US Foreign Investment Review Continues To Evolve – Government, Public Sector – Canada – Mondaq News Alerts

The Committee on Foreign Investment in the United States (CFIUS)
has remained active despite challenges presented by the COVID-19
pandemic.

What you need to know

• Since new rules went into effect in February expanding its
  jurisdiction, CFIUS has been reviewing a broader scope of
  transactions by foreign investors in U.S. businesses and real
  estate.
• Filing parties should build in additional time to account for
  delays attributable to remote operations.
• CFIUS recently implemented filing fees and will revise the
  scope of transactions subject to mandatory filing.

Reviews progressing at protracted pace during the pandemic

Although M&A activity has declined due to uncertainties
raised by the pandemic, the Committee’s broader mandate and
remote operations have delayed the review process.

Most notably, the time between parties’ submission of a
formal written notice and CFIUS’s acceptance of the notice for
review—period not governed by any regulation—reportedly
has increased to as much as 30-45 days. Because the Committee’s
threat assessment typically requires classified information, not
accessible from unsecured home computers, it is also understood
that CFIUS is clearing fewer transactions within the initial 45-day
review period.

During the pandemic, the new short-form declaration, review of
which is limited to 30 days, has been of limited value because
CFIUS is informing most parties that it cannot conclude action
within the timeframe. Under such circumstances, parties can proceed
to close without the benefit of the “safe harbor”
afforded cleared transactions or they can file a formal notice and
work through the full, lengthier process.

Parties subject to CFIUS jurisdiction should consider these
developments when assessing whether to submit a voluntary filing,
and parties expecting, or required, to file are advised to account
for delays in their transaction planning and documentation.

CFIUS implements additional new rules

The pandemic has not stopped CFIUS from implementing and
refining its rules and procedures pursuant to 2018’s Foreign
Investment Risk Review Modernization Act (FIRRMA).

1. Filing fees

Effective May 1, 2020, CFIUS now requires a filing fee for
formal written notices, but not short-form declarations. The
current fee scale is summarized below (in U.S. dollars):

2. Mandatory filing for certain critical
technology transactions

CFIUS currently requires a filing for certain foreign investment
transactions involving a U.S. business that produces, designs,
tests, manufactures, fabricates, or develops one or more critical
technologies in connection with one of 27 industries identified by
North American Industry Classification System (NAICS) code. The
enumerated industries include, for example, aircraft manufacturing,
aluminum production, biotechnology R&D, and storage battery
manufacturing.

On May 21, 2020, CFIUS proposed a revised rule, subject to
public comment through June 22, 2020, that eliminates the list of
27 industries. A CFIUS filing will instead be mandatory for
transactions involving a U.S. business that produces, designs,
tests, manufactures, fabricates, or develops one or more critical
technologies for which a foreign person to the transaction would
need a license for the export, re-export, transfer, or re-transfer
of the technology in accordance with U.S. export control rules
under the International Traffic in Arms Regulations (ITAR) or
Export Administration Regulations (EAR)¹. The new rule
will oblige foreign investors to consider whether a CFIUS filing is
required for any transaction involving a U.S. business with
critical technologies.

This is not to suggest that all, or even most, transactions by
Canadian investors in U.S. technology businesses will trigger a
mandatory CFIUS filing under the revised rule. The mandatory filing
provisions do not apply to transactions involving an “excepted
investor”², which is defined to include the
Canadian government, most Canadian individuals, and some Canadian
entities that meet specific criteria. In addition, although
U.S.-origin technology is subject to ITAR and EAR controls
generally, the export of such technology to Canada may not require
a license (contrasted, for example, with the export of the same
technology to China).

Reflecting on the COVID-19 pandemic’s impact, which may
prompt opportunistic foreign investment in weakened U.S.
businesses, a U.S. Department of Defense official recently observed
that CFIUS is “more important than ever”. Investors from
outside the U.S., and their prospective U.S. targets, should
contemplate CFIUS early in a transaction lifecycle and the new
rules will require parties to engage in a careful analysis to
determine whether a filing is mandatory.

Footnotes

¹ The proposed rule also applies to critical
technologies relating to atomic energy and nuclear equipment or
material for which a license or authorization from the U.S.
Department of Energy or Nuclear Regulatory Commission is
required.

² See our bulletin, “CFIUS set to operate under new
rules