CFIUS: Now More Complicated and More Expensive
Effective Oct. 15, 2020, the Committee on Foreign Investment in the United States’ (CFIUS) mandatory filing requirement will shift from a critical technology, industry-specific focus to one focused on export controls. It will focus on whether the U.S. regulatory authorization would be required to export the target U.S. business’ critical technology to the foreign person party to the transaction, including certain parties in the foreign person’s ownership chain.
As a result, parties to potentially covered transactions will be required to diligence the application of the U.S. export control regime to the target – a complicated endeavor if undertaken for the first time merely to evaluate whether the transaction is subject to a mandatory notification to CFIUS. That exercise, coupled with the filing fees in place since May 2020, will make making foreign direct investment in the United States more complicated, time consuming and expensive.
Since October 2018, whether a mandatory CFIUS notification was required was determined by a two-part test based on whether the U.S. target:
produced, designed, tested, manufactured, fabricated, or developed one or more critical technologies; and
utilized such critical technology, or designed it for use, in one or more of 27 industries designated by North American Industry Classification System (NAICS) codes.
Use of the NAICS codes proved ineffective due to limitations regarding the definitions of the 27 industries, including the lack of precision, overlap, and under-inclusion.
Under the new rule, parties will be required to file a notification for any transaction subject to CFIUS jurisdiction involving a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies for which a “U.S. regulatory authorization” would be required for the export, re-export, transfer (in-country), or retransfer of such critical technology to a foreign person who is a party to the transaction or certain parties in the ownership chain of the foreign person. The export controls analysis is required for any foreign entity directly or indirectly holding 25 percent or more of the foreign-controlled entity investing in the U.S. critical technology company and considers the principal place of business or country of nationality, for businesses and individuals, respectively. Whether a transaction would require a mandatory filing requires an assessment of whether a critical technology is implicated, which is assessed at the earliest of the date of completion, the date the parties have executed a binding written agreement, the date a party has made a public offer to shareholders to buy shares of a U.S. business, or the date of certain activities involving the solicitation of proxies or conversion of a contingent equity interest.
Importantly, the export control analysis is required without regard to whether the U.S. business actually exports any products. In other words, parties to a transaction involving a U.S. target involved in the production chain of a critical technology that has never been sold outside the U.S. will be required to diligence the application of the U.S. export control regime to the target.
Although the new rule complicates the determination of whether a transaction requires a mandatory CFIUS notification, it eliminates the loophole in the former rule that would permit a foreign entity to purchase a U.S. critical technology business, while being restricted by the U.S. export control regime from being able to purchase the products of the U.S. critical technology business in its home country.
The final rule provides that the mandatory filing requirement will not apply if the critical technologies involved are eligible under certain provisions under the EAR’s License Exception ENC (applicable to certain encryption items), License Exception TSU (covering certain unrestricted technology and software), and License Exception STA (authorizing exports to certain U.S.-allied countries as a strategic trade authorization), provided the U.S. business has satisfied any pre-export requirements imposed by the EAR to use the relevant license exception.
In this regard, we note an increasing number of items incorporate some encryption functionality (implicating License Exception ENC), but the Final Rule clarifies any procedural requirements to submit notifications to the Department of Commerce prior to export must have been satisfied before parties may rely on License Exception ENC to conclude no mandatory notification is required (even if the parties have no plan to export the relevant items). However, compliance with post-export requirements, such as the recordkeeping requirements applicable to license exception TSU or the requirement to provide commodity classifications to third parties under license exception STA, are not required to qualify for the mandatory notification exception when relying on those license exceptions.
The new rule will often require the assessment of U.S. export controls to a number of jurisdictions. For example, for each entity holding an interest of 25 percent or more in a foreign-controlled person investing in a U.S. critical technology company, any entity that is a “parent” of such shareholder (50 percent or more of either the economic or voting rights in that entity) is attributed 100 percent of its interest. As a result, these rules substantially expand the number of jurisdictions to be assessed in consortium transactions or when acquirers have complex ownership structures. In instances where the foreign-controlled person investing in a U.S. critical technology company is a limited partnership, limited liability company, or a similar investment vehicle with passive investors, the 25 percent interest is tested at the general partner, managing member, or equivalent level. Finally in this regard, note that where the ownership interests of foreign persons are acting in concert or controlled by a single foreign state, such interests are aggregated for purposes of assessing export controls to that jurisdiction.
Investors from “excepted foreign states” (currently Australia, Canada, and the United Kingdom) subject to certain requirements, remain exempt from the mandatory CFIUS filing requirements.
Since May 1, 2020, joint notices submitted to CFIUS have been subject to a filing fee of up to $300,000. The filing fees apply to joint notices submitted to CFIUS for “covered transactions” and “covered real estate transactions,” which are long-form submissions generally used for more sensitive or complex transactions. Filing fees do not apply to CFIUS declarations, which are short-form filings parties may submit to CFIUS on either a mandatory or voluntary basis.
However, CFIUS may, and often does, request parties file a notice after reviewing a declaration. Parties may also elect to file a notice in lieu of a declaration. In each case, an appropriate filing fee must be paid with the notice following a tiered scale based on the overall value of the transaction as shown in the following table.
The value of the transaction is based on the total value of consideration that has or will be paid. Such consideration includes but is not limited to cash, assets, shares or other ownership interests, forgiveness of debt, services, or other in-kind consideration.
If you have any questions regarding this client alert or the CFIUS approval process, please contact the author David Lavan (202.372.9122) or Harvey Cohen (614.977.8184).
 The new regime will apply to all transactions entered into (i.e., binding agreement signed, public offer launched, proxies solicited, or options exercised) after Oct. 15, 2020.
 Critical technologies include:
Defense articles or defense services included on the United States Munitions List (USML) set forth in the International Traffic in Arms Regulations (ITAR) (22 CFR parts 120-130);
Items included on the Commerce Control List (CCL) set forth in Supplement No. 1 to part 774 of the Export Administration Regulations (EAR) (15 CFR parts 730-774), and controlled pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology; or for reasons relating to regional stability or surreptitious listening;
Specially designed and prepared nuclear equipment, parts and components, materials, software, and technology covered by 10CFR part 810 (relating to assistance to foreign atomic energy activities); Nuclear facilities, equipment, and material covered by 10 CFR part 110 (relating to export and import of nuclear equipment and material);
Select agents and toxins covered by 7 CFR part 331, 9 CFR part 121, or 42 CFR part 73; and
Emerging and foundational technologies controlled under section 1758 of the Export Control Reform Act of 2018 (50 U.S.C. 4817).
 Licenses or other approvals required for defense articles or defense services under the International Traffic in Arms Regulations (ITAR); licenses required for items controlled under the Export Administration Regulations (EAR); specific or general authorizations required for the export of certain controlled nuclear technology under the Department of Energy Regulations; and any specific license required by the Nuclear Regulatory Commission Regulations.
 In other words, License Exemption ENC, which requires a party to submit a classification request 30 days before export, is available only if a party actually submitted a classification request and 30 days have passed.