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The FIRRMA Rules

The Foreign Investment Risk Review Modernization Act (FIRRMA) was signed into law by US President Donald Trump in August 2018. It is the first change to be made to the Committee on Foreign Investment in the United States (CFIUS) regime in more than a decade. Regulations to comprehensively implement the FIRRMA, which broadened the authorities of the CFIUS to better address national security concerns arising from some types of investments and real estate transactions, became effective on 13 February 2020. Among other things, these regulations will implement CFIUS’s new authority to review (i) certain non-controlling investments into certain US businesses involved in critical technology, critical infrastructure or sensitive personal data, and (ii) certain real estate transactions involving foreign persons.

The first rule reflects the expansion of CFIUS’s jurisdiction to non-controlling investments that afford a foreign person certain access, rights or involvement in a US business that (i) produces, designs, tests, manufactures, fabricates or develops one or more critical technologies (e.g., certain items subject to export controls as well as emerging and foundational technologies controlled under the Export Control Reform Act of 2018); (ii) owns, operates, manufactures, supplies or services critical infrastructure (e.g., telecommunications, energy, utilities and transportation); or (iii) maintains or collects sensitive personal data of US citizens that may be exploited in a manner that threatens national security.

According to the Treasury Department, the CFIUS review process remains largely voluntary under this rule. That is, parties can choose whether or not to file a notice or submit a short-form declaration notifying CFIUS of a covered investment in order to receive a potential safe harbour letter, after which CFIUS will generally not initiate a review. However, filing a declaration is mandatory for specified covered transactions where a foreign government is acquiring a substantial interest in certain US businesses.

In addition, this rule imposes a mandatory declaration requirement on covered transactions involving certain US businesses that produce, design, test, manufacture, fabricate or develop one or more critical technologies. In light of this requirement and its 13 February 2020 effective date, the related pilot programme CFIUS has been conducting ended on 12 February. While many of the provisions of the pilot are incorporated into this rule, Treasury anticipates issuing a separate proposal to revise this mandatory declaration requirement from one based on North American Industry Classification System codes to one based on export control licensing requirements.

A second final rule implements FIRRMA’s authorisation for CFIUS to review foreign persons’ purchase or lease of US real estate that is, is located within, or will function as part of an air or maritime port, as well as certain other types of real estate, provided the transaction affords the person specified rights to that property. However, the rule does not include a mandatory filing requirement for such transactions, and parties may choose to file a notice or submit a short-form declaration to potentially qualify for a safe harbour letter.

According to the Treasury Department, the final regulations respond to public input from a wide variety of interested parties by, among other things, defining additional terms, adding specificity to a number of provisions and including illustrative examples. The final regulations also implement FIRRMA’s requirement that CFIUS limit the application of its expanded jurisdiction to certain categories of foreign persons. Generally speaking, the changes seek to further clarify the regulations and provide useful examples for businesses, and do not appear to establish any additional restrictions or potential hurdles to businesses in Hong Kong or elsewhere. Some of the more notable changes are summarised below.

Rule on Investments in the US by Foreign Persons

  • Principal Place of Business. The final regulations add, as an interim rule, a new definition for the term “principal place of business”, which refers to “the primary location where an entity’s management directs, controls, or coordinates the entity’s activities, or, in the case of an investment fund, where the fund’s activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent.”

If the location determined under this definition is in the US and the entity has represented to the US government or a sub-national government of the United States or any other foreign government, in the most recent submission or filing to such government (other than CFIUS) in which the entity has identified its principal place of business, principal office and place of business, address of principal executive offices, address of headquarters or equivalent, that any of the fore-going is outside the United States, then the location identified in such submission or filing is deemed for purposes of the aforementioned definition to be the entity’s principal place of business unless the entity can demonstrate that such location has changed to the United States since such submission or filing.

  • Examples in Final Regulations. The final rule adds a new section to clarify that the examples included in the regulations are provided for informational purposes and should not be construed to alter the meaning of the text of the regulations, as well as to clarify that, as used throughout the regulations, the term ‘‘including’’ means ‘‘including without limitation.”
  • Covered Investment. The proposed rule used the term ‘‘covered investment’’ to capture an investment by a foreign person in certain types of US businesses that affords the foreign person certain access to information in the possession of such US businesses, rights in such US businesses, or involvement in the substantive decision-making of such US businesses but that does not afford the foreign person control over the US business. The final rule adds an example showing the application of Section 800.211(b) in situations where the investment affords a foreign person membership or observer rights on the board of directors or equivalent governing body of a US business that operates as a TID US business through a subsidiary.
  • Excepted Foreign States. The regulations limit the application of CFIUS’s jurisdiction over non-controlling “covered investments” by certain foreign persons, defined as “excepted investors,” from certain “excepted foreign states.” Treasury has initially selected Australia, Canada and the United Kingdom as “excepted foreign states” due to certain aspects of their robust intelligence-sharing and defence industrial base integration mechanisms with the United States.

Thus, as of 13 February each of these states is an excepted foreign state without regard to the second criterion (i.e., favourable determination under Section 800.1001). Because this is a new concept with potentially significant implications for US national security, CFIUS is initially identifying a limited number of foreign states and may expand the list in the future. Treasury indicates that it will post a list of factors on its website outlining what CFIUS will consider when making a determination regarding an eligible foreign state’s national security-based foreign investment review processes and bi-lateral co-operation with the United States on national security-based investment reviews.

  • Excepted Investors. The final rule modifies the definition of ‘‘excepted investor’’ by revising (i) the board member nationality criterion to allow up to 25 percent representation by foreign nationals of foreign states that are not excepted foreign states; (ii) the percentage ownership limit for an individual investor in an excepted investor from five to 10 percent; and (iii) the definition of ‘‘minimum excepted ownership’’ under Section 800.233.
  • Foreign Persons. The final rule adds a section to clarify that an entity which is controlled by a ‘‘foreign person’’ is itself a ‘‘foreign person.”
  • Minimum Excepted Ownership. The proposed rule defined ‘‘minimum excepted ownership’’ along with other terms which operate together to exclude from CFIUS’s jurisdiction covered investments by certain foreign persons who meet certain criteria establishing sufficiently close ties to certain foreign states. The final rule amends Section 800.233 by reducing the minimum excepted ownership percentage in Section 800.233(b) from 90 to 80 percent. On the other hand, a suggestion to treat privately held and publicly traded entities the same was not adopted.
  • Substantial Interest. The proposed rule established a voting interest threshold for the definition of ‘‘substantial interest.’’ The final rule clarifies in Section 800.244(a) that substantial interest applies to a single foreign government, which is consistent with the Section 800.222 definition of ‘‘foreign government’’, which, in turn, includes both national and subnational governments, including their respective departments, agencies and instrumentalities. In Section 800.244(a), the final rule also excludes governments of excepted foreign states in order to better synchronise the application of the two mandatory filing requirements under Section 800.401.

Additionally, the rule revises Section 800.244(b) to define ‘‘substantial interest,’’ in certain circumstances, as a foreign government’s interests in the general partner (or equivalent) only, disregarding its limited partner interests. Treasury argues that this provides clarity to parties in the investment fund context and focuses the substantial interest analysis on the entity that typically is responsible for the day-to-day decision-making regarding the investment fund.

  • Businesses Involved in Critical Technology and Sensitive Personal Data. The proposed rule defined the types of businesses with certain involvement in critical technology, critical infrastructure and sensitive personal data in which an investment may constitute a covered investment. The final rule adds examples addressing scenarios in which a US business is maintaining or collecting sensitive personal data indirectly via an intermediary. Additionally, the rule adds illustrative examples with respect to critical technology, informed by CFIUS’s experience with respect to the pilot programme on certain transactions involving foreign persons and critical technologies.
  • Incremental Acquisitions. The final rule expands the incremental acquisition rule to apply to transactions made subsequent to a covered control transaction submitted to CFIUS via declaration and for which CFIUS concludes action based upon that declaration.
  • Mandatory Declarations. The final rule integrates the mandatory declaration requirement from the pilot programme interim rule, which is based upon whether a transaction involves certain US businesses with a nexus to specified industries identified by NAICS codes. However, the Treasury Department anticipates issuing a separate notice of proposed rulemaking that would replace this requirement with a mandatory declaration requirement based upon export control licensing requirements. Additionally, in response to public comments, the rule exempts certain transactions from the critical technology mandatory declaration requirement. These exemptions relate to excepted investors; entities subject to an agreement to mitigate foreign ownership, control or influence; certain encryption technology; and investment funds managed exclusively by, and ultimately controlled by, US nationals. The Treasury Department anticipates that these exemptions would continue to apply even if the scope of the mandatory declaration requirement is modified.
  • Contents of Declarations. The final rule makes certain changes to the contents of declarations by requiring additional information to allow CFIUS to more efficiently assess whether a transaction is a covered transaction. For example, for declarations involving the acquisition of a US business that produces, designs, tests, manufactures, fabricates or develops one or more critical technologies, parties must describe the item(s) and the applicable export control classification/category.

Rule on Certain Transactions by Foreign Persons Involving Real Estate in the US

  • Principal Place of Business. Similar to the final rule on investments in the United States by foreign persons, the final rule on certain transactions by foreign persons involving real estate in the United States adds, as an interim rule, a new definition for the term “principal place of business”.
  • Close Proximity. The proposed rule defined ‘‘close proximity’’ as the area that extends outward one mile from the boundary of a relevant site. While the final rule makes no change to this definition, Treasury anticipates making available a web-based tool to help the public understand the geographic coverage of the rule. In the meantime, information relevant to certain aspects of the rule is available on-line. For example, the US Census Bureau maintains a web-based system, TIGERweb, which allows users to select features (e.g., military installations, urbanised areas and urban clusters) and view such attributes on a map. Additionally, each of the National Oceanic and Atmospheric Administration and the Bureau of Ocean Energy Management maintains a web-based map delineating US maritime boundaries, including the territorial sea and other attributes relevant to the geographic coverage under the rule.
  • Covered Port. The final rule combines the definitions of ‘‘airport’’ and ‘‘maritime port’’ from the proposed rule into a new term, ‘‘covered port.’’ This definition of ‘‘covered port’’ identifies in Section 802.210(a) the relevant lists maintained by the Department of Transportation and clarifies the specific references to the various lists. Additionally, the definition includes provisions to clarify the effective date of any changes to the Department of Transportation lists.
  • Excepted Real Estate Foreign States. CFIUS has initially selected Australia, Canada and the UK as “excepted foreign states.” Thus, as of 13 February each of these states is an excepted foreign state without regard to the second criterion (i.e., favourable determination under Section 802.1001).
  • Excepted Real Estate Investors. The final rule modifies the definition of ‘‘excepted real estate investor’’ by revising (i) the board member nationality criterion to allow up to 25 percent representation by foreign nationals of foreign states that are not excepted foreign states; (ii) the percentage ownership limit for an individual investor in an excepted investor from five to 10 percent; and (iii) the definition of ‘‘minimum excepted ownership’’ under Section 802.228.
  • Excepted Real Estate Transactions. The proposed rule defined “excepted real estate transaction” by listing specific types of transactions that are not covered real estate transactions, as well as examples. The final rule adds an exception for “foreign air carriers” to the extent that the lease or concession is related to the foreign person’s activities as a foreign air carrier and for whom the Department of Homeland Security has accepted a security programme under 49 CFR 1546.105. The final rule also revises the exception for retail trade, accommodation and food service sector establishments by eliminating the reference to the NAICS codes and instead applying the exception to leases and concessions of real estate that may be used only for the purposes of engaging in the retail sale of consumer goods or services to the public. According to Treasury, this revision provides a broader exception for retail services as compared to the proposed rule, with respect to, for example, car rental and parking.
  • Minimum Excepted Ownership. The minimum excepted ownership percentage has been revised from 90 to 80 percent.
  • Contents of Declarations. The final rule modifies the provision related to contents of declarations to require additional information in order to allow CFIUS to more efficiently assess whether a transaction falls under its jurisdiction. The rule requires a brief description of whether the transaction is part of a larger project undertaken by the foreign person and whether the foreign person is acquiring a collection of assets or interest in an entity. Additionally, parties are required to provide a brief description of any US government leases involved in the transaction. With respect to the foreign person and its affiliates, the final rule further clarifies what relevant address information should be included in a declaration. Finally, the final rule requires that parties provide additional information about the transaction, such as any applicable term, current physical security of premises, and distance to covered port(s) or military installation(s) relevant to CFIUS’s geographic coverage under the rule.
  • List of Bases, Ranges and Other Installations. The final rule includes revisions to the appendix setting forth the bases, ranges and other installations that meet the “military installation” definition at Section 802.227 to remove one site and further refine the geographic areas covered in connection with the sites listed at part 3 of the appendix.

Tips to Mitigate the Possible Adverse Impacts

While some of FIRRMA's provisions came into effect straight away in August 2018, the final rules unveiling the significant changes to CFIUS’s scope and structure became effective only on 13 February 2020. Although it makes many changes to the CFIUS regime, it doesn’t alter the committee’s case-by-case approach to reviewing foreign investment transactions.

For every transaction that it evaluates, CFIUS will continue to look at the potential threat posed by a particular investor, the vulnerability of the investment target, and the consequences of the transaction. In this regard, there may be cases where CFIUS sees no national security issues associated with a particular transaction, or sees ones that can be mitigated somehow.

It is however important not to view FIRRMA in isolation. One needs to understand it in relation to wider issues, including the broader Sino-US trade dispute, and also a new export control reform law that passed at the same time as FIRRMA to control so-called “emerging” and “foundational” technologies. Both this new export control law and the trade dispute are underpinned and motivated by concerns about China’s acquisition of US technology and theft of IP. Because of this, it’s important when dealing with CFIUS issues to have a clear overall strategy – not just a legal strategy but a public policy and public relations strategy as well.

Content provided by Picture: Louis Chan
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