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CFIUS Excepted Investors: Canada, United Kingdom and Australia

By | January 18, 2020

On January 13, 2020, the U.S. Department of Treasury published final regulations relating to the Committee on Foreign Investment in the United States, or CFIUS.  The regulations implement the Foreign Investment Risk Review Modernization Act of 2018, or FIRRMA.  The regulations become effective on February 13, 2020.

As required by FIRRMA, however, the regulations limit the application of CFIUS’s jurisdiction over non-controlling “covered investments” and certain real estate transactions by certain foreign persons, defined as “excepted investors,” from certain “excepted foreign states.” Any such eligible investor and foreign state must meet specific criteria to qualify for this status.

CFIUS has identified Australia, Canada, and the United Kingdom as the initial excepted foreign states and excepted real estate foreign states. CFIUS identified these countries due to certain aspects of their robust intelligence-sharing and defense industrial base integration mechanisms with the United States. Because this is a new concept with potentially significant implications for U.S. national security, CFIUS is initially identifying a limited number of foreign states and may expand the list in the future. Note that in order for each of these countries to remain an excepted foreign state and an excepted real estate foreign state after February 13, 2022, the Committee must make a determination regarding an eligible foreign state’s national security based foreign investment review processes and bilateral cooperation with the United States on national security-based investment reviews.

Importantly, under the regulations CFIUS retains the authority to review a transaction that could result in foreign control of any U.S. business. CFIUS’s jurisdiction is limited for excepted investors only for non-controlling investments.

Under the regulations, the term excepted investor means a foreign person who is, as of the completion date of the transaction:

  • A foreign national who is a national of one or more excepted foreign states and is not also a national of any foreign state that is not an excepted foreign state;
  • A foreign government of an excepted foreign state; or
  • Certain foreign entities.

For a foreign entity to qualify as an excepted investor it must meet each of the following conditions with respect to itself and each of its parents (if any):

  • Such entity is organized under the laws of an excepted foreign state or in the United States;
  • Such entity has its principal place of business in an excepted foreign state or in the United States;
  • Seventy-five percent or more of the members and 75 percent or more of the observers of the board of directors or equivalent governing body of such entity are: (A) U.S. nationals; or (B) Nationals of one or more excepted foreign states who are not also nationals of any foreign state that is not an excepted foreign state;
  • Any foreign person that individually, and each foreign person that is part of a group of foreign persons that in the aggregate (subject to the aggregation rule noted below), holds 10 percent or more of the outstanding voting interest of such entity; holds the right to 10 percent or more of the profits of such entity; holds the right in the event of dissolution to 10 percent or more of the assets of such entity; or otherwise could exercise control over such entity, is: (A) A foreign national who is a national of one or more excepted foreign states and is not also a national of any foreign state that is not an excepted foreign state; (B) A foreign government of an excepted foreign state; or (C) A foreign entity that is organized under the laws of an excepted foreign state and has its principal place of business in an excepted foreign state or in the United States; and
  • The minimum excepted ownership of such entity is held, individually or in the aggregate, by one or more persons each of whom is: (A) Not a foreign person; (B) A foreign national who is a national of one or more excepted foreign states and is not also a national of any foreign state that is not an excepted foreign state; (C) A foreign government of an excepted foreign state; or (D) A foreign entity that is organized under the laws of an excepted foreign state and has its principal place of business in an excepted foreign state or in the United States.

The term minimum excepted ownership means:

  • With respect to an entity whose equity securities are primarily traded on an exchange in an excepted foreign state or the United States, a majority of its voting interest, the right to a majority of its profits, and the right in the event of dissolution to a majority of its assets; and
  • With respect to an entity whose equity securities are not primarily traded on an exchange in an excepted foreign state or the United States, 80 percent or more of its voting interest, the right to 80 percent or more of its profits, and the right in the event of dissolution to 80 percent or more of its assets.

For purposes of the 10% ownership rule set forth above, foreign persons who are related, have formal or informal arrangements to act in concert, or are agencies or instrumentalities of, or controlled by, the national or subnational governments of a single foreign state are considered part of a group of foreign persons and their individual ownerships are aggregated.

The regulations contain certain “bad actor” type disqualifiers that prevent qualifications as an excepted investor.

Contact Steve Quinlivan for more information.

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