Recent Changes in the CFIUS Evaluation Process
Recently the Committee on Foreign Investment in the United States (“CFIUS”, or the “Committee”) announced three changes that impact how the Committee evaluates foreign investments in U.S. businesses. While the changes appear minor, the modifications provide CFIUS with even greater capabilities to ensure protection of U.S. national security.
“Springing Rights” are No Longer an Option.
Following the passage of the Foreign Investment Risk Review Modernization Act (“FIRRMA”), certain transactions involving TID U.S. businesses that afford foreign investors control or certain rights, such as the right to nominate a member or observer to the U.S. business’s board, require a mandatory CFIUS filing at least 30 days before closing. In certain circumstances, a company may make the financial investment immediately, but condition control or receiving the rights on CFIUS approval.
CFIUS made it clear that this practice is not acceptable. In a recently released FAQ, CFIUS notes:
The “completion date” is the earliest date upon which any ownership interest is conveyed, assigned, delivered, or otherwise transferred to a person [31 C.F.R. § 800.206]. In a transaction where the ownership interest is conveyed before the foreign person receives the corresponding rights, the “completion date” is the earliest date upon which the foreign person acquired any of the equity interest. For example, if Company A acquired a 25 percent ownership interest in Company B on July 1, but its right to control Company B was deferred until after CFIUS reviews the transaction, the “completion date” for the transaction is July 1. If the transaction is subject to the mandatory declaration requirement pursuant to 31 C.F.R. § 800.401, the latest date that the parties can file the transaction with CFIUS is June 1. Note that contingent equity interests are assessed separately under 31 C.F.R. § 800.207. (emphasis added).
CFIUS has authority to issue penalties up to the value of the transaction when companies fail to notify the Committee before closing when required. Going forward, companies must consider whether a transaction triggers a mandatory CFIUS filing early and allow for adequate time to navigate the CFIUS process.
Limited Partnerships are on Notice.
Once CFIUS is formally reviewing a transaction, the Committee typically requests that the parties provide additional information needed to assess whether a transaction may threaten U.S. national security. These questions can be far reaching, and the Committee recently put limited partner investors on notice that they may be required to provide information about their indirect investments. CFIUS notes in an additional FAQ:
In addition to the information required for submission of a complete filing with CFIUS, to facilitate its review, CFIUS through the Staff Chairperson may request follow-up information with respect to all foreign investors that are involved, directly or indirectly, in a transaction, including limited partners in an investment fund. Like other aspects of the CFIUS process, the scope of such a request depends on the facts and circumstances of each transaction. For example, CFIUS often requests identifying information for indirect foreign person investors, including limited partners, their jurisdiction(s) of organization, and ultimate ownership, among other information, regardless of any arrangements that may otherwise limit the disclosure of such foreign person’s identity. CFIUS may also request information with respect to any governance rights and other contractual rights that investors collectively or individually may have in an indirect or direct acquirer or the U.S. business to facilitate the Committee’s review regarding jurisdictional or national security risk-related considerations. Such information, as with all information filed with CFIUS pursuant to 50 USC 4565, is subject to the confidentiality protections afforded by 50 USC 4565(c).
Under the Regulations, companies only have three business days to respond to questions from the Committee. As such, fund managers should sensitize their limited partner investors that disclosure may be required in order to receive CFIUS approval.
Eight New Bases Added to CFIUS’s Real Estate Jurisdiction.
Proximity to sensitive military bases and operations is an important element of many CFIUS reviews. Even if CFIUS does not believe that the acquisition of a U.S. business presents national security risks (e.g., no critical technology, no sensitive data, and no critical supply chain), CFIUS may conclude that the location of the U.S. business creates proximity concerns.
With the passage of FIRRMA, Congress authorized CFIUS to review the acquisition of certain real estate transactions that do not include the acquisition of a U.S. business. CFIUS’s real estate jurisdiction is focused on transactions meeting certain criteria that are in or around specific airports, maritime ports, or military installations. The relevant military installations are listed by name and location.
Recently, CFIUS prosed adding eight new bases to its list of sensitive military bases that will allow the Committee to review real estate transactions in even more locations across the United States. These bases include:
- Air Force Plant 42, located in Palmdale, California
- Dyess Air Force Base, located in Abilene, Texas
- Ellsworth Air Force Base, located in Box Elder, South Dakota
- Grand Forks Air Force Base, located in Grand Forks, North Dakota
- Iowa National Guard Joint Force Headquarters, located in Des Moines, Iowa
- Lackland Air Force Base, located in San Antonio, Texas
- Laughlin Air Force Base, located in Del Rio, Texas
- Luke Air Force Base, located in Glendale, Arizona
CFIUS proposes adding these bases to Part 2 of Appendix A of the Real Estate Regulations. Once formally adopted, these bases will be afforded “extended range” protection (a 100 mile radius) from the outer boundary of these facilities. Not all real estate within the 100 mile radius falls within CFIUS’s jurisdiction. However, the acquisition of real estate near these and other previously identified bases by certain foreign investors will likely face significantly more scrutiny going forward.
 A TID U.S. Business is defined as any U.S. business that: (a) produces, designs, tests, manufactures, fabricates, or develops one or more critical Technologies; (b) performs the functions as set forth [in the CFIUS Regulations] with respect to covered investment critical Infrastructure; or (c) maintains or collects, directly or indirectly, sensitive personal Data of U.S. citizens.