Tag: FINSA

The Ins and Outs of CFIUS Filing

newman

The Foreign Investment and National Security Act of 2007 applies to takeovers of U.S. businesses by non-U.S. persons. That law formalized the Committee on Foreign Investment in the United States to review foreign investments that could impair national security

Back in November, I was looking at how the new CFIUS regulations would affect real estate investors with significant foreign ownership. it seems clear the purchase of a building could be considered a purchase US business. The issue would be whether the tenants in the building are government tenants and how the ownership of the building could implicate national security.

William A. Newman, of Sullivan & Worcester LLP in New York, put together an article on process for making a CFIUS application filing: The Ins and Outs of CFIUS Filing. He does not paint a pretty picture. CFIUS has estimated that the average filing requires about 100 hours.

Mr. Newman also contributes to the USA Inbound Acquisitions & Investments Blog.

Previous Posts:

Implementation of Foreign Investment and National Security Act

Davis Polk & Wardwell attorneys Margaret M. Ayres and Jeanine P. McGuinness prepared a memorandum entitled FINSA Final Regulations (.pdf) discussing the final regulations issued by the U.S. Department of the Treasury to implement the Foreign Investment and National Security Act of 2007. That law amended the 1988 “Exon-Florio” statute and made significant changes to the scope of review and process for evaluating foreign acquisitions of U.S. businesses for national security risks. The regulations also codify recent improvements to the practices of the Committee on Foreign Investment in the United States.

The new regulations include the concept of a “covered transaction” and give additional guidance on key terms, including “control.”

A “covered transaction” is a transaction that could result in control of a U.S. businesss by a foreign person.

“Transaction” is broadly defined [§800.224] to include acquisitions, mergers, joint ventures and long term leases.

“U.S. Business” is also broadly defined [§800.226] to include any entity engaged in interstate commerce in the U.S. For real estate that excluded raw land and equipment. If contracts go along with the assets, then you could have a U.S. Business. Although raw land is excluded a leased building probably would be a U.S. business.

“Control” is broadly defined [§800.204] to give the CFIUS broad discretion. A list of minority shareholder protections are listed in §800.204(c) as not in themselves conferring control. This list is fairly short compared to most minority shareholder protections. There is another relatively safe harbor in §800.302(b) that a transaction with a foreign person holding 10% or less of the voting interest and holding that interest solely for passive investment will not be a covered transaction.

The final regulations were published in the Federal Register on November 21 and will become effective on December 22, 2008.

Comments on CFIUS

Over at Sheppard Mullin’s Government Contracts Blog, Lucantonio N. Salvi put together a summary of comments to the draft CFIUS regulations: Comments On Proposed CFIUS Rules Range From Cautious Praise To Outright Criticism.

[T]he U.S. Department of the Treasury published on April 21, 2008 proposed rules designed to strengthen the process by which the Committee on Foreign Investment in the United States (“CFIUS”) reviews and approves certain business transactions involving foreign investment. The proposed rules were issued under the Foreign Investment and National Security Act of 2007, Pub. L. No. 110-49 (“FINSA”), which requires a more intense CFIUS process that allows the government more discretion in investigating and altering business transactions that may impact national security. The U.S. Department of the Treasury invited comments on the proposed rules through June 9, 2008. Now that the comment period is over, we thought it might be worthwhile to see what types of comments were received. Not surprisingly, it is a mixed bag.

The final regulations are now ready for publishing in the Federal Register and will go into afect thirty days after publication.

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Control under FINSA and CFIUS

On November 14, 2008, the Department of the Treasury issued its final rule to implement the Foreign Investment and National Security Act of 2007, which provided guidelines for the Committee on Foreign Investment in the United States when reviewing investments by foreign persons in U.S. businesses for national security issues. The final regulations go into effect 30 days after publication in the Federal Register: Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. (.pdf) That means they should be in effect by the end of the year.

One issue with the law and regulations is the uncertainty of when notification is required under FINSA.

Under §800.207:

The term covered transaction means any transaction that is proposed or pending
after August 23, 1988, by or with any foreign person, which could result in control of a
U.S. business by a foreign person.

The issue then is what is meant by “control” under FINSA?

The final regulations do not offer much help:

The Final Rule maintains the long-standing approach of defining “control” in functional terms as the ability to exercise certain powers over important matters affecting an entity. Specifically, “control” is defined as the “power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity; in particular, but without limitation, to determine, direct, take, reach, or cause decisions regarding the [matters listed in §800.204(a)], or any other similarly important matters affecting an entity.” See §800.204(a). Two points should be emphasized concerning this definition. First, it eschews bright lines. Consistent with the existing regulations, control is not defined in terms of a specified percentage of shares or number of board seats. Although share holding and board seats are relevant to a control analysis, neither factor on its own is necessarily determinative. Instead, all relevant factors are considered together in light of their potential impact on a foreign person’s ability to determine,
direct, or decide important matters affecting an entity.

One useful carve-out is under §800.302(b) that transactions that are not covered transactions include:

A transaction that results in a foreign person holding ten percent or less of the outstanding voting interest in a U.S. business (regardless of the dollar value of the interest so acquired), but only if the transaction is solely for the purpose of passive investment. (See §800.223.)

See my prior blog posts:

Treasury Issues Final Regulations for Committee on Foreign Investment in the United States

On November 14, 2008, the Department of the Treasury issued its final rule to implement the Foreign Investment and National Security Act of 2007, which provided guidelines for the Committee on Foreign Investment in the United States when reviewing investments by foreign persons in U.S. businesses for national security issues.

The Foreign Investment and National Security Act of 2007 amended section 721 of the Defense Production Act of 1950 (50 USC §2170) authorizing the President to review merger, acquisitions and takeovers by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States to determine the effects of such transaction on the national security of the United States.

FINSA codifies the structure, role, process and responsibilities of the Committee on Foreign Investment in the United States. Previously, CFIUS had existed only by executive order. FINSA establishes CFIUS in statute.

On April 21, 2008, the Department of the Treasury issued proposed regulations for the CFIUS . You can also get the comments on the proposed CFIUS regulations.

The final regulations go into effect 30 days after publication in the Federal Register: Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. (.pdf) That means they should be in effect by the end of the year.

See my blog posts:

See also:

Committee on Foreign Investment in the United States

The Foreign Investment and National Security Act of 2007, Pub. L. 110-49, which amends section 721 of the Defense Production Act of 1950 (50 USC §2170) authorizes the President to review merger, acquisitions and takeovers by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States to determine the effects of such transaction on the national security of the United States.

FINSA codifies the structure, role, process and responsibilities of the Committee on Foreign Investment in the United States. Previously, CFIUS had existed only by executive order. FINSA establishes CFIUS in statute.

FINSA provides for a 30 day review period of a “covered transaction” to determine the effect of the transaction on national security.

The system is based on voluntary notices to CFIUS by parties to a transaction, although CFIUS can review a transaction regardless of whether it has been notified.

The term ‘control’ has the meaning given to such term in regulations which the Committee shall prescribe.

The term ‘covered transaction’ means any merger, acquisition, or takeover that is proposed or pending after August 23, 1988, by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.

The term ‘foreign government-controlled transaction’ means any covered transaction that could result in the control of any person engaged in interstate commerce in the United States by a foreign government or an entity controlled by or acting on behalf of a foreign government.

The Department of the Treasury issued proposed regulations for the CFIUS on April 21, 2008. You can also get the comments on the proposed CFIUS regulations.

The key part of the proposed regulations is section 800.302(c) (on page 54) stating that a “transaction that results in a foreign person holding ten percent or less of the outstanding voting interests in a U.S. business (regardless of the dollar value of the interests so acquired), but only if the transaction is solely for the purpose of investment” is not a covered transaction.

Section 800.203 helps to clarify “control.” Even though an investor has some investor protection rights associated with their investment, that does not necessarily create “control” under section 800.203(c). Having the power to limit insider deals and selling the company’s assets do not in themselves confer control of the entity.

Section 800.224 expands the term transaction to include the acquisition of an ownership interest in an entity, the formation of a joint venture and certian types of long term leases.