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Treasury Implements Pilot Program for New CFIUS Review Process Under FIRRMA

Client Updates

Although limited to certain U.S. businesses in the “critical technology” sector, the pilot program represents the first major step by the Committee on Foreign Investment in the United States (“CFIUS”) to implement its expanded authorities under the Foreign Investment Risk Review Modernization Act of 2018, including CFIUS’s authority to review certain non-controlling investments in U.S. businesses involved in critical technologies related to specific sectors.

The U.S. Department of the Treasury, as chair of the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”), has issued temporary regulations to conduct a pilot program that addresses specific risks to U.S. national security and will inform the Committee’s work in drafting the final regulations that will fully implement the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which was signed into law on August 13, 2018

The pilot program implements authorities that expand the scope of transactions subject to CFIUS review to include certain non-controlling investments in U.S. businesses involved in critical technologies related to specific industries. The pilot program also makes effective FIRRMA’s mandatory declarations provision for transactions that fall within the scope of the pilot program. The pilot program will be effective starting November 10, 2018.

I. Expansion of Scope of Transactions Subject to CFIUS Review

A. Types of Investments Covered

In addition to covering investments that result in foreign person control of a “pilot program U.S. business” (explained below), the pilot program expands CFIUS’s jurisdiction, consistent with FIRRMA, to include certain non-controlling investments by foreign persons in any pilot program U.S. business that would give the foreign investor:

  • access to any material nonpublic technical information in the possession of the pilot program U.S. business;
  • membership or observer rights on the board of directors or equivalent governing body of the pilot program U.S. business or the right to nominate an individual to a position on the board of directors or equivalent governing body of the pilot program U.S. business; or
  • any involvement, other than through voting of shares, in substantive decision-making of the pilot program U.S. business regarding the use, development, acquisition, or release of critical technology.

B. Types of U.S. Businesses Covered

The pilot program covers any U.S. business that produces, designs, tests, manufactures, fabricates, or develops a “critical technology” (explained below) that is:

  • utilized in connection with the U.S. business’s activity in one or more “pilot program industries;” (explained below); or
  • designed by the U.S. business specifically for use in one or more pilot program industries.

C. Types of Critical Technology Covered

The pilot program covers all critical technologies that are controlled under the following export control regimes:

  • Defense articles or defense services included on the United States Munitions List set forth in the International Traffic in Arms Regulations (ITAR) (22 CFR Parts 120-130);
  • Items included on the Commerce Control List in the Export Administration Regulations (EAR) (15 CFR Parts 730-774) and controlled for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, missile technology, regional stability, or surreptitious listening;
  • Specially designed and prepared nuclear equipment, parts and components, materials, software, and technology covered by Department of Energy regulations relating to assistance to foreign atomic energy activities (10 CFR Part 810);
  • Nuclear facilities, equipment, and material covered by Nuclear Regulatory Commission regulations relating to export and import of nuclear equipment and material (10 CFR Part 110); and
  • Select agents and toxins covered by regulations promulgated by the Department of Agriculture (7 CFR Part 331; 9 CFR Part 121) or Health and Human Services (42 CFR Part 73).

In addition, critical technologies will include emerging and foundational technologies to be identified as “essential to U.S. national security” by the Department of Commerce’s Bureau of Industry and Security (BIS) through an interagency process and controlled for export/re-export pursuant to the Export Control Reform Act of 2018. As technology becomes controlled under this and the above export control regimes, it is captured under the definition of “critical technology.”

D. Types of Industries Covered

The pilot program covers 27 industries, identified by their respective North American Industry Classification System (NAICS) code, for which the U.S. Government has determined that certain strategically motivated foreign investment could pose a threat to U.S. technological superiority and national security.

These industries include the following:

  1. Aircraft Manufacturing (NAICS Code: 336411)
  2. Aircraft Engine and Engine Parts Manufacturing (NAICS Code: 336412)
  3. Alumina Refining and Primary Aluminum Production (NAICS Code: 331313)
  4. Ball and Roller Bearing Manufacturing (NAICS Code: 332991)
  5. Computer Storage Device Manufacturing (NAICS Code: 334112)
  6. Electronic Computer Manufacturing (NAICS Code: 334111)
  7. Guided Missile and Space Vehicle Manufacturing (NAICS Code: 336414)
  8. Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing (NAICS Code: 336415)
  9. Military Armored Vehicle, Tank, and Tank Component Manufacturing (NAICS Code: 336992)
  10. Nuclear Electric Power Generation (NAICS Code: 221113)
  11. Optical Instrument and Lens Manufacturing (NAICS Code: 333314)
  12. Other Basic Inorganic Chemical Manufacturing (NAICS Code: 325180)
  13. Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing (NAICS Code: 336419)
  14. Petrochemical Manufacturing (NAICS Code: 325110)
  15. Powder Metallurgy Part Manufacturing (NAICS Code: 332117)
  16. Power, Distribution, and Specialty Transformer Manufacturing (NAICS Code: 335311)
  17. Primary Battery Manufacturing (NAICS Code: 335912)
  18. Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing (NAICS Code: 334220)
  19. Research and Development in Nanotechnology (NAICS Code: 541713)
  20. Research and Development in Biotechnology (except Nanobiotechnology) (NAICS Code: 541714)
  21. Secondary Smelting and Alloying of Aluminum (NAICS Code: 331314)
  22. Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing (NAICS Code: 334511)
  23. Semiconductor and Related Device Manufacturing (NAICS Code: 334413)
  24. Semiconductor Machinery Manufacturing (NAICS Code: 333242)
  25. Storage Battery Manufacturing (NAICS Code: 335911)
  26. Telephone Apparatus Manufacturing (NAICS Code: 334210)
  27. Turbine and Turbine Generator Set Units Manufacturing (NAICS Code: 333611)

II. Mandatory Declarations

The pilot program establishes mandatory declarations for foreign investments involving U.S. businesses covered above that are within the purview of CFIUS (i.e., both controlling investments and covered non-controlling investments).

A declaration is meant to serve as an abbreviated way of informing CFIUS of a transaction and generally should not exceed five pages in length. As part of the pilot program, CFIUS is developing a Web template to guide parties in providing information and facilitate filing of declarations, which CFIUS indicates should be available in the coming days.

Declarations must be filed at least 45 days prior to a transaction’s expected completion date, meaning the date upon which an ownership interest, including contingent equity interest, is conveyed, assigned, delivered or otherwise transferred to a person, or a change in rights occurs. The Committee will then have 30 days to act, which may include any of the following measures:

  • request that the parties file a formal notice;
  • inform the parties that CFIUS cannot complete action on the basis of the declaration and that they may file a formal notice regarding the transaction;
  • initiate a unilateral review of the transaction through an agency notice; or
  • notify the parties that CFIUS has completed all action.

It should be noted that the regulatory safe harbor that is typically afforded when CFIUS clears a transaction based on a formal joint voluntary notice will not be available for pilot program covered transactions for which the Committee completes all action on the basis of a declaration, irrespective of whether the transaction could result in foreign control of a U.S. business. Thus, any subsequent or incremental acquisition that constitutes a pilot program covered transaction must be submitted to CFIUS through a joint voluntary notice or declaration.

In lieu of filing a declaration, parties may choose to file a joint voluntary notice under CFIUS’s standard procedures. If parties file a joint voluntary notice after they have filed a declaration, the statutory timeframe for review of that joint voluntary notice will be in addition to the time already taken by CFIUS for review of the declaration.

Parties that are required to file with CFIUS under the pilot program (either a declaration or a joint voluntary notice) and do not do so can be assessed a civil monetary penalty up to the value of the transaction.

III. Timing of Pilot Program

In accordance with FIRRMA, the pilot program will begin on November 10, 2018 (i.e., 30 days following publication of the regulations in the Federal Register). It will end no later than the date on which the final FIRRMA regulations are implemented in February 2020.

Please contact one of the authors below or your Baker Botts relationship attorney with any questions.

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