On April 21, 2008, the Treasury Department's Office of Investment Security (Treasury) released proposed regulations that would revise the process for giving notice of certain transactions by or involving foreign persons. 

Background

The Foreign Investment and National Security Act of 2007 (FINSA) codified certain aspects of the role, processes and responsibilities of the Committee on Foreign Investment in the United States (CFIUS), the intra-agency government committee that reviews transactions for national security concerns.  FINSA also codified the role that the various executive branch departments, agencies and offices will play in CFIUS's review process.  FINSA provides for a 30-day CFIUS review of transactions to determine the effect of the transactions on national security and to address any perceived threat.  In the following situations, FINSA requires a follow-up investigation: (1) the transaction threatens to impair U.S. security, (2) the transaction is a foreign government controlled transaction (which includes transactions involving persons controlled by foreign governments), (3) the transaction could result in foreign control of critical infrastructure (ports, for example) and could impair national security and (4) upon a recommendation of one of the governmental agencies involved in the CFIUS review. 

Proposed Regulations

In an effort to establish predictability, efficiency and clarity, the regulations expressly encourage pre-notice discussions with CFIUS and include an extensive list of information that parties providing notice to CFIUS should be prepared to deliver.  This information request list reflects a sensitivity to the identity of the parties and their affiliates, government contracts to which they are a party, and technological and energy-related aspects of the applicable business.  The proposed regulations retain earlier policies that seek voluntary notices to CFIUS by parties to potential covered transactions.  CFIUS may also undertake a review of transactions that have not been voluntarily reported. 

The regulations provide that if a transaction constitutes a covered transaction, the parties to the transaction should provide (voluntarily) notice to CFIUS.  Covered transactions include mergers, acquisitions or takeovers by or with a foreign person which could result in foreign control of any U.S. business.  (The formation of a new business is not a covered transaction, nor is a joint venture unless a U.S. business is contributed to it.)  For purposes of the definition of covered transaction, "control" is the power, whether or not exercised, to directly or indirectly, "determine, direct or decide important matters affecting an entity", regardless of how that "power" is acquired.  If there is a potential for foreign control, the other terms used in the definition of covered transaction cast a wide net. For example, the term "foreign person" includes foreign nationals, foreign governments, including their respective agencies and instrumentalities, foreign entities owned at least 50% by foreign nationals and foreign entities that are traded on foreign exchanges, as well as entities controlled by any of the foregoing.  The term "U.S. business" is broadly defined to mean any entity engaged in interstate commerce in the United States, but only to the extent of its activities in interstate commerce in the United States.

The proposed regulations include numerous examples of covered transactions and clarify two important points about control.  First, if the foreign person involved in the transaction (i) does not have any intent other than "investment intent" and does not acquire the ability to exert any rights inconsistent therewith (such as veto rights on material matters) and (ii) acquires less than ten percent of the applicable U.S. business, then the transaction will not be a covered transaction. Second, with respect to secured lenders, the making of a loan pursuant to which a U.S. business is pledged to a foreign lender will not be a covered transaction; however, the realization upon the pledge may result in a covered transaction.

It is also noteworthy that "sovereign wealth funds" (SWFs), such as quasi-governmental pension funds, are included within the foreign government category, as there are no separate provisions (safe harbor or otherwise) for SWFs.  This reflects U.S. government concerns that SWFs can be used for purposes that are strategic, not strictly "commercial". Although SWFs were covered by pre-FINSA legislation and could have been investigated by CFIUS, such investigation was not mandatory.  However, because SWFs are not accorded separate treatment from foreign governments, the effect of the proposed regulations is to mandate a follow-up investigation for SWF transactions that result in the acquisition of control of a U.S. business.  SWFs had sought provisions excepting them from the regulations directed at foreign governments.

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Comments on the Treasury release will be accepted on the proposed rules for 45 days after publication in the U.S. Federal Register.  A public meeting is being held at the office of the Department of Treasury on May 2, 2008 at 10:00 a.m.

A copy of the entire Treasury release can be found at http://www.treas.gov/press/releases/reports/proposed_regulations42108.pdf

If you would like further information on this topic, please do not hesitate to contact Marc Berger in our New York office (212.588.5500).

Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance.  For particular applications of the law to specific situations, the reader should seek professional advice.
 
 
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April 25, 2008