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LONG-AWAITED FINAL RULES FROM THE U.S.
Treasury Department governing national
security reviews of foreign investments in
U.S. companies were issued on Jan. 13,
with importance for general counsel in
specific industries—including venture
capital—who are involved in cross-border
dealmaking.
“General counsel and in-house counsel at companies involved in technology,
infrastructure and data, which capture a
broad spectrum of the economy should
be aware of these changes, particularly
the expanded jurisdiction of CFIUS and
mandatory reporting requirements,” said
Christian Davis, an international trade
partner at Akin, Gump, Strauss, Hauer
& Feld in Washington, D.C. He was
referring to the Committee on Foreign Investment in the U.S., the
interagency panel chaired by the
Treasury secretary.
But the Treasury Department
generally excluded from the new
regulations most deals from Australia, Canada and the United Kingdom,
unless there is a concern about foreign
control of the acquiring companies.
“The only countries that are initially
eligible for exemptions are the U.K., Canada and Australia. As a result, most investors will be subject to the new expanded
jurisdiction of these rules,” Davis said.
Mario Mancuso, partner at Kirkland &
Ellis and leader of its international trade
and national security practice, said in an
email, “the selection of the U.K., Aus-
tralia, and Canada as the first ‘excepted
foreign states’ is not surprising in light
of their shared security perspectives and
interests. With that said, it’s important
to note that not every investor from one
of these countries will be exempt from
CFIUS’ jurisdiction, and the exemption
applies only to certain non-controlling
investments and real estate transactions.
In other words, the CFIUS calculus for
traditional M&A will not materially
change as a result of this action.”
Anne Salladin, a partner at Hogan
Lovells in its regulatory practice group,
said, “It’s a new concept and we will have
to see how it plays out going forward.”
She added, “I would call it a bit of a test
run and it is a totally new concept for this
committee.”
Aside from the “whitelisting” of those
three countries, the final rules for national
security reviews of foreign investment
transactions hewed closely to the draft
rules proposed last fall. The final regula-
tions take effect Feb. 13 and were enacted
under the Foreign Investment Risk
Review Modernization Act of 2018.
The regulations require mandatory
filing for CFIUS
review of
two catego-
ries of investments:
First, certain foreign government-backed
investments in U.S. businesses, and, sec-
ond, certain foreign investments in criti-
cal technology companies. Most filings
remain voluntary, however.
“Anyone with pie-in-the-sky hopes of
dramatic changes from September [when
the draft rules were issued] were probably
disappointed,” said Ken Nunnenkamp,
international trade and national security
partner at Morgan, Lewis & Bockius in
Washington, D.C.
“This is the new paradigm and there’s
still more to come on penalties, defini-
tions and fees,” he said. “The venture
capital community was introduced to
this new world in September and it is not
going away.”
The final rules significantly extend
the power of the interagency com-
mittee to review for national security
threats private equity and minority-
stake, non-controlling investment deals
involving foreign entities and persons. As
always, the panel can require modification
of deals, or not approve them.
Mancuso said U.S. private equity
investors would likely benefit from the
new proposed definition of “principal
place of business,” which, he said “
provides important clarity on when investments by U.S.-controlled funds through
non-U.S. fund vehicles may be subject to
CFIUS’ legal jurisdiction.”
The final rules also expand reviews
of real estate transactions located near
military installations, airports and maritime ports. The real estate transactions
are not subject to a mandatory declaration requirement but urban areas aren’t
completely exempt.
Giovanna Cinelli, leader of the
international trade and national security practice at Morgan Lewis, said the
Treasury Department resisted calls
from some trade groups for the new
regulations to narrowly define “national
security.” Instead, she said, the depart-
ment “confirmed its longstanding approach
that there is no set definition of national
security and it wouldn’t be appropriate to
come up with a standing definition.”
The final rules increase scrutiny of
investments—including minority invest-
ments—by foreign entities and persons
of the U.S. in critical technology, infra-
structure and data businesses (TID) in the
United States, including those handling
specific types of sensitive personal data on
more than 1 million U.S. residents, which
could include big insurers and financial
services companies among many others.
“While CFIUS did build in some new
exemptions to these filing requirements,
parties will need to ensure that they are
complying with these rules in the context
of transactions going forward,” Davis said.
FINAL FOREIGN INVESTMENT RULES ENACTED
