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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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United States | Publication | May 22, 2020
The US Department of Treasury published a proposed rule on May 21, 2020, that would, if implemented as drafted, revise the current mandatory filing requirements for transactions involving US businesses that deal in critical technologies. As described in more detail below, the proposed rule does not modify the current definition of critical technologies but would abandon the requirement that the target US business have activities in one of 27 industries, as identified by North American Industry Classification System (NAICS) codes. Instead, the mandatory filing requirement would apply where the critical technologies at issue would require particular US government authorizations in order to be exported to certain transaction parties or foreign persons in the buyer's ownership chain.
Under the current rules that were issued on January 13, 2020 (see our prior client update), CFIUS requires parties, where the foreign buyer will obtain certain control rights in the target US business, to submit a short form declaration to CFIUS regarding transactions where: (i) a foreign government or foreign government owned entity obtains, directly or indirectly, a substantial interest in a US business that has dealings in critical technologies or infrastructure, or maintains sensitive personal data (a "TID US Business"); or (ii) a foreign person acquires a controlling, or non-controlling, interest in a TID US business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies and has activities in, one of twenty-seven (27) industries identified by NAICS codes.
When the current rules were issued, however, Treasury noted it anticipated issuing a separate proposed rule replacing the industry specific criteria with a requirement based on export control licensing requirements, which it has now done.
The proposed rule removes the NAICS code industry criteria for non-government entity transactions and replaces it with an analysis of whether the critical technologies at issue would require authorization from relevant US government agencies to be exported to certain entities directly or indirectly involved in the transaction. More specifically, the proposed rule would require parties to submit a short form declaration to CFIUS at least 30 days prior to the transaction's completion date where the foreign person is: (i) obtaining a controlling, or non-controlling interest, in a US business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies; and (ii) a US regulatory authorization (defined to include ITAR, EAR, DOE, or NRC export authorizations) would be required for the export, re-export, or transfer of such critical technology to certain foreign persons that are a party to the transaction or in the foreign person's ownership chain. Specific rules are set forth regarding which parties in the transaction or ownership chain would need to be considered.
Whether a US regulatory authorization would be required is predicated on the foreign person's principal place of business (for entities) and the foreign person's nationality or nationalities (for individuals). Moreover, the analysis would be conducted without giving effect to any license exemption under the ITAR or under the EAR, other than license exceptions TSU, ENC, and STA in the EAR.
No changes were proposed to the mandatory filing requirements for transactions involving foreign governments or foreign government entities, other than a relatively minor clarification regarding the definition of "substantial interest" in 31 C.F.R. 800.244(b).
Interested parties may submit comments on the proposed rule through June 22, 2020. Comments may be submitted online at www.regulations.gov or by mail to US Department of the Treasury, Attention: Meena R. Sharma, Deputy Director of Investment Security Policy and International Relations, 1500 Pennsylvania Avenue NW, Washington, DC 20220.
We will continue to monitor these, and related, developments closely and publish additional updates, as appropriate.
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