Originally published May 8, 2008
Keywords: FINSA, Foreign Investment and National Security Act, Treasury Department, Committee on Foreign Investment in the United States, CFIUS, US national security, sovereign wealth funds.
On April 23, 2008, the US Department of the Treasury published its long-awaited proposed rules implementing the 2007 amendments to the US laws restricting foreign investments that may threaten US national security. The proposed rules signal that foreign investments will be subject to a more expansive and intensive examination in the months and years ahead.
Although not yet in final form, and therefore not officially in effect, in many respects the proposed rules are already in force. They reflect practices that have been adopted in recent years by the inter-agency Committee on Foreign Investment in the United States (CFIUS), the regulatory body that administers those US restrictions on foreign investment that are grounded in national security concerns. For the most part, the proposed rules simply codify the mode of operation that CFIUS has developed before and since the enactment of the Foreign Investment and National Security Act of 2007 (FINSA). (For more information on FINSA, see the July 2007 Mayer Brown Client Alert "New US law increases stringency of reviews of foreign acquisitions in the United States.")
The proposed rules are subject to public comments, which may be filed until June 9, 2008. Then the rules will be issued in final form, perhaps with revisions, at some future date. In the meantime, the proposed rules represent a guidebook to the way in which CFIUS administers its broad authority to screen foreign investments in the United States.
Expansion of the Scope of CFIUS's Examination
Specifically, the proposed rules broaden the scope of CFIUS scrutiny of foreign investments. They include the following significant provisions:
- Control: The concept of
"control" is the cornerstone of the proposed rules,
as CFIUS only screens those investments that would result in
control by a foreign person over a US business, which control
would threaten to impair national security.
- Means of Control: Control can be
exercised not only through shareholdings and board seats but
also through other direct or indirect arrangements, including
proxies, contracts, informal agreements, and other means to
determine or direct major business decisions of the US
business. A joint venture may be subject to CFIUS scrutiny if
one party contributes a US business and a foreign person
gains control over that business through the joint
- 10-Percent Interest: Significantly, the
10-percent-interest threshold, which generally had been
considered the dividing line between control and no control,
is expressly stated to be irrelevant unless "the
transaction is solely for the purpose of investment."
Thus, a foreign investor taking less than a 10-percent
interest in the voting shares of a US business with national
security implications would still need to establish a solely
passive investment purpose.
- Negative Power: While the lower bounds
of "control" have been erased, the proposed rules
do note that certain types of negative power, generally used
to protect minority shareholders' rights, will not be
automatically deemed to constitute control. Types of negative
power discussed in the proposed rules include: preventing the
sale of all of the business's assets, preventing the
business from entering into contracts with the majority
owners, and preventing dilution of the minority
- Lending Transactions: The proposed rules
state that the extension of a loan or similar financing by a
foreign person to a US person, accompanied by the creation of
a secured interest in securities or other assets of the US
business by the foreign person, does not constitute control.
Control may occur, however, if the foreign lender is the
largest secured creditor in a bankruptcy of the US business.
CFIUS may scrutinize transactions involving loans or
financing by a foreign person when a significant possibility
exists that the foreign person may obtain control of a US
business due to imminent or actual default, or other similar
- National Security: "National
security" remains undefined under the proposed rules.
Under FINSA, however, the national security is clearly
implicated by foreign acquisitions of "critical
technologies" or "critical infrastructure."
The proposed rules define "critical technologies"
as items on the US Munitions List under the International
Traffic in Arms Regulations, certain controlled items under
the Export Administration Regulations, nuclear items
specified in the Assistance to Foreign Energy Activities and
Export and Import of Nuclear Equipment and Materials
regulations, and certain agents and toxins in the Export and
Import of Select Agents and Toxins regulations. The proposed
rules adopt the definition of "critical
infrastructure" provided in FINSA and do not offer
Modifications of the CFIUS Process
The previously discussed adjustments in the scope of CFIUS's examination of foreign investments are accompanied by a sweeping restatement of the process by which CFIUS will conduct its examinations. With respect to process, the proposed rules include the following significant provisions:
Pre-Notification Consultation:" While notifying CFIUS of a proposed transaction in most instances will continue to be a voluntary decision by the parties to the transaction, the proposed rules encourage the parties to confer with CFIUS in advance of a formal notification so that CFIUS can understand the transaction and provide guidance as to the informationit will need to conduct the examination. Parties will now need to plan for this pre-notification consultation phase as they allocate time for satisfying regulatory preconditions to a transaction.
- Informational Requirements: The proposed
rules update and clarify the informational requirements for
CFIUS notification. Certain information that CFIUS had
typically requested in the course of an examination will now
be required in the initial notification, placing a greater
information-gathering burden on the parties at the outset.
The proposed rules specify that the notifications must
contain more detailed information on the parents, affiliates,
and subsidiaries of the acquiring party, on the personal
identification of the directors and senior management of the
acquiring party, and on critical technologies owned by the US
business. Furthermore, the notifications must include a
statement from the parties about their views on whether the
acquiring party is controlled by a foreign government.
- Deadlines for Responding to CFIUS
Inquiries: The pace of the CFIUS examination seems likely to
quicken, with the proposed rule requiring that, within two
business days, responses to any CFIUS questions be provided
or an extension of time to respond be requested in writing.
Given the differences in time zones that usually affect
parties' response times in CFIUS examinations and the
breadth of many CFIUS questions, this two-business-day rule
is likely to pose challenges for parties.
- Mitigation Agreements: Much emphasis is
placed on mitigation agreements, which will be an
increasingly common condition of CFIUS clearance. These
agreements between the US Government and the parties to the
transaction are intended to ameliorate concerns about the
national security risks of a proposed transaction. The
proposed rules specify that civil penalties may be imposed
for violations of mitigation agreements. Furthermore, the
mitigation agreements may include provisions for liquidated
damages. The threat of penalties and liquidated damages is
likely to make parties all the more careful in undertaking
obligations pursuant to mitigation agreements.
- Withdrawals: For those parties that
ultimately decide that they cannot satisfy CFIUS and still
preserve the commercial viability of the proposed
transaction, withdrawal of the notification remains an
option. The proposed rules make clear, however, that CFIUS
will monitor the circumstances surrounding any withdrawn
notification to ensure that national security is not
compromised by any actions of the parties following the
withdrawal. These provisions will tend to make withdrawal
from the CFIUS process more burdensome and inconvenient for
- Presidential Involvement: Finally, the
proposed rules confirm that a CFIUS decision to extend an
examination beyond the 30-day "review" period into
the additional 45-day "investigation" period does
not necessitate a referral to the President. Originally, any
time a transaction could not be cleared within 30 days and
was moved into the further 45-day investigation, CFIUS was
required to make a recommendation to the President at the end
of the investigation. CFIUS traditionally sought to shield
the President from having to make such highly visible and
potentially controversial decisions about particular foreign
investments by minimizing the number of transactions that
reached the 45-day investigation phase. The proposed rules
follow the recent practice of limiting the circumstances
under which CFIUS investigations need to be referred for
presidential determination. Specifically, the President will
be involved only if CFIUS recommends that a transaction be
blocked or cannot reach a consensus on whether to make such a
recommendation, or otherwise requests the President to make
the determination. Because 45-day investigations no longer
lead automatically to presidential involvement, the political
cost of such investigations is lower and CFIUS is less likely
to feel pressed to complete its examination within the
original 30 days.
Exceptions and Omissions: The Privatization of US Infrastructure and Investments by Sovereign Wealth Funds
In addition to addressing the scope and process of CFIUS examinations, the proposed rules address, explicitly or implicitly, two phenomena of growing significance to foreign investors in the United States: (i) the privatization of US infrastructure, and (ii) the activity of sovereign wealth funds (SWFs).
- Privatization of US Infrastructure:
Foreign investors have played a key role in a number of
transactions through which turnpikes, bridges, and other
infrastructure have been placed in private hands, typically
through long-term leases. The proposed rules expressly state
that long-term leases may be considered transactions that
transfer control, but only where the lessee "makes
substantially all business decisions concerning the operation
of a leased entity, as if it were the owner." An example
provided in the proposed rules notes that, where a foreign
person "signs a concession agreement to operate a toll
road business" in the United States "for 99
years," but where the US owner retains authority to
perform "safety and security functions" and to
terminate the lease if the foreign person fails to fulfill
its operational obligations under the lease, then the lease
would not constitute a transaction transferring control. This
provision provides to parties to infrastructure privatization
transactions a road map on how to draft long-term leases that
will fall outside the scope of CFIUS examination.
- Sovereign Wealth Funds: As to SWFs, the
proposed rules make no mention of them. Some observers,
including some members of Congress, had urged that the
proposed rules address SWFs directly, given their growing
importance in international investment flows and their
potential for extending foreign government control into US
energy, infrastructure, telecommunications, and other
sensitive sectors. In announcing the proposed rules, however,
the Treasury Department commented that CFIUS has examined SWF
transactions for many years and that CFIUS intends to treat
SWFs as it does any other investor controlled by a foreign
government. For parties to SWF transactions, therefore, the
proposed rules promise no better treatment, and no worse,
than that accorded to other investments by foreign government
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