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Foreign Investments Require Mandatory Declaration to CFIUS Under Pilot Program

Tuesday, February 26, 2019
Sandler, Travis & Rosenberg Trade Report

Parties to specified types of transactions involving foreign investment in the U.S. must submit mandatory declarations to the federal government under a pilot program implementing a law enacted in 2018. Parties to foreign investment transactions not subject to the new program should consider submitting such declarations voluntarily.

The Committee on Foreign Investment in the United States, an interagency committee created in 1975, has the authority to review, block, and even unwind certain transactions involving foreign investments in U.S. companies or operations that may jeopardize U.S. national security. It is chaired by the Treasury secretary and includes 16 other members representing the departments of Defense, Homeland Security, State, and Commerce as well as other agencies.

CFIUS’ powers were greatly expanded by the 2018 Foreign Investment Risk Review Modernization Act, which among other things broadened the committee’s jurisdiction to include emerging and foundational technologies, added new national security factors for CFIUS to consider, and strengthened CFIUS’ ability to protect critical infrastructure from foreign government disruption.

(Click here to register for ST&R’s Feb. 28 webinar on the impact of these expanded authorities.)

FIRMMA also created a requirement for parties to submit a mandatory declaration (essentially a prior notification filing) to CFIUS for certain investments by non-U.S. individuals in any U.S. business that (1) owns, operates, manufactures, supplies, or services critical infrastructure, (2) produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies, or (3) maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.

In November 2018 the Treasury Department initiated a pilot program to implement this mandatory declaration requirement. Under this pilot, mandatory declarations are required for any investment in a U.S. business that will result in any of the following.

- access by the foreign individual to material nonpublic technical information related to a critical technology that is in the possession of the U.S. business

- the foreign individual receiving membership or observer rights (including rights of nomination) on the board of directors or equivalent governing body of the U.S. business

- any involvement by the foreign individual in substantive decision making of the U.S. business regarding the use, development, acquisition, or release of a critical technology

For purposes of this requirement, “critical technology” is defined as any of the following.

- an export-controlled defense article or defense service (as defined under the International Traffic in Arms Regulations) or an item subject to export control under Nuclear Energy Commission rules

- an export-controlled commercial or dual-use item controlled under the Export Administration Regulations for reasons of regional stability or surreptitious listening as well as under multilateral regimes (including for reasons of national security; nonproliferation of nuclear, chemical, or biological weapons; or missile technology)

- a select agent or toxin

- an emerging and foundational technology as defined in forthcoming Department of Commerce regulations and controlled under the EAR

In addition, this pilot program applies only to 27 industries (specified by North American Industry Classification System code) specifically designated by Treasury. Examples include aircraft manufacturing, computer manufacturing, and guided missile and space vehicle manufacturing (see below for a full list).

Parties to foreign investment transactions should have a clear understanding of whether their transactions involve a critical technology and whether the U.S. company or operations being sold fall under one of the 27 NAICS codes. If so, a mandatory declaration to CFIUS may be required.

If not, parties should weigh the advisability of submitting a voluntary declaration. If there is any possibility that CFIUS may be interested in a transaction, a voluntary declaration will protect the filing parties against CFIUS later reviewing and possibly unwinding the transaction.

Pilot program industries

NAICS code

Aircraft manufacturing

336411

Aircraft engine and engine parts manufacturing

336412

Alumina refining and primary aluminum production

331313

Ball and roller bearing manufacturing

334112

Electronic computer manufacturing

334111

Guided missile and space vehicle manufacturing

336414

Guided missile and space vehicle propulsion unit and propulsion unit parts manufacturing

336415

Military armored vehicle, tank, and tank component manufacturing

336992

Nuclear electric power generation

221113

Optical instrument and lens manufacturing

333314

Other basic inorganic chemical manufacturing

325180

Other guided missile and space vehicle parts and auxiliary equipment manufacturing

336419

Petrochemical manufacturing

325110

Powder metallurgy part manufacturing

332117

Power, distribution, and specialty transformer manufacturing

335311

Primary battery manufacturing

335912

Radio and television broadcasting and wireless communication equipment manufacturing

334220

Research and development in nanotechnology

541713

Research and development in biotechnology

541714

Secondary smelting and alloying of aluminum

331314

Search, detection, navigation, guidance, aeronautical, and nautical system and instrument manufacturing

334511

Semiconductor and related device manufacturing

334413

Semiconductor machinery manufacturing

333242

Storage battery manufacturing

335911

Telephone apparatus manufacturing

334210

Turbine and turbine generator set units manufacturing

333611

For more information on CFIUS, please contact Kristine Pirnia at (202) 730-4964 or Josh Rodman at (202) 730-4961.

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