More foreign investments to be scrutinized under Treasury proposals

Late last month, two proposed rules on foreign investment in the United States were published in the Federal Register for public comment. Developed by the Treasury Department, the rules implement the Foreign Investment Risk Review Modernization Act of 2018. That law expanded CFIUS jurisdiction to review mergers and acquisitions that could result in foreign control while simultaneously acknowledging the important role foreign investment has played in the U.S. economy.

“The United States welcomes and encourages investment in our country and our workforce,” said Treasury Secretary Steven Mnuchin when the proposals were announced.

In drafting the proposed rules, the Treasury Department “addressed issues like what types of personal data we worry about foreign entities acquiring, and the types of sales of real estate around sensitive sites that CFIUS should review,” explained Deputy Treasury Secretary Justin Muzinich in remarks prepared for the 2019 U.S. Treasury Market Conference held Sept. 23.

The proposed rules “will provide clarity and certainty to investors regarding CFIUS’s enhanced authorities to address national security risks that arise from certain foreign investments, and continue modernizing the CFIUS process,” Mnuchin explained.

The finalized version of the rules is slated to go into effect by Feb. 13, 2020. Meanwhile, public comment on “Provisions Pertaining to Certain Investments in the United States by Foreign Persons” and “Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States” must be submitted by Oct. 17, 2019. (Note: A later deadline was originally published erroneously for one of the rules, but that was subsequently corrected in the Federal Register.)

The deal this impacts might be yours

Even organizations not accustomed to having to obtain the government’s blessing on deals might need to pay attention to these proposed rules. “The main challenge for companies with regard to the new regulations is that they threaten to sweep into CFIUS’s potential coverage scope numerous transactions that would not previously have been subject to CFIUS review,” says Raymond Paretzky, an international trade partner at the law firm McDermott Will & Emery. “This challenge affects both foreign companies that are potential acquirers of all or part of U.S. businesses and U.S. companies that may wish to be acquired.”

CFIUS has the authority to review certain investments by foreign entities in U.S. businesses. “Many new types of transactions—including certain non-controlling investments as well as transactions involving certain real estate—now are subject to CFIUS review,” explains Jeremy Zucker, a partner at the law firm Dechert. In addition, “certain transactions involving foreign investors in which foreign governments hold meaningful direct or indirect interests are now subject to mandatory review requirements,” he says.

A CFIUS review, however, “adds considerable time, expense, and complexity to any covered transaction,” Paretzky notes.

On the bright side, the government maintains it has been a bit speedier in its oversight. “We have been running the review process more efficiently, to help ensure that safe investments can be made easily and expeditiously in the United States,” Muzinich said in his remarks. “Twice as many cases are clearing during the first stage of review as compared to a year ago. Where there are no national security risks, we are letting the parties know quickly, so that they can proceed with their transactions.”

To that end, “companies that may be acquirers or acquisition targets should familiarize themselves in advance with the information that CFIUS requires to be in a joint voluntary notice (JVN),” Paretzky says, referring to the paperwork needed for a CFIUS review. A little legwork ahead of time will position a company “to be able to file a draft JVN quickly in the event they have a potential deal in place,” Paretzky says.

The time to comment is now

In the meantime, organizations still have a bit more than a week to submit comments on the proposed rules. The American Chemistry Council is seeking to have the comment period extended to 90 days. “It will take some time for companies to determine whether their facilities may be considered ‘covered real estate’” under the new rules, Ed Brzytwa, director for international trade at the council, wrote in a Sept. 28 letter to the Treasury Department.

Among other things, the new rules, while broadening the types of transactions to which CFIUS transactions will apply, also clarify who will not be subject to this expanded jurisdiction. These “excepted investors” are defined narrowly under the proposed rules, though, “in the interest of protecting national security in light of increasingly complex ownership structures, and to prevent foreign persons from circumventing CFIUS’s jurisdiction,” the Treasury Department explained in the preamble to “Provisions Pertaining to Certain Investments in the United States by Foreign Persons.”

“A foreign company that is not excepted would be well served if it could persuade CFIUS to broaden the definition in such a way as to include the company within this definition’s ambit,” Paretzky suggests.

Among the universe of transactions to which CFIUS reviews now apply are certain investments that would allow a foreign person access to “sensitive personal data.” The proposed rules provide that the data needs to involve one million or more individuals, which is a fairly low bar, Paretzky observes.

“A company may wish to explain to CFIUS why a higher number would be a more reasonable trigger for CFIUS coverage,” he adds.

Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.