Some Foreign Investment Transactions Involving "Critical Technology" Soon Must Be Notified to CFIUS

International Trade & Compliance Alert

Whether to notify transactions to the Committee on Foreign Investment in the United States (“CFIUS”) has always been discretionary. Soon, that will no longer be true. For some transactions, whether to file with CFIUS will be a compliance matter – failure to file regarding some types of transactions involving “critical technology” could expose parties to penalties.

Effective November 10, 2018, CFIUS will (i) expand its jurisdiction to cover non-controlling foreign investmentsin certain U.S. businesses connected to critical technology, and(ii) require parties to notify CFIUS of such critical technology investments whether or not the investor acquires a controlling interest. In doing so, CFIUS will partially implement provisions of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) that were not immediately effective upon FIRRMA’s enactment in August 2018. We described this and other features of FIRRMA in our prior alert.

CFIUS’s jurisdiction has been limited to instances in which a foreign person’s investment in a U.S. business could provide the investor with control over the U.S. business. The scope of “covered transactions” will now extend to transactions that do not provide control if:

  • the investor is a foreign person of any country;
  • the investment will be in an unaffiliated U.S. business (business with operations in the United States);
  • the U.S. business designs, tests, develops or produces “critical technology” – generally, items the export of which commonly requires a license from the U.S. government (including newly identified “emerging and foundational technologies”) and “select agents or toxins”;
  • the U.S. business uses critical technology in one or more of 27 specified industries defined by the North American Industrial Classification System codes, listed here, or designs critical technology for use in one or more of these industries; and
  • the transaction will provide the investor: (i) access to material non-public technical information of the U.S. business, (ii) membership or observer rights with respect to the U.S. business’s board of directors or the equivalent(except through certain funds), or (iii) involvement, other than through share voting, in substantive decision-making of the U.S. business regarding critical technology.

Parties will be required to notify CFIUS of transactions meeting these criteria whether or not the investment could result in foreign control over the U.S. business. The requirement will apply to an investment of any size that will close after November 10 and for which the parties did not before October 11, 2018 execute an agreement establishing the material terms of the transaction. Investments involving certified U.S. air carriers are excluded.

Parties involved in such covered transactions are to notify CFIUS by electronically filing “declarations” (abbreviated notices) or submitting standard written notices. Parties are generally to notify CFIUS 45 days before closing but are to notify CFIUS by or soon after November 10, 2018 if the transaction is to close between November 10 and December 25, 2018. Within 30 days of filing a declaration, CFIUS is to complete one of the four actions: (i) request a standard written notice, (ii) informthe parties that CFIUS cannot complete action based of the declaration and advise that a standard written notice would be needed for final disposition by CFIUS, (iii) initiate a unilateral review or (iv) clear the transaction.

Failure to file a required CFIUS notification may put any covered transaction in jeopardy. Parties that do not file the mandatory declarations may be assessed a civil penalty of up to the value of the transaction.