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CFIUS Creates New Pilot Program for Mandatory Declarations

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22 November 2018

On August 13, 2018, Congress expanded the authority of the U.S. Treasury Department’s Committee on Foreign Investment in the United States (CFIUS) to review certain transactions resulting in non-US control of US assets, businesses or technologies.

While the Foreign Investment Risk Review Modernization Act (FIRRMA) formally expands CFIUS’ review authority in a number of ways, one important change is that parties to certain transaction involving “critical technologies” will be required to submit mandatory short-form transaction declarations (previously, all CFIUS filings were strictly voluntary).

Following the passage of FIRRMA, CFIUS has now created a new pilot program, effective November 10, which implements the requirement for mandatory declarations for a number of specified technologies and industries. 

This Alert summarizes the new program and its implications for international dealmakers.

Who’s affected?

The pilot program requires that mandatory declarations be submitted for transactions that (i) involve critical technology (ii) being used in a critical industry (iii) where a non-U.S. legal person might obtain control over a U.S. business or obtain material, non-public technical information.
 Critical technologies, as defined by the rule, consist of:
 
    • Defense articles and services on the U.S. Munitions List set by ITA;
    • Certain items on the Commerce Control List;
    • Certain specially designed nuclear equipment and facilities;
    • Certain agents and toxins; and
    • Emerging and foundational technologies, to be designated through an interagency process by the Departments of Defense, State, Energy and other agencies. As of yet, none have been designated.
 
However, on November 19, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued a proposed rule (technically an Advance Notice of Proposed Rulemaking) that proposes the following 14 categories of technology to be considered emerging technologies:
 
      • Biotechnology
      • Artificial intelligence (AI) and machine learning technology
      • Position, Navigation, and Timing (PNT) technology
      • Microprocessor technology
      • Advanced computing technology
      • Data analytics technology
      • Quantum information and sensing technology
      • •ogistics technology
      • Additive (i.e, 3D) manufacturing
      • Robotics
      • Brain-computer interfaces
      • Hypersonics
      • Advanced materials and
      • Advanced surveillance technologies.

The interim rule also designates 27 NAICS (i.e., industry codes) codes as “critical industries,” most of which involve high-tech manufacturing.  A list of these codes is included at the end of this Alert. 

For transactions that do involve critical technologies in critical industries, parties must submit the mandatory declaration either if the transaction would give a non-U.S. person control over the U.S. business, with control described as “the ability to determine important matters” with respect to the U.S. business, or if the investment is non-controlling but would give a non-U.S. person any of the following:
 
    • Access to any material non-public 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.

What’s required?

For transactions that are covered by the pilot program, parties must submit a declaration listing information such as:
 
    • Information about the non-U.S. person involved in the transaction, such as a complete organization chart including parent entities, whether the non-U.S. person will acquire material non-public technical information, and information on the extent and form of control that the non-U.S. person will obtain in the U.S. business.
    • Information about the U.S. business, such as a description of the critical technologies involved, any contracts the business holds with any U.S. government agencies, grants from the U.S. Departments of Defense or Energy, or priority-rated contracts or orders under the Defense Priorities and Allocations System.
Once CFIUS receives the declaration, it is required to conduct a short 30-day review of the transaction, after which it will decide either to request a full filing, commence a full investigation on its own, or inform the parties that it has concluded action on the transaction. 

What’s next?

The interim rule took effect on Nov. 10, and the pilot program will remain in effect for 570 days (i.e., until June 2, 2020) or until CFIUS publishes a final rule that could further expand the range of industries and technologies coveredd.

What does this all mean for transaction parties?

The mandatory declaration ostensibly provides a potential 30-day short-cut for parties to avoid the more lengthy formal CFIUS review and investigation process (along with related costs and uncertainties).  Theoretically, parties may prepare a mandatory declaration and know within 30 days that their contemplated transaction can close.  How this will actually work in practice, however, remains to be seen. We are beginning to submit our first mandatory declarations now and will soon discover whether and to what extent the program will deliver on its promises. It is possible, and likely in many cases, that parties submitting a mandatory declaration will nevertheless also need to submit a full formal CFIUS filing.  In such cases, rather than shortening the process and reducing costs, the mandatory declaration will instead add at least 30 days (and add some additional costs).
 
Parties to transactions that may fall with CFIUS’ purview must carefully consider these requirements and procedures in light of a range of factors, including, among others, their (i) transaction strategies and goals, (ii) timing constraints, (iii) financing conditions and covenants, (iv) ability and willingness to s​ubmit to CFIUS scrutiny, (v) presence, relationships, reputation in the U.S., and (vi) aspirations for future growth in the U.S.    
For more information, or to discuss your approach to a particular transaction, please contact any of the listed contacts on Allen & Overy’s CFIUS team or your usual contact at Allen & Overy LLP.
 
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