The Committee on Foreign Investment in the United States (“CFIUS”), an interagency government body charged with reviewing transactions that may lead to foreign “control” over areas such as U.S. defense production and technological leadership, will operate under a new set of regulations effective December 21, 2008. Although the new regulations leave the voluntary process for submission of these reviews largely intact, certain changes will affect the investments that draw scrutiny by CFIUS and thus the strategies that investors should consider.
The touchstone concept of “control” has been developed in the new regulations to clarify that certain types of foreign influence over a business (e.g., through a board seat; by voting pro rata shares) will not necessarily result in a finding of control. As before, the test for control is a functional, fact-based one, asking whether a foreign person will acquire the actual ability to affect important matters of a U.S. business. In evaluating foreign control, CFIUS will also consider whether there are formal or informal agreements among foreign investors to act in concert.
The new regulations identify more expansively the matters considered “important” for purposes of evaluating whether a transaction will result in control of a U.S. business. And they make more explicit that certain transactions will be regarded as “covered transactions,” e.g.,
- corporate reorganizations resulting in a new foreign person having control, even if the ultimate parent of the U.S. business does not change
- certain asset acquisitions where the assets constitute a “U.S. business”
- certain long-term leases and joint ventures
- certain lending transactions that carry economic or governance rights
- certain convertible securities
But the new regulations provide more expressly than before that certain transactions are not subject to CFIUS review, e.g.,
- certain purely passive investments below 10%
- transactions involving only certain negative-control rights identified in the regulations
- certain asset acquisitions that do not constitute a U.S. business
- incremental acquisitions made following prior CFIUS clearance
- most ordinary lending transactions
- “greenfield” or startup investments
If a transaction will result in foreign control over a U.S. business, the parties still must evaluate potential concerns for national security – a concept that remains flexible and therefore elusive under the new regulations.
Prompted by congressional furor over the 2005 bid by Dubai Ports World to acquire port facilities in the United States, the new regulations call for an investigation of any transaction that is “foreign-government controlled” (e.g., sovereign wealth fund investments) or that involves “critical infrastructure,” an elastic term that will expand the scope of transactions subject to review. In either case, CFIUS is required to conduct a full 45-day investigation, absent high-level findings that there are no national security concerns.
Mitigation agreements crafted to address national security concerns will assume a larger role under the new CFIUS regime, while breaching such agreements can result in substantial financial penalties. This calls for a proactive approach to configuring transactions so that CFIUS-initiated mitigation agreements do not become necessary.
Advance planning to determine the advisability and ramifications of a making a voluntary notification to CFIUS regarding a foreign person’s investment in a U.S. business is increasingly important.