Clifford Chance

Pursuant to the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the United States Treasury Department's Office of Investment Security has issued Proposed Rules implementing the changes FIRRMA brought to the Committee on Foreign Investment in the United States.

Among the changes, the Proposed Rules extend CFIUS' jurisdiction to "covered investments" that do not provide foreign investors with control, provides for a "white list" process for favoring investors from certain countries in the CFIUS review process, and sets out rules for real estate transactions.

The Proposed Rules offer both risks and rewards for international investors. The new rules significantly expand the scope of CFIUS jurisdiction over non-controlling transactions and acquisition of greenfield sites. They also increase the stakes for non-U.S. buyers by continuing mandatory filing for FIRRMA Pilot Program covered investments, expanding mandatory filing to certain investments where a non-U.S. government has a stake in the transaction, and imposing penalties up to the total value of the transaction for failure to file when required. Combined with CFIUS's new powers to identify non-notified transactions and its increasingly aggressive enforcement, these provisions make the decision whether to seek CFIUS review even more strategically critical in deal planning and execution.

The Proposed Rules also offer key advantages for certain investors, however. They define for the first time important CFIUS concepts, such as:

• What qualifies as sensitive personal data, and when does access to such data create concerns for CFIUS review; 
• What proximity thresholds between an acquired site and a "sensitive" U.S. installation trigger CFIUS concerns; and
• What qualifies as "critical infrastructure" where increased CFIUS scrutiny is merited.

The specificity afforded by these definitions should help clarify when CFIUS filing is appropriate, potentially saving significant deal time and avoiding the need for CFIUS review in many cases.

Equally important, the Proposed Rules create an entirely new opportunity for non-U.S. investors to avoid CFIUS jurisdiction in certain cases. If an investor qualifies as an "excepted investor" at the time of the transaction and for 3 years afterwards, its non-controlling investments are not subject to CFIUS review. This could provide a potentially critical advantage for favored investors when competing for deals, because their competitors might be subject to a CFIUS review requirement when they would not, providing both a cost and time savings in relation to their competition. The criteria for identifying "excepted investors" are complex, but largely involve their exclusive affiliation with close U.S. allies who have adopted CFIUS-like investment controls, and their being on the right side of U.S. export control, national security and criminal law. However, the rules for determining "excepted investor" status are not binary, and the Proposed Rules do not define a process to determine "excepted investor" status. It remains unclear how investors will know whether they qualify in advance, and therefore whether they can avoid CFIUS filing for non-controlling investments.

Comments on the Proposed Rules are due by October 17, 2019. We would encourage parties interested in this mechanism to file comments with CFIUS by the October deadline, perhaps to suggest creation of a participatory process for determining in advance of deal structuring whether the non-U.S. investor(s) qualify as "excepted investors".