected by U.S. businesses in specific circumstances—those that target U.S. executive branch or military personnel or contractors, and those that maintain or aspire to maintain data on more than one million individuals—in 10 categories of data, or, without a requirement of those circumstances or any of the 10 categories, genetic data. As with infrastructure, non-passive investments in such businesses are proposed to be subject to CFIUS jurisdiction but not to a mandatory filing regime, the same for control transactions.
  • Change in rights. The proposed rules implement coverage of the new “change in rights” category of CFIUS jurisdiction by adding a prong to the definition of “covered transaction,” the term used for non-control but non-passive investment, and by adding a few examples of how the new rule will work.
  • Lending transactions. The proposed rules also apply the existing rules on lending transactions to non-control but non-passive debt investments. Otherwise the CFIUS approach to debt investments remains the same: for plain vanilla debt investments with control features that do not become effective until a borrower has defaulted or otherwise suffered some credit event or breached a covenant, CFIUS would not want to review such investments until those events occur; but for more complex investments with equity-like or control features that are in effect at inception, it may be possible to make a CFIUS filing at the outset so that a lender whose investment has cleared CFIUS will have the assurance that it can take further steps without the need to get CFIUS approval (subject of course to any limitations that CFIUS clearance may have imposed).
  • Excepted foreign states. The proposed rules create a special excepted category of non-control but non-passive investments that otherwise would be subject to CFIUS The proposed rules introduce a regime under which such non-passive but non-control investments by certain investors would be excepted from jurisdiction by virtue of the country where such investors are located. The determination of which foreign states will be on that excepted list will be made on the basis of factors that have not yet been published. Beginning in February 2022, such foreign states will be required to satisfy additional requirements of cooperation with the United States on foreign investment matters. In addition, any investor seeking to take advantage of such exception will need to satisfy a detailed and complex set of conditions in order to do so.
  • Investment funds. The proposed rules also apply the private equity clarification that applied to control transactions under FIRRMA to the new non-passive investment regime. The elements of the provision are essentially the same as in the pilot program regulations for control transactions.
  • New mandatory declaration category. The proposed rules implement a mandatory declaration requirement for any covered transaction, whether non-passive or control transaction, that results in the acquisition by a foreign person of 25 percent or more of a U.S. business when that foreign person is owned 49 percent or more by a foreign government. Mandatory filings triggered by this requirement would have to be made at least 30 days prior to closing, in contrast to the 45-day rule applicable to mandatory filings under the pilot Note that transactions entered into by certain investors from excepted foreign states, as described above, would not be covered transactions subject to this mandatory filing requirement. As with the pilot program, the parties have the option of submitting a joint voluntary notice rather than a short-form declaration.
  • Voluntary short-form declaration. The proposed rules also establish a process for submission of a voluntary short-form declaration as opposed to a full joint voluntary notice, aligning the process with that available for the mandatory declaration As with the pilot program, CFIUS will be required to take one of four actions in response to a voluntary declaration: request that the parties file a full notice; inform the parties that CFIUS cannot complete action on the basis of the short-form declaration and that they may file a full notice; initiate a unilateral review of the proposed transaction; or clear the transaction.

The proposed rules set forth in the separate release relating to real estate give effect to FIRRMA’s expansion of CFIUS jurisdiction to cover the acquisition of undeveloped or non-commercial real estate—so-called “greenfield” investment. The rules are complex and wholly distinct from the regime applicable to control transactions and non-passive transactions in the TID Businesses, which regime is addressed in the release described above.

  • Scope of CFIUS jurisdiction. The scope of CFIUS jurisdiction in the proposed rules is focused on the purchase or lease by, or concession to, a foreign person of private or public U.S. real estate that is connected to an air or maritime port or is in close proximity to, or in certain specified cases is within a 100-mile range of, a U.S. military installation or another facility or property of the U.S. Government that is sensitive from a national security point of view.
  • Voluntary filing regime. The proposed rules do not impose a mandatory filing requirement, but instead confer jurisdiction on CFIUS with respect to investments that fit within the scope described above, subject to certain exceptions. Voluntary filings may be made either as joint voluntary notifications or, as in the case of the other release, voluntary short-form declarations.
  • Expectations. Exceptions from jurisdiction exist for real estate within urbanized areas or urban clusters outside the one-mile proximity buffer around a covered military installation, single housing units, certain commercial and retail real estate assets, and certain Native American lands.
  • Lending transactions. As in the case of other covered transactions outside the real estate area, CFIUS generally would not have jurisdiction to review financings of real estate transactions unless a financing arrangement would constitute a purchase, lease or concession at the time of extension or unless an imminent or actual default or other condition would result in a significant possibility that the lender may purchase or lease, or be granted a concession to, the real estate being financed.

The Treasury Department’s release accompanying the proposed rules advises that, consistent with CFIUS processes generally, the proposed rules reflect extensive consultation with CFIUS member agencies, as well as other relevant agencies. There is a one-month comment period on the proposals, and comments must be received by October 17. The comment period will be the only formal opportunity to provide input on the proposed regulations. The final regulations are expected to be issued in January 2020, and, by statute, the regulations must be effective by February 13, 2020.

The complete publication, including footnotes, is available here.

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