The Treasury Department held a public hearing May 2 on its proposed rule to implement changes required by legislation modifying the process the U.S. uses to vet foreign direct investments for national security concerns. Ron Orol reports for TheDeal.com: Lawyers Question Proposed Rules Governing Foreign Investment in U.S. (May 5).
Some suggested that firms, to minimize their risk in the face of ambiguity in the rule, would be more likely to file notifications with the Committee on Foreign Investment in the U.S. in marginal cases, increasing the administrative burden of the process:
One question on CFIUS practitioners' minds was to determine whether a sovereign wealth fund was gaining a "controlling interest" in a U.S. company. Acquisition of a controlling interest obligates an acquirer to apply for CFIUS approval. The proposal defines control not as a percentage of investment but as "the ability to exercise certain powers over important matters affecting a business."
Two CFIUS practitioners said the draft isn't clear enough about whether U.S. private equity firms must submit acquisitions for review simply because a sovereign fund is among their limited partners. "By virtue of our sovereign fund limited partners, have we breached that abstract 'control' threshold?" asked one attorney. He added that many foreign companies seeking to invest in or buy U.S. assets will for a while be "feeling their way in the dark" as they try to figure out what transactions need to be submitted.
The vagueness of the rule, another attorney argued, will likely lead to a raft of applications to CFIUS from foreign companies that might not have bothered previously.
"The only way to obtain comfort with respect to various control triggers is to file notification and that's a very heavy burden, potentially unnecessary from our perspective, and will pose undue burden on the CFIUS agencies," said George Kleinfeld, counsel at Clifford Chance in Washington...
Revised on April 6. To read more on the CFIUS process, go to CFIUS.
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