Key Takeaways From Treasury Dept.'s Final Rules on Foreign Investment
The Treasury Department generally excluded from the new regulations most deals from three countries, unless there is a concern about foreign control of the acquiring companies.
January 14, 2020 at 06:16 PM
7 minute read
The original version of this story was published on Corporate Counsel
Long-awaited final rules from the U.S. Treasury Department governing national security reviews of foreign investments in U.S. companies were issued Monday, with importance for general counsel in specific industries—including venture capital—who are involved in cross-border dealmaking.
"General counsel and in-house counsel at companies involved in technology, infrastructure and data, which capture a broad spectrum of the economy, should be aware of these changes, particularly the expanded jurisdiction of CFIUS and mandatory reporting requirements," said Christian Davis, an international trade partner at Akin, Gump, Strauss, Hauer & Feld in Washington, D.C. He was referring to the Committee on Foreign Investment in the U.S., the interagency panel chaired by the Treasury secretary.
But the Treasury Department generally excluded from the new regulations most deals from Australia, Canada and the United Kingdom, unless there is a concern about foreign control of the acquiring companies.
"The only countries that are initially eligible for exemptions are the U.K., Canada and Australia. As a result, most investors will be subject to the new expanded jurisdiction of these rules," Davis said.
Mario Mancuso, partner at Kirkland & Ellis and leader of its international trade and national security practice, said in an email, "the selection of the U.K., Australia, and Canada as the first 'excepted foreign states' is not surprising in light of their shared security perspectives and interests. With that said, it's important to note that not every investor from one of these countries will be exempt from CFIUS' jurisdiction, and the exemption applies only to certain non-controlling investments and real estate transactions. In other words, the CFIUS calculus for traditional M&A will not materially change as a result of this action."
Anne Salladin, a partner at Hogan Lovells in its regulatory practice group, said, "It's a new concept and we will have to see how it plays out going forward." She added, "I would call it a bit of a test run and it is a totally new concept for this committee."
Aside from the "whitelisting" of those three countries, the final rules for national security reviews of foreign investment transactions hewed closely to the draft rules proposed last fall. The final regulations take effect Feb. 13 and were enacted under the Foreign Investment Risk Review Modernization Act of 2018.
The regulations require mandatory filing for CFIUS review of two categories of investments: First, certain foreign government-backed investments in U.S. businesses, and, second, certain foreign investments in critical technology companies. Most filings remain voluntary, however.
"Anyone with pie-in-the-sky hopes of dramatic changes from September [when the draft rules were issued] were probably disappointed," said Ken Nunnenkamp, international trade and national security partner at Morgan, Lewis & Bockius in Washington, D.C.
"This is the new paradigm and there's still more to come on penalties, definitions and fees," he said. "The venture capital community was introduced to this new world in September and it is not going away."
The final rules significantly extend the power of the interagency committee to review private equity and minority-stake, non-controlling investment deals involving foreign entities and persons for national security threats. As always, the panel can require modification of deals, or not approve them.
Mancuso said U.S. private equity investors would likely benefit from the new proposed definition of "principal place of business," which he said "provides important clarity on when investments by U.S.-controlled funds through non-U.S. fund vehicles may be subject to CFIUS' legal jurisdiction."
The final rules also expand reviews of real estate transactions located near military installations, airports and maritime ports. The real estate transactions are not subject to a mandatory declaration requirement but urban areas aren't completely exempt.
Giovanna Cinelli, leader of the international trade and national security practice at Morgan Lewis, said the Treasury Department resisted calls from some trade groups for the new regulations to narrowly define "national security." Instead, she said, the department "confirmed its longstanding approach that there is no set definition of national security and it wouldn't be appropriate to come up with a standing definition."
The final rules increase scrutiny of investments—including minority investments—by foreign entities and persons of the U.S. in critical technology, infrastructure and data businesses (TID) in the United States, including those handling specific types of sensitive personal data on more than 1 million U.S. residents, which could include big insurers and financial services companies among many others.
"While CFIUS did build in some new exemptions to these filing requirements, parties will need to ensure that they are complying with these rules in the context of transactions going forward," Davis said.
Nunnenkamp said, "As a practical matter all transactions where foreign money is coming in must do this analysis up-front," especially with respect to TID transactions.
The Treasury Department said it would publish separate proposed regulations regarding filing fees and penalties at a later date.
Direct investment in U.S. companies from China, in particular, has declined dramatically since 2016, plunging from more than $46.5 billion that year to about $3.1 billion in 2019, not solely because of CFIUS rules and U.S.-China trade battles, but also because of internal factors in China, according to the Rhodium Group, a research organization. Venture capital from China into U.S. companies also declined last year to the smallest level since 2015, according to data from Refinitiv.
Signs of a possible thaw in U.S.-China trade tensions recently have appeared, however: The Treasury Department also announced Monday its intention to lift its designation of China as a currency manipulator. And the two countries are expected to sign a "phase one" compromise trade deal Wednesday.
In a statement, Treasury Secretary Steven Mnuchin said of the CFIUS rules: "These regulations strengthen our national security and modernize the investment review process and also maintain our nation's open investment policy by encouraging investment in American businesses and workers, and by providing clarity and certainty regarding the types of transactions that are covered."
Read More:
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View All'Effective Remedy'?: DOJ Unveils Corrective Action Plan in Google Search Monopoly Case
3 minute readMassachusetts Federal Judge F. Dennis Saylor to Take Senior Status
What Judicial Nominations Could Look Like Under a President Harris or Trump
Law Firms Mentioned
Trending Stories
Who Got The Work
Clark Hill members Vincent Roskovensky and Kevin B. Watson have entered appearances for Architectural Steel and Associated Products in a pending environmental lawsuit. The complaint, filed Aug. 27 in Pennsylvania Eastern District Court by Brodsky & Smith on behalf of Hung Trinh, accuses the defendant of discharging polluted stormwater from its steel facility without a permit in violation of the Clean Water Act. The case, assigned to U.S. District Judge Gerald J. Pappert, is 2:24-cv-04490, Trinh v. Architectural Steel And Associated Products, Inc.
Who Got The Work
Michael R. Yellin of Cole Schotz has entered an appearance for S2 d/b/a the Shoe Surgeon, Dominic Chambrone a/k/a Dominic Ciambrone and other defendants in a pending trademark infringement lawsuit. The case, filed July 15 in New York Southern District Court by DLA Piper on behalf of Nike, seeks to enjoin Ciambrone and the other defendants in their attempts to build an 'entire multifaceted' retail empire through their unauthorized use of Nike’s trademark rights. The case, assigned to U.S. District Judge Naomi Reice Buchwald, is 1:24-cv-05307, Nike Inc. v. S2, Inc. et al.
Who Got The Work
Sullivan & Cromwell partner Adam S. Paris has entered an appearance for Orthofix Medical in a pending securities class action arising from a proposed acquisition of SeaSpine by Orthofix. The suit, filed Sept. 6 in California Southern District Court, by Girard Sharp and the Hall Firm, contends that the offering materials and related oral communications contained untrue statements of material fact. According to the complaint, the defendants made a series of misrepresentations about Orthofix’s disclosure controls and internal controls over financial reporting and ethical compliance. The case, assigned to U.S. District Judge Linda Lopez, is 3:24-cv-01593, O'Hara v. Orthofix Medical Inc. et al.
Who Got The Work
Attorneys from Cadwalader, Wickersham & Taft and Pryor Cashman have entered appearances for Diageo Americas Supply d/b/a Ciroc Distilling Co. and Sony Songs, a division of Sony Music Publishing, respectively, in a pending lawsuit. The case was filed Sept. 10 in New York Southern District Court by the Bloom Firm and IP Legal Studio on behalf of Dawn Angelique Richard. The plaintiff, who performed as a member of producer Sean 'Diddy' Combs girl group Danity Kane and later his band, Diddy - Dirty Money, claims that she was financially exploited by Combs and subjected to inhumane working conditions. Among other violations, Richard claims that Combs required group members to remain at his residences and studios, deprived them of adequate food and sleep and forced them to rehearse for 36 to 48 hours without breaks. The case, assigned to U.S. District Judge Katherine Polk Failla, is 1:24-cv-06848, Richard v. Combs et al.
Who Got The Work
Mathilda McGee-Tubb and Kevin M. McGinty of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, as well as Jesse W. Belcher-Timme of Doherty, Wallace, Pillsbury & Murphy, have stepped in to defend Peter Pan Bus Lines in a pending consumer class action. The suit, filed Sept. 4 in Massachusetts District Court by Hackett Feinberg PC and KalielGold PLLC, accuses the defendant of charging undisclosed 'junk fees' on top of ticket prices during checkout. The case, assigned to U.S. District Judge Mark G. Mastroianni, is 3:24-cv-12277, Mulani et al v. Peter Pan Bus Lines, Inc.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250