Presenting a live 90-minute webinar with interactive Q&A. Today s faculty features:

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1 Presenting a live 90-minute webinar with interactive Q&A New CFIUS Pilot Program: Expanded Jurisdiction, Reporting Requirements for Non-Controlling Investments Ensuring Compliance in the Evolving CFIUS Landscape WEDNESDAY, FEBRUARY 13, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Farhad Jalinous, Partner, White & Case, Washington, D.C. Keith Schomig, Counsel, White & Case, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1.

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5 New CFIUS Pilot Program: Expanded Jurisdiction, Reporting Requirements for Non-Controlling Investments Farhad Jalinous Keith Schomig Strafford Webinar February 13, 2019

6 CFIUS Overview CFIUS is a U.S. government inter-agency committee that reviews certain foreign investment for national security concerns. Historically: Limited only to transactions that could result in control of a U.S. business by a foreign person. Primarily a voluntary process. Now, under the Foreign Investment Risk Review Modernization Act (FIRRMA): Expanded jurisdiction to review other types of transactions. Certain filings mandatory. 6

7 CFIUS Composition Members: Secretary of the Treasury (chair) Secretary of State Secretary of Defense Secretary of Commerce Secretary of Energy Secretary of Homeland Security Attorney General United States Trade Representative Director of the White House Office of Science and Technology Policy the heads of any other executive department, agency, or office, as determined to be appropriate, on a case-bycase basis Nonvoting, ex officio members: Director of National Intelligence Secretary of Labor Officials of five White House offices are observers 7

8 General CFIUS Process Preliminary Work 45-Day Initial Review Day Investigation (if needed) 15-Day Presidential Review (if needed) Review within 45 days of accepting a notice filed by the parties. Investigation of up to 45 days if CFIUS determines that it needs additional time to complete its assessment. (Potential for 15 additional days in extraordinary circumstances.) CFIUS may seek to mitigate any national security risk posed by a transaction that is not adequately addressed by other provisions of law. If CFIUS determines that a transaction poses national security risk that cannot be resolved by mitigation, it will refer the transaction to the President, unless the parties choose to abandon the transaction. The President may suspend or prohibit the transaction. The President has 15 days to make his decision, and the decision is made public. Total process, including pre-filing stage: about 5-6 months. 8

9 Foreign Investment Risk Review Modernization Act (FIRRMA) Enacted in August 2018 Motivated by concerns with Chinese investment. 2 key changes to CFIUS process: Expands the types of transactions that CFIUS may review Creates a declaration process and makes certain declarations mandatory 9

10 Pre-FIRRMA Expansion of CFIUS Covered Transactions 1 Who Transaction Types Degree of Influence over Target Target Characteristics Any foreign person Merger Acquisition Takeover Joint venture Long-term lease Control = power to determine, direct, or decide important matters Any U.S. business 10

11 FIRRMA Pre-FIRRMA Expansion of CFIUS Covered Transactions Who Transaction Types Degree of Influence over Target Target Characteristics Any foreign person Certain categorie s of foreign persons Certain categorie s of foreign persons Merger Acquisition Takeover Joint venture Long-term lease Purchase Lease Concession Any investment, direct or indirect Control = power to determine, direct, or decide important matters N/A access to material non-public technical information, member or observer of board (or equivalent) of the U.S. business, OR any involvement, other than voting of shares, in substantive decision-making of the U.S. business regarding (i) sensitive personal data of U.S. citizens, (ii) critical technologies, OR (iii) critical infrastructure Any U.S. business Real estate in the United States: air or maritime port, OR in close proximity to, or that could be used to collect intelligence on or expose national security activities at, certain sensitive U.S. government installations, facilities, or property But excluding: single housing units potentially, real estate in urbanized areas Any unaffiliated U.S. business involved in: critical infrastructure, critical technologies, OR sensitive personal data of U.S. citizens 4 Any change in rights, if that change could result in a transaction of the type in (1) or (3). 5 Any other transaction, the structure of which is designed or intended to evade or circumvent CFIUS jurisdiction. 11

12 FIRRMA Pre-FIRRMA Expansion of CFIUS Covered Transactions Who Transaction Types Degree of Influence over Target Target Characteristics Any foreign person Certain categorie s of foreign persons Certain categorie s of foreign persons Merger Acquisition Takeover Joint venture Long-term lease Purchase Lease Concession Any investment, direct or indirect Control = power to determine, direct, or decide important matters N/A access to material non-public technical information, member or observer of board (or equivalent) of the U.S. business, OR any involvement, other than voting of shares, in substantive decision-making of the U.S. business regarding (i) sensitive personal data of U.S. citizens, (ii) critical technologies, OR (iii) critical infrastructure Any U.S. business Real estate in the United States: air or maritime port, OR in close proximity to, or that could be used to collect intelligence on or expose national security activities at, certain sensitive U.S. government installations, facilities, or property But excluding: single housing units potentially, real estate in urbanized areas Any unaffiliated U.S. business involved in: critical infrastructure, critical technologies, OR sensitive personal data of U.S. citizens 4 Any change in rights, if that change could result in a transaction of the type in (1) or (3). 5 Any other transaction, the structure of which is designed or intended to evade or circumvent CFIUS jurisdiction. 12

13 Expansion of CFIUS Covered Transactions FIRRMA adds four new types of covered transactions : 1. EXISTING: Mergers, acquisitions, or takeovers which could result in control of a U.S. business by a foreign person 2. NEW: Certain real estate investments by a foreign person* in sensitive areas 3. NEW: Non-passive, non-controlling investments (including through PE structures) in U.S. businesses involved in critical technology, critical infrastructure, or sensitive personal data in which the foreign person* obtains: o o o Member/observer of the board of the U.S. business, Access to material non-public technical information of the U.S. business, or Involvement in substantive decision-making of the U.S. business 4. NEW: Changes in a foreign person s governance rights that could result in a transaction of the type in (1) or (3) 5. NEW: Any transaction structured to evade CFIUS * FIRRMA instructs CFIUS to limit the application to investments by certain categories of foreign persons. 13

14 Expansion of CFIUS Covered Transactions FIRRMA adds four new types of covered transactions : 1. EXISTING: Mergers, acquisitions, or takeovers which could result in control of a U.S. business by a foreign person 2. NEW: Certain real estate investments by a foreign person* in sensitive areas 3. NEW: Non-passive, non-controlling investments (including through PE structures) in U.S. businesses involved in critical technology, critical infrastructure, or sensitive personal data in which the foreign person* obtains: o o o Member/observer of the board of the U.S. business, Access to material non-public technical information of the U.S. business, or Involvement in substantive decision-making of the U.S. business 4. NEW: Changes in a foreign person s governance rights that could result in a transaction of the type in (1) or (3) 5. NEW: Any transaction structured to evade CFIUS * FIRRMA instructs CFIUS to limit the application to investments by certain categories of foreign persons. 14

15 Declarations Declarations - new streamlined process Declarations will be mandatory for certain types of transactions CFIUS must require declarations for any covered transaction that results in the acquisition of a substantial interest in a U.S. business involved in critical technology, critical infrastructure, or sensitive personal data, by a foreign person in which a foreign government has a substantial interest. CFIUS may require declarations for other types of covered transactions, including any covered transaction involving an investment in a U.S. business involved in critical technology. 15

16 Pilot Program FIRRMA authorizes pilot programs to implement any provision of FIRRMA on a trial basis in advance of final regulations. First pilot program, effective November 10, 2018, mandates filings (by declaration or full notice) for certain critical technology transactions: 1. Pilot Program U.S. Business 2. In which foreign investor acquires control or makes non-passive investment Must file at least 45 days before closing. Failure to file could be penalized up to value of the transaction. 16

17 Pilot Program U.S. business 1. Pilot Program U.S. Business is a U.S. business that: A. produces, designs, tests, manufactures, fabricates, or develops a critical technology; and B. such critical technology is either used in connection with the U.S. business s activities in, or specifically designed by the U.S. business for, one or more Pilot Program Industries 17

18 Critical Technologies 4 existing categories: Defense articles/services included on the United States Munitions List Items on the Commerce Control List that are controlled pursuant to multilateral regimes or for reasons relating to regional stability or surreptitious listening Nuclear facilities, equipment, materials, software, technology covered by 10 CFR Part 810 or Part 110 Select Agents and Toxins Plus new category: emerging and foundational technologies Will be identified and controlled for export under a new interagency process, coordinated by the Commerce Department, under Section 1758 of the Export Control Reform Act of 2018 Representative general categories of emerging technologies proposed by the Commerce Department requested comments on criteria to define and identify specific emerging technologies: Biotech AI and machine learning Position, navigation, and timing technology Microprocessor technology Advanced computing technology Data analytics technology Quantum information and sensing technology Logistics technology Additive manufacturing Robotics Brain-computer interfaces Hypersonics Advanced materials Advanced surveillance technologies 18

19 Pilot Program Industries Aircraft Manufacturing NAICS Code: Aircraft Engine and Engine Parts Manufacturing NAICS Code: Alumina Refining and Primary Aluminum Production NAICS Code: Ball and Roller Bearing Manufacturing NAICS Code: Computer Storage Device Manufacturing NAICS Code: Electronic Computer Manufacturing NAICS Code: Guided Missile and Space Vehicle Manufacturing NAICS Code: Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing NAICS Code: Military Armored Vehicle, Tank, and Tank Component Manufacturing NAICS Code: Nuclear Electric Power Generation NAICS Code: Optical Instrument and Lens Manufacturing NAICS Code: Other Basic Inorganic Chemical Manufacturing NAICS Code: Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing NAICS Code: Petrochemical Manufacturing NAICS Code: Powder Metallurgy Part Manufacturing NAICS Code: Power, Distribution, and Specialty Transformer Manufacturing NAICS Code: Primary Battery Manufacturing NAICS Code: Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing NAICS Code: Research and Development in Nanotechnology NAICS Code: Research and Development in Biotechnology (except Nanobiotechnology) NAICS Code: Secondary Smelting and Alloying of Aluminum NAICS Code: Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing NAICS Code: Semiconductor and Related Device Manufacturing NAICS Code: Semiconductor Machinery Manufacturing NAICS Code: Storage Battery Manufacturing NAICS Code: Telephone Apparatus Manufacturing NAICS Code: Turbine and Turbine Generator Set Units Manufacturing NAICS Code:

20 Pilot Program foreign investor interest 2. Foreign investor acquires control or makes non-passive investment Control = power, direct or indirect, whether or not exercised, to determine, direct, or decide important matters Essentially, ability to unilaterally compel or veto any important matter Non-passive: Member or observer of board of U.S. business; Access to material non-public technical information in possession of U.S. business; OR Any involvement, other than through voting of shares, in substantive decision-making of U.S. business relating to critical technology. 20

21 Pilot Program foreign investor interest material non-public technical information Information, not available in the public domain, that is necessary to design, fabricate, develop, test, produce, or manufacture critical technologies, including processes, techniques, or methods. Does not include financial information. substantive decision-making Right to consult with or provide advice to a decision-maker; Special approval or veto rights; Right or ability to participate on a committee with decision-making authority; Right to have direct access to directors, officers, managers, and other employees engaged in or with the ability to make decisions; or Right to appoint officers or employees who have involvement of the type listed above. 21

22 Two-Step Analysis Does the proposed transaction fall within the scope of the Pilot Program? If so, mandatory declaration (or full notice) required at least 45 days before closing. If not, does the proposed transaction fall within CFIUS s general jurisdiction ( control of U.S. business )? If so, does the proposed transaction raise national security considerations, such that a voluntary filing is warranted? 22

23 Pilot Program - Investment Funds An investment through a fund by a foreign limited partner who is a member of the fund s advisory board or a committee of the fund is not a pilot program covered transaction if all of the following criteria are met: The fund is managed exclusively by a general partner (or equivalent) that is not the foreign limited partner; The advisory board/committee does not have the ability to approve/disapprove/control investment decisions of the fund or decisions by the general partner with respect to the fund s portfolio assets; The foreign limited partner cannot otherwise control the fund; The foreign limited partner does not have access to material nonpublic technical information as a result of its participation on the advisory board or committee; and The investment otherwise meets the requirements of "other investments" (i.e., non-passive, non-controlling transactions) set forth in FIRRMA. 23

24 Pilot Program - Investment Funds This leads to unanswered questions: If one of the elements is not met, is the investment then covered by the pilot program? If all elements are met but the foreign investor can nonetheless (1) access any material nonpublic technical information in the possession of the US business (other than through its participation on the advisory board); (2) appoint a director or observer to the board of directors of the US business; or (3) be involved, other than through voting of shares, in substantive decision making of the US business regarding the use, development, acquisition, or release of critical technology; then is the investment covered by the pilot program? 24

25 White & Case Pilot Program Tool White & Case developed and published a CFIUS Pilot Program Covered Transaction Analysis Tool. It provides an online, step-by-step analysis of a transaction in order to assist in determining whether the transaction could be subject to the Pilot Program. As with any such tool, the CFIUS Pilot Program Covered Transaction Analysis Tool is intended as a guide for informational purposes only it is not a substitute for legal advice. The tool is based upon interim regulations and guidance provided by CFIUS, and therefore remains subject to change based on regulatory changes and further guidance from CFIUS. The tool is available here: 25

26 White & Case Pilot Program Tool 26

27 National Security Considerations National security risk is a function of the interaction between threat and vulnerability, and the potential consequences of that interaction for U.S. national security. Threat: whether a foreign person has the capability or intention to exploit or cause harm Vulnerability: whether the nature of the U.S. business, or its relationship to a weakness or shortcoming in a system, entity, or structure, creates susceptibility to impairment of U.S. national security Availability of supply to the U.S. government, defense industrial base Integrity of supply e.g., susceptibility to sabotage, espionage, supply chain tampering Sensitive infrastructure Sensitive technology Data that the U.S. business collects (e.g., large amounts of sensitive data on U.S. citizens (PII/PHI)) or to which it has access (e.g., classified information, sensitive information of its clients/customers or end-users) Proximity to ports or sensitive U.S. government installations 27

28 Outcomes of a Pilot Program Review Upon accepting a declaration, CFIUS must take one of four actions within 30 days: Conclude action (confers safe harbor ) Request that the parties file a full notice Inform the parties that CFIUS is not able to conclude action on the basis of the declaration Self-initiate a full review CFIUS has not extended safe harbor to subsequent acquisitions of interests when: CFIUS concludes action on a pilot program covered transaction (whether a controlling or noncontrolling investment) by declaration, or CFIUS concludes action on a non-controlling "pilot program covered investment" through a full notice. Control transactions reviewed on the basis of a full notice, even when involving a pilot program US business, will continue to receive the safe harbor for any subsequent acquisition of interest in that US business by the foreign person v1 28