Global Securities Law Update | October 2020
Amendment to Rules Governing Review of Certain Foreign Investments in US Critical Technology Companies Brings US Export Controls to Center Stage
A major rule change regarding when a foreign investment in US critical technology triggers a mandatory filing with the Committee on Foreign Investment in the United States, or CFIUS, went into effect on October 15, 2020. The amendment brings US export regulations to the forefront of the determination of when a filing with CIFIUS is required.
The amendment does not change the basic obligation that a filing with CIFIUS is required prior to certain investments by a foreign person or foreign entity in US “critical technology”, “critical infrastructure” or “sensitive personal data” – even if that investment is small and non-controlling (referred to as a “covered investment”). We described these requirements in a previous memorandum (see here).
Those subject to mandatory filings should note that:
- parties must file at least 30 days prior to a transaction’s expected completion date.
- CFIUS will have 30 days to take action on such filing.
- a penalty can be assessed up to the value of the transaction where parties fail to make a mandatory filing.
Prior to the recent rule change, whether a transaction triggered a mandatory filing with CFIUS depended in part on whether the US “critical technology” at issue was used in one of 27 North American industries.
Under the rule change, instead of an industry classification, the determination as to whether a CIFIUS filing is required depends on the far more complicated test of whether a license would be required to export such critical technology under US export regulations.
Specifically, a controlling transaction or covered investment now requires a mandatory filing whenever:
- the US business that is the target of the investment (which can be a subsidiary of a foreign parent into which the investment is made) produces, designs, tests, manufactures, fabricates or develops any “critical technology” that
- requires a “US regulatory authorization” (defined as licensing under four main US export control regimes, including ITAR and EAR regulations, with limited exemptions available) for export, re-export, transfer (in-country), or retransfer of that technology to either:
- the party making the investment, or
- any person that, individually, or as part of a group of foreign persons, holds a voting interest, director or indirect, of 25% or more in the party making the investment.
For these purposes, “critical technology” remains as previously defined to include US export control list technology such as certain defense, dual-use and nuclear-related articles and services; select agents and toxins; and emerging and foundational technology (the last category is as yet largely undefined).
Because of the design of US export control regimes, mandatory CFIUS filing obligations will now vary depending on the principal place of business of foreign entity investors and/or the nationality of foreign individual investors. Overall, fewer mandatory filings may now be required by investors from NATO countries plus Australia, Japan, New Zealand and South Korea, and more may be required by investors from other countries, including China, Russia and perhaps Israel.
Our clients and friends planning relevant transactions should note that US export analysis can be complex and time-consuming, especially for US businesses which have not performed this analysis before or have not done so on all of their products (such as those not currently exported). As a result, transaction timelines should be designed to allow for adequate consideration of these new CFIUS requirements.
Even if no mandatory filing is required, a voluntary filing with CFIUS may be advisable where a controlling transaction or covered transaction implicates US national security. Absent clearance, CFIUS could investigate and force a filing after the fact, impose conditions on the transaction or even recommend that it be blocked (even after closing).
The US State Department administers International Traffic in Arms Regulations (ITAR) and the US Commerce Department administers Export Administration Regulations (EAR).