A few months ago, we informed you about the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) and its changes to the Committee on Foreign Investment in the United States (“CFIUS”) process. [Government Contracts ConneKTion Blog/August 2018] One of FIRRMA’s biggest changes to the CFIUS process was making CFIUS declarations mandatory in certain instances. Until FIRRMA, CFIUS had been—at least in theory—a voluntary process. FIRRMA changes that and in October, the Department of Treasury published interim regulations implementing a pilot program that now requires declarations for transactions subject to the pilot program. Failing to comply can result in civil monetary penalties equaling the amount of the transaction. The pilot program commences on November 10, 2018, so if you have a transaction in progress or contemplated, the time to evaluate these changes is now.What Transactions Are Subject to the Pilot Program? There are two types of transactions the pilot program applies to: (1) Any transaction resulting in “control” by a foreign person of a pilot program U.S. business; and (2) Any “pilot program covered transactions.” While these terms seem simple enough, there’s much more beneath the surface. What is a Pilot Program U.S. Business? A “pilot program U.S. business” is defined in the regulations as “any business that produces, tests, manufactures, fabricates, or develops a critical technology that is: (a) utilized in connection with the U.S. business’s activity in one or more pilot program industries; or (b) designed by the U.S. business specifically for use in one or more pilot program industries.” A “critical technology” is defined as any of the following:
- Defense articles or defense services included on the U.S. Munitions List as set forth in the International Traffic in Arms Regulations;
- Items included on the Commerce Control List set forth in Supplement No. 1 to part 774 of the Export Administration Regulations and controlled: (i) pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology; or (ii) reasons relating to regional stability or surreptitious listening;
- Nuclear facilities, equipment, and material covered by 10 C.F.R. part 110 (relating to exporting and importing nuclear equipment and material);
- Select agents and toxins covered by specific parts of the C.F.R.; and
- Emerging and foundational technology controlled pursuant to the Export Control Reform Act of 2018. The technology covered here will be defined in the near future by the Department of Commerce.
- Access to any “material nonpublic technical information” in the possession of the target U.S. business. “Material nonpublic technical information” is information that is “not available in the public domain” and is “necessary to design, fabricate, develop, test, produce, or manufacture critical technologies, including processes, techniques, or methods.” The definition excludes financial information regarding the performance of an entity;
- Membership or observer rights on the board of directors or equivalent governing body of the U.S. business, or the right to nominate an individual to a position on the board of directors or equivalent governing body; or
- Any involvement (besides voting of shares) in substantive decision making of the U.S. business regarding the use, development, acquisition, or release of critical technology.
- The investment fund is “managed exclusively by a general partner, a managing member, or an equivalent;”
- The investment fund’s general partner, managing member, or equivalent is not the foreign person;
- The advisory board or committee does not have the ability to approve, disapprove, or otherwise control the investment fund’s investment decisions or decisions by the general partner (or equivalent) regarding portfolio assets;
- The foreign person does not otherwise have an ability to control the fund;
- The foreign person does not have access to “material nonpublic technical information” as a result of its participation.
- The investment otherwise satisfies the requirements of “other investments” set forth in FIRRMA (meaning the investment is non-passive, non-controlling).
- For transactions that are expected to close between November 10, 2018, and December 25, 2018, declarations should be filed “on November 10, 2018 or promptly thereafter.”
- For transactions that are expected to close after December 25, 2018, the declarations should be filed at least 45-days before closing.
- Identifying the parties;
- A brief description of the transaction including percentages of voting and economic interest acquired, total transaction value, and sources of financing;
- Description of the rights the foreign person will have in the business;
- Information on the U.S. business’s government contracts and grants; and
- Whether the parties, including parents and subsidiaries, have been convicted of a crime within the past 10 years in any jurisdiction.
- Request the parties submit a complete joint voluntary notice;
- Inform the parties that CFIUS cannot reach a decision based on the declaration and that the parties may submit a complete joint voluntary notice;
- Unilaterally review the transaction; or
- “Clear” the transaction.
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