CFIUS Proposes New Rule: What You May Need to Know About Potential Changes to the Mandatory Reporting Requirement
June 12, 2020
By Brett W. Johnson and Tracy A. Olson
The Department of Treasury has recently proposed a rule revising the Committee on Foreign Investment in the United States’(“CFIUS”) regulation, 31 C.F.R. Part 800. Generally, CFIUS is a government body that has authority to review transactions that could result in foreign control of a U.S. business. Within the last year, CFIUS’ review authority has expanded to include certain noncontrolling transactions, including certain transactions related to critical technologies. CFIUS’ proposed rule suggests two changes to this current regulation.1
First, the proposed rule modifies the scope of “mandatory” declarations for certain transactions related to critical technologies. Currently, the scope of mandatory declarations for these transactions is based on the North American Industry Classification System (“NAICS”) code criteria found in Appendix B to Part 800. The proposed rule removes the NAICS criteria and bases disclosure on whether the transaction would require “certain U.S. government authorizations would be required to export, re-export, transfer (in country), or retransfer the critical technology or technologies produced, designed, tested, manufactured, fabricated, or developed by the U.S. business to certain transaction parties and foreign persons in the ownership chain.” Under this criterion, a company would be required to submit a declaration, even if an International Traffic in Arms Regulations (“ITAR”) or Export Administration Regulation (“EAR”) exception or exemption applied.
Second, the proposed rule clarifies the term “substantial interest,” which is relevant to determining indirect ownership interests for CFIUS disclosure. Specifically, the proposed rule seeks to clarify that the 25 percent interest threshold only applies “where a general partner, managing member, or equivalent primary directs, controls, or coordinates the activities of the entity.” In addition, the proposed rule clarifies how to calculate an indirect ownership interest.
If a company produces, sells or utilizes technologies that might require export classifications and licenses, this proposed rule could impact its CFIUS compliance responsibilities. Companies should consider evaluating their export policies and, if appropriate, implement CFIUS and other export control specific policies. In any transaction involving foreign ownership, technology license, or joint venture arrangement, companies should consider the impact of such policies.
Proposed regulations can sometimes require additional clarification. CFIUS will accept comments on this proposed rule until June 22, 2020. If this policy potentially affects your company, consider submitting a comment to protect your interests.