On April 23rd the Treasury published its proposed rule to modify the regulations governing U.S. national security reviews of foreign investments (Proposed rule). The Treasury is accepting public comments through June 9.
Barara Linnney of Blank Rome LLP describes the content of the new rules: United States: No “Bright Lines” Drawn By New Foreign Investment Regulations (Mondaq, April 24).
Simeon Kriesberg, David McIntosh, and Kristy Balsanek of Mayer Brown LLP, describe the content and provide a little more analysis: United States: Proposed Rules Signal A More Expansive And Intensive Examination Of Foreign Investments In The United States (Mondaq, May 12, 2008). It doesn't break new ground: "For the most part, the proposed rules simply codify the mode of operation that CFIUS has developed before and since the enactment of the Foreign Investment and National Security Act of 2007 (FINSA)."
Control is the most important concept in the rule:
The concept of "control" is the cornerstone of the proposed rules, as CFIUS only screens those investments that would result in control by a foreign person over a US business, which control would threaten to impair national security.
There has been an important change in the threshold used to identify control:
Significantly, the 10-percent-interest threshold, which generally had been considered the dividing line between control and no control, is expressly stated to be irrelevant unless "the transaction is solely for the purpose of investment." Thus, a foreign investor taking less than a 10-percent interest in the voting shares of a US business with national security implications would still need to establish a solely passive investment purpose.
When an investment is not solely passive, the control determination is more complex. Here are some of the considerations that apply to infrastructure investments:
Foreign investors have played a key role in a number of transactions through which turnpikes, bridges, and other infrastructure have been placed in private hands, typically through long-term leases. The proposed rules expressly state that long-term leases may be considered transactions that transfer control, but only where the lessee "makes substantially all business decisions concerning the operation of a leased entity, as if it were the owner." An example provided in the proposed rules notes that, where a foreign person "signs a concession agreement to operate a toll road business" in the United States "for 99 years," but where the US owner retains authority to perform "safety and security functions" and to terminate the lease if the foreign person fails to fulfill its operational obligations under the lease, then the lease would not constitute a transaction transferring control. This provision provides to parties to infrastructure privatization transactions a road map on how to draft long-term leases that will fall outside the scope of CFIUS examination.
On a different topic, sovereign wealth funds are not specifically mentioned in the rule:
In announcing the proposed rules, however, the Treasury Department commented that CFIUS has examined SWF transactions for many years and that CFIUS intends to treat SWFs as it does any other investor controlled by a foreign government. For parties to SWF transactions, therefore, the proposed rules promise no better treatment, and no worse, than that accorded to other investments by foreign government instrumentalities.
The rule is structured so as to husband the President's scarce political capital:
...the proposed rules confirm that a CFIUS decision to extend an examination beyond the 30-day "review" period into the additional 45-day "investigation" period does not necessitate a referral to the President. Originally, any time a transaction could not be cleared within 30 days and was moved into the further 45-day investigation, CFIUS was required to make a recommendation to the President at the end of the investigation. CFIUS traditionally sought to shield the President from having to make such highly visible and potentially controversial decisions about particular foreign investments by minimizing the number of transactions that reached the 45-day investigation phase. The proposed rules follow the recent practice of limiting the circumstances under which CFIUS investigations need to be referred for presidential determination. Specifically, the President will be involved only if CFIUS recommends that a transaction be blocked or cannot reach a consensus on whether to make such a recommendation, or otherwise requests the President to make the determination. Because 45-day investigations no longer lead automatically to presidential involvement, the political cost of such investigations is lower and CFIUS is less likely to feel pressed to complete its examination within the original 30 days.
Revised May 14.
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