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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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Effective October 15, 2020, the Department of the Treasury’s September 15 <a href="https://www.federalregister.gov/documents/2020/09/15/2020-18454/provisions-pertaining-to-certain-investments-in-the-united-states-by-foreign-persons" target="_blank" rel="noopener">final rule</a> (“Rule”) will modify certain regulations of the Committee on Foreign Investment in the United States (CFIUS) pursuant to the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). In a <a href="https://www.thompsonhinesmartrade.com/2020/09/treasury-issues-final-rule-modifying-cfius-mandatory-declarations/" target="_blank" rel="noopener">previous blog post</a>, we noted that the Rule would change the requirements for making mandatory disclosures to the U.S. government prior to completing certain types of foreign investments in, or acquisitions of, certain types of U.S. businesses. These changes are comprehensive and will require parties entering into these types of transactions to undertake new due diligence efforts to ensure they are in compliance with CFIUS’s strict liability requirements and avoid penalties for noncompliance. This update describes the underlying legislation as well as the legal and practical implications of the Rule.

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FIRRMA’s Expansion of CFIUS Jurisdiction and Mandatory Filings

In 2018, Congress enacted FIRRMA to expand the government’s ability to monitor and mitigate national security risks arising from non-controlling, non-passive foreign investments in and acquisitions of U.S. businesses. Notably, FIRRMA introduced mandatory filing requirements to the CFIUS review process. The first mandatory filings implemented were for foreign investments in “critical technologies” resulting in the transfer of certain rights to the investor under the <a href="https://home.treasury.gov/news/press-releases/sm506" target="_blank" rel="noopener">pilot program in November 2018</a> (“Pilot Program”). Under the Pilot Program, the “critical technologies” mandatory CFIUS filing was determined through a combination of identifying the covered technology and confirming whether it was designed for use in specific industries. The filings were mandatory regardless of the nationality of the foreign investor. Subsequently, <a href="https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius" target="_blank" rel="noopener">broader regulations implementing FIRRMA </a>&nbsp;became effective in February 2020. These included additional mandatory filing requirements for certain transactions in which a foreign government-owned investor would obtain a “substantial interest” in a U.S. company involved with (i)&nbsp;critical technologies, (ii) critical infrastructure, or (iii)&nbsp;sensitive personal data. The CFIUS regulations call such companies “TID U.S. businesses” (“T” for technology, “I” for infrastructure and “D” for data).

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Mandatory CFIUS Filings as of October 15, 2020

As of October 15, 2020, the new Rule significantly updates the critical technology mandatory filing requirement. The Rule removes and replaces the industry component of the analysis and instead requires the parties to determine whether the foreign investor and other foreign entities in the investor’s ownership chain would require certain U.S. export authorizations to receive or access the U.S. business’s critical technologies. Specifically, Section 800.401(c)(1) of the Rule provides that a mandatory CFIUS filing is required with respect to any covered transaction involving:

“U.S. regulatory authorization” includes any license or other approval issued by the Department of State under the International Traffic in Arms Regulations (ITAR), the Department of Commerce’s Bureau of Industry and Security (BIS) under the Export Administration Regulations (EAR), any specific or general authorization from the Department of Energy under foreign atomic energy regulations, or any specific license from the Nuclear Regulatory Commission. Except for some limited EAR license exceptions, a U.S. regulatory authorization is considered to be required even though a license exception or exemption may be available under the EAR or ITAR, respectively.

A foreign person is an “investor” in a TID U.S. business for purposes of Section 800.401(c)(1) if it:

Foreign Government “Substantial Interest” Mandatory Filings

This “substantial interest” requirement remains unchanged except that, as explained in our <a href="https://www.thompsonhinesmartrade.com/2020/09/treasury-issues-final-rule-modifying-cfius-mandatory-declarations/" target="_blank" rel="noopener">previous blog post</a>, what constitutes a “substantial interest” by a foreign government in a foreign person was defined in the Rule. Under the Rule, a foreign government is considered to have a substantial interest in an entity whose activities are primarily directed, controlled, or coordinated by or on behalf of a general partner, managing member, or equivalent, only if they hold 49% or more of the interest in that general partner, managing member, or equivalent.

Summary of Mandatory Filings

A mandatory filing is required when there exists a covered transaction:

Key Legal and Practical Implications of the Rule for U.S. Businesses

Knowledge of U.S. Export Control Laws and Regulations

On its face, changing the CFIUS rules to more closely align with U.S. export controls and regulations makes sense as both regimes are concerned with national security issues and limiting the influence of U.S. adversaries. However, legally and practically, CFIUS rules and U.S. export controls were developed to target different types of transactions, companies and aims.

For example, ITAR and the EAR were designed to address national security concerns with real exports of U.S. products and technology in the context of a specific transaction. Determining whether an export authorization is required for actual export involves a complex analysis of various factors specific to each transaction including: export control classification numbers (ECCN) on the Commerce Control List (CCL); types of products, software, technology or services being exported; country destinations of those exports; intended or potential end-uses of those products; and a determination of the actual end-users of the product. Companies that are not exporters or trained in export controls may be at a disadvantage and could easily expose themselves and their potential partners to risk of noncompliance.

In addition to analyzing the regulatory designations of the U.S. business’s products, the new assessment requires diligence on investors. It is often not obvious whether a foreign person is involved in a transaction indirectly. In addition, U.S. companies must ascertain not only whether a foreign investor is involved, but also the identities and nationalities of all foreign persons involved, including parent entities and ownership chains of control, to determine whether mandatory filing requirements apply relative to each specific foreign person.

Thompson Hine LLP’s International Trade practice group has extensive experience in CFIUS filings. For more information, please contact:

David M. Schwartz Partner and Practice Group Leader, International Trade 202.263.4170 <a href="mailto:David.Schwartz@ThompsonHine.com">David.Schwartz@ThompsonHine.com</a>

Samir D. Varma Partner, International Trade 202.263.4136 <a href="mailto:Samir.Varma@ThompsonHine.com">Samir.Varma@ThompsonHine.com</a>

Francesca M.S. Guerrero Partner, International Trade 202.973.2774 <a href="mailto:Francesca.Guerrero@ThompsonHine.com">Francesca.Guerrero@ThompsonHine.com</a>

Brent Connor Senior Counsel, International Trade 202.263.4188 <a href="mailto:Brent.Connor@ThompsonHine.com">Brent.Connor@ThompsonHine.com</a>

Joyce Rodriguez Associate, International Trade 202.973.2724 <a href="mailto:Joyce.Rodriguez@ThompsonHine.com">Joyce.Rodriguez@ThompsonHine.com</a>

Scott E. Diamond* Senior Legislative &amp; Regulatory Policy Advisor, International Trade 202.263.4197 <a href="mailto:Scott.Diamond@ThompsonHine.com">Scott.Diamond@ThompsonHine.com</a> *Not licensed to practice law

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

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https://admin.thompsonhine.com/wp-content/uploads/2022/04/International_Trade_Update_-_New_CFIUS_Critical_Technology_Mandatory_Filing_Requirements_Take_Effect_October_15.pdf

New CFIUS Critical Technology Mandatory Filing Requirements Take Effect October 15

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