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The following story is from the November 27 issue of International Trade Reporter
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Foreign Investment

Treasury Issues Final CFIUS Rules;
No Bright Lines, but Descriptions of Control

The Treasury Department Nov. 21 published final rules revamping the Committee of Foreign Investment in the United States (CFIUS), giving examples of what would likely be considered “control” of a U.S. business by a foreign investor and trigger a national security review under the Foreign Investment and National Security Act of 2007.

“The ten percent test is part of the [control] test, but the main part of our test is really looking at things like the shareholder agreement, the totality of the case,” Clay Lowery, assistant secretary of treasury for international affairs, said at a briefing on the final rule (73 Fed Reg. 70,701 (Nov. 21, 2008)). “You've got to look at this on case-by-case basis and not on sectoral-wise analysis.”

The final rule states that it maintains the Treasury Department's long-standing approach of defining “control” and the triggering of national security reviews in functional terms as the ability to exercise certain powers over important matters affecting an entity (25 ITR 586, 4/24/08).

The rule becomes effective Dec. 22 and Treasury will be issuing additional guidance on the final rule in the next weeks, Lowery said. Lowery also said of the forthcoming guidance, Treasury was not seeking to make certain sectors automatically file with CFIUS, an interagency group that vets foreign direct investment for national security concerns, or to change the voluntary nature of CFIUS filings. “In no way are we trying to create some sort of a list of what should or should not be considered CFIUS material,” he said.

Treasury has been working on the rule revamping CFIUS since FINSA was passed in the wake of congressional outrage over the sale of operating rights to U.S. ports to government-owned Dubai Ports World. Lowery said that Treasury was seeking to establish for the next administration a more stable system for looking at national security concerns in foreign direct investment.

Lowery said that the Obama transition team had been briefed on CFIUS and the regulatory changes, but not yet been briefed on specific transactions, given appropriate security clearances.

No Prefiling.

CFIUS practitioner Joseph A. Dennin of McKenna, Long, and Aldridge, Washington D.C., said that almost in every instance, changes to the final rule were positive. He did however, express some disappointment that Treasury had not elected to accept a suggestion that CFIUS allow prefiling specifically on the issue of control.

He said that allowing prefiling and an early determination on control by CFIUS would have greatly relieved the regulatory burden, given the amount of information required by the agency for a prefiling. Lowery, in addressing the administrative burden, did say that Treasury could elect to waive a particular requirement if a filer were to petition for that waiver.

Some of the positive changes cited by Dennin in the rule included:

• explicitly extends confidential treatment to information pre-filed with CFIUS even when no notice is ultimately filed.

• a definition of critical infrastructure that clarifies that determination of whether an asset is critical infrastrure depends on the specific assets being acquired in a given transaction,

• joint ventures are covered transactions when a foreign person could control that U.S. business.

Definition of ‘Control.'

On control, Lowery said when a foreign direct investor purchases equity, and that transaction is reviewed by CFIUS, and then in a subsequent transaction purchases more equity, then generally that transaction is not considered to be a covered transaction required to go through the CFIUS process again.

Lowery said that was opposed to a rule requiring that above or below 10 percent of a transaction should be reviewed. “If a foreign person holds ten percent or less of the voting interest in a U.S. business but does not hold that interest solely for the purpose of passive investment, then the transaction may be a covered transaction,” the rule states.

The rule also provides that where more than one foreign investor has an ownership in an entity, consideration will be given as to whether the foreign parties are related or controlled by a foreign government, or aggregation, which had been expressed as a concern in comments to the proposed rule (25 ITR 919, 6/19/08).

The final rule provides a nonexclusive list of 10 important matters where the ability to exercise “control” should prompt a CFIUS practitioner to pursue a national security review, including the sale, lease, transfer of tangible or intangible principal assets of the entity, reorganization, closing, relocation, or substantial alteration of production, operational or research facilities, major expenditures or approval of the operating budget of an entity, among other illustrative examples.

The rules also provide for six examples of minority shareholder protections that in and of themselves generally would not be deemed to confer control over an entity, including the power to prevent the sale of assets in a voluntary bankruptcy, the power to prevent an entity from entering into a major contract with majority investors, and the power to prevent an entity from guaranteeing obligations of majority investors, among other examples.

CFIUS Filings This Year.

Lowery said that there should be roughly 150-170 CFIUS cases filed this year, compared to 2006 when there were approximately 65, a threefold increase. He also said that in a larger volume of cases, the percentage of cases going to investigation as opposed to being approved in the first 30 days had increased as a result of FINSA requiring a higher standard of review for foreign government FDI.

He said, however, that not all cases going to investigation needed to go to the president, and also that the agency has changed its policy on mitigation agreements to require them only when analysis shows a risk that could be improved by a mitigation agreement.

With the internal change, Lowery said he anticipated the percentage of filings subject to mitigation agreements to drop from an average over three years between 10-15 percent in previous years to 5 percent this year.

By Amy Tsui

The final rule is available at: http://edocket.access.gpo.gov/2008/E8-27525.htm.

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