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.