New Articles

Treasury Proposes Filing Fees for CFIUS Voluntary Notices

CFIUS

Treasury Proposes Filing Fees for CFIUS Voluntary Notices

On Monday, March 9, 2020, the U.S. Department of the Treasury (“Treasury Department”) published a proposed rule in the Federal Register establishing a tiered filing fee system for parties filing voluntary notices with the Committee on Foreign Investment in the United States (“CFIUS”). The proposed rule accompanies other recently implemented regulations issued by the Treasury Department that implement the Foreign Investment Review Modernization Act of 2018 (“FIRRMA”), effective since February 13, 2020.  We have previously summarized the FIRRMA implementing regulations here and here.

FIRRMA expanded the scope of transactions subject to CFIUS review and modernized the review process. FIRRMA also authorized CFIUS to collect filing fees up to the lesser of 1 percent of the value of a transaction or $300,000. The proposed rule establishes a fee structure intended, according to the Treasury Department, to “not discourage filings and…allow parties to continue the practice of determining whether to file a voluntary written notice based on an evaluation of the facts and circumstances of the transaction.” The fees were set to only be a small proportion of the value of any transaction, in order to avoid discouraging voluntary filings. Under the proposed fee structure, the required fees are in proportion to the value of the transaction, as follows:

The same fee structure applies to both foreign investments under Part 800 and real estate transactions under Part 802. Fee requirements are only in place for voluntary CFIUS notices, however, and there are no filing fees for declarations or for unilateral reviews of transactions self-initiated by CFIUS. Accordingly, parties for whom the filing fee would be particularly burdensome, or parties engaged in low-risk transactions, can take advantage of the mandatory or voluntary declarations authorized by CFIUS under Parts 800 and 802.

The proposed rule requires parties to pay the fee at the time a notice is filed, so parties must calculate the total value of a transaction prior to filing. To calculate the value of a transaction, parties should include “the total value of all consideration that has been or will be paid in the context of the transaction by or on behalf of the foreign person who is a party to the transaction, including cash, assets, shares or other ownership interests, debt forgiveness, services, or other in-kind consideration.” Because transactions often include consideration paid in securities or non-cash assets, the rule provides the following guidance:

-Value on national securities exchange: value is calculated based on the closing price on the national securities exchange on which the securities are primarily listed on the trading day immediately prior to the date the parties file a notice with CFIUS. If the security was not traded the day prior to the date of filing, then the last published closing price will apply.

-Non-cash assets, interests, or services or other in-kind consideration:  value is calculated based on the fair market value as of the date the parties file the notice.

-Lending transaction: value is calculated based on the cash value of the loan or other similar financing arrangement.

-Conversion of contingent equity interest previously acquired by a foreign person: value is calculated including the consideration that was paid by or on behalf of the foreign person to initially acquire the contingent equity interest in addition to any other consideration.

-Real estate leases: value is calculated by the sum of fixed payments to be paid by the foreign person over the term of the lease; variable payments that depend on an index or rate over the term of the lease, measured by using the index or rate as of the date of the filing of the notice; and any non-cash or in-kind consideration to be provided by the lessee to the lessor over the term of the lease, as reasonably determined as of the date of the notice.

In light of the calculation requirements, the proposed rule also adjusts the content requirements for joint voluntary notices, requiring parties to provide the value of the transaction and the methodology used to calculate the value, along with the applicable fee.

Because parties are required to pay applicable fees at the time the notice is filed, CFIUS is authorized to delay its review until and unless the fee has been paid. In general, CFIUS will not require parties to submit double payments if it requires parties to withdraw and re-file a notice, absent a material change to the transaction or a material inaccuracy or omission in the initial filing. The proposed rule also allows for fee refunds in certain limited circumstances.

CFIUS will refund the filing fee if it later determines that the notified transaction is not a covered transaction, and it may issue partial refunds if parties can demonstrate that they paid a higher filing fee than required by the tiered fee structure. Notably, CFIUS has not indicated that it will refund the filing fees if a transaction is blocked.  Although CFIUS is also authorized to waive fees, it may only do so under “extraordinary circumstances relating to national security,” and the proposed rule states that it anticipates infrequent partial or total waivers.

The proposed fee schedule has not yet gone into effect, and it will only apply after the Treasury Department publishes its final rule.  Interested parties have until April 8, 2020, to submit comments on the proposed rule. Specifically, the Treasury Department has solicited comments from the public “on the impact of the proposed tiered fixed-fee structure and whether additional tiers or additional features should be considered.”

______________________________________________________________

By Ryan Fayhee, Roy (Ruoweng) Liu, Alan G. Kashdan, Tyler Grove and Sydney Stringer at Hughes Hubbard & Reed LLP

foreign investment

New Foreign Investment Restriction Regulations Cement CFIUS Reform

One of the emerging focal points of the U.S.-China trade war involves the implementation of updated foreign investment restrictions in key U.S. industries. 

On September 17, 2019, the Department of the Treasury issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), legislation that sought to reform and expand the scope of foreign investment reviews conducted by the Committee on Foreign Investment in the United States (CFIUS). CFIUS, an inter-agency committee chaired by the Treasury Department with the authority to review, modify and potentially reject certain types of foreign investment that could adversely affect U.S. national security, has undergone a significant overhaul during the past year in the wake of FIRRMA becoming law in August 2018. It is now more vital than ever that companies understand how their business can be affected by the updated CFIUS regulations when they are seeking or negotiating a merger, acquisition, real estate investment or even a non-controlling investment from a foreign investor.

Typically, CFIUS reviews are voluntary and are conducted for merger or acquisition transactions where a non-U.S. company or a foreign government-controlled entity obtain a controlling interest in a U.S. company. If CFIUS determines that a covered transaction presents a national security risk, it has the authority to impose certain mitigating conditions before allowing the deal to proceed and can refer the transaction to the President for an ultimate decision. 

However, FIRRMA updated and expanded the scope of CFIUS jurisdiction to authorize reviews of additional types of non-controlling foreign investments based on the type of U.S. company involved. The implementing regulations proposed in September 2019 are set to take effect February 13, 2020, and while the CFIUS reform regulations are motivated by concerns directly related to China, the impact of FIRRMA will be felt globally and the new rules will not be tied to or affected by impending trade negotiations. U.S. businesses, particularly those involved in critical technologies, real estate, infrastructure and data collection or maintenance, must take heed of how the updated rules will affect their global business decisions moving forward.

New Regulations for TID Companies Effective February 2020

Effective February 13, 2020, CFIUS will be authorized to review “covered control transactions,” (all foreign acquisitions resulting in direct control in a U.S. business, which CFIUS already had jurisdiction over), as well as non-controlling “covered investments” by a foreign person in a U.S. critical technology, critical infrastructure or sensitive personal data company. The new rules refer to these as “TID U.S. Businesses” (Technology, Infrastructure and Data), or to be more specific, a company that engages in one of the following categories of activity: 

-produces, designs, tests, manufactures, fabricates or develops one or more critical technologies;

-owns, operates, manufactures, supplies or services critical infrastructure; or

-maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.

“Critical technologies” include defense articles or defense services under the International Traffic in Arms Regulations, certain nuclear-related products regulated by the Nuclear Regulatory Commission Controls and certain technologies on the Commerce Control List under the Export Administration Regulations. In addition, “critical technologies” will include certain “emerging technologies” that are yet to be defined, and the Commerce Department’s Bureau of Industry and Security is currently reviewing at least 17 technology areas that are anticipated to result in new controls (including bio-tech, artificial intelligence, microprocessors, positional navigation and timing technology, quantum computing and additive manufacturing (3D printing)). 

“Critical infrastructure” includes key industry subsectors such as telecommunications, utilities, energy and transportation. “Sensitive personal data” is defined to include ten categories of data maintained or collected by U.S. businesses that (i) target products or services to sensitive populations (including U.S. military members and federal national security employees); (ii) collect or maintain such data on at least one million individuals; or (iii) have a business objective to collect such data on greater than 1 million individuals and such data is an integrated part of the U.S. business’s primary product or service. The categories of data include types of financial, geolocation and health data. 

Non-Controlling Covered Investments

Under the new regulations, CFIUS will be authorized to review non-controlling covered investment in TID U.S. Businesses. A “covered investment” includes scenarios where a foreign investor obtains:

-access to material non-public technical information;

-membership or observer rights on the board of directors or an equivalent governing body of the business or the right to nominate an individual to a position on that body; or

-any involvement, other than through voting of shares, in substantive decision making regarding sensitive personal data of U.S. citizens, critical technologies, or critical infrastructure.

Filing a CFIUS declaration for a non-controlling covered investment will remain a largely voluntary process, and parties will be able to file a notice or submit a short-form declaration notifying CFIUS of a covered investment in order to receive a potential “safe harbor” letter (after which CFIUS in most scenarios will not initiate a review of a transaction). 

However, if a foreign government holds a “substantial interest” in the foreign investor that obtains a “substantial interest” in a TID U.S. Business, a CFIUS filing will be mandatory. The updated regulations provide that a foreign government is considered to have a substantial interest in the foreign investor if it holds a 49% direct or indirect interest, whereas a foreign person will obtain a substantial interest in a TID U.S. Business if it obtains at least a 25% direct or indirect interest. CFIUS is also authorized to mandate declarations for transactions involving certain types of critical technology companies. 

The proposed rules also include a “white list” provision providing CFIUS the authority to designate certain “excepted investors” and “excepted foreign states” that may be eligible for an exclusion in connection with non-controlling covered investments. 

Global Impact: How Does This Affect My Business? 

The most important practical effect of the updated regulations is the breadth of U.S. companies standing to be impacted or affected by new foreign investment restrictions. U.S. businesses and industries that have previously never had to consider filing a CFIUS declaration, including healthcare companies, tech start-ups, related infrastructure industries, venture capital funds, emerging technology companies and manufacturers, and any company with access to sensitive consumer data, will now have to contemplate the implications of a CFIUS review when considering even passive foreign investment. Robust due diligence on potential investors will be more important than ever to ensure compliance with both mandatory and voluntary CFIUS declaration filings. Cross-border deals will be a costlier and more time-consuming process that will require acute attention to detail when drafting the contractual rights afforded to foreign investors. 

If you have any questions about the impact of the updated CFIUS regulations or how they may affect your company, please contact a member of Baker Donelson’s Global Business Team for additional information.

___________________________________________________________________

Joe D. Whitley is a shareholder at Baker Donelson, chair of the Firm’s Government Enforcement and Investigations Group and former General Counsel at the Department of Homeland Security. He can be reached at jwhitley@bakerdonelson.com

Alan Enslen is a shareholder with Baker Donelson and leads the International Trade and National Security Practice and is a member of the Global Business Team. He can be reached at aenslen@bakerdonelson.com

Julius Bodie is an associate with Baker Donelson who assists U.S. and foreign companies across multiple industries with international trade regulatory issues. He can be reached at jbodie@bakerdonelson.com