New CFIUS Critical Technology Mandatory Filing Requirements Take Effect October 15th
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On September 15, 2020, the US Treasury Department published a final rule modifying the mandatory Committee on Foreign Investment in the United States (CFIUS) filing requirements for certain foreign investments in US businesses involved with critical technologies. Largely unchanged from the proposed rule issued in May 2020, the new rule will shift the critical technology mandatory filing standard away from the current industry test and instead focus on whether the US business's products and technology would require a license for export to the foreign investor and its substantial owners. The new mandatory filing rule takes effect on October 15, 2020.
As we previously reported, the Treasury Department issued a proposed rule on May 21, 2020, to modify the mandatory filing requirements for certain foreign investments in US businesses involved with critical technologies (i.e., primarily items, technology and services subject to certain US export controls). The final rule is largely unchanged from the proposed rule, with certain notable modifications, as described below.
Currently, as described in more detail here, CFIUS's regulations mandate advance notification for certain transactions involving US businesses that produce, design, test, manufacture, fabricate, or develop critical technologies1 in connection with any of 27 industries identified by North American Industry Classification System (NAICS) codes. CFIUS also used this industry test in the Critical Technologies Pilot Program (CFIUS Pilot Program) that was in effect from November 2018 until the new CFIUS regulations took effect earlier this year.
As of October 15, the industry test will no longer apply and parties will need to submit a declaration to CFIUS, or a full notice in lieu of a declaration, when their covered transaction involves a US business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies if – with limited exceptions – a "US regulatory authorization" would be required for the export, re-export, transfer (in-country), or retransfer of such critical technologies to either (a) the person making the investment subject to CFIUS's jurisdiction, or (b) a person that individually, or as part of a group of foreign persons, holds a voting interest, direct or indirect, of 25 percent or more in a person described in (a). US regulatory authorizations include licenses, approvals, and other authorizations under the International Traffic in Arms Regulations, the Export Administration Regulations (EAR), or regulations governing certain nuclear energy-related activities, as applicable.
Notably, with the exception of cases where the parties are eligible to use any of three enumerated license exceptions under the EAR, a mandatory filing is required regardless of whether any license exceptions or exemptions would apply for exports of the US business's critical technology to the given foreign person. The final rule clarifies that to be "eligible" for one of these three license exceptions refers to any requirements imposed by the EAR that must be satisfied prior to export, even if no export is to occur. Accordingly, the parties would only be exempted from the mandatory filing requirement if the US business has satisfied all the requirements under the EAR that must be met prior to export, as applicable. The qualifying license exceptions are:
- Technology and Software—Unrestricted (TSU) (15 C.F.R. § 740.13);
- Encryption Commodities, Software, and Technology (ENC) (15 C.F.R. § 740.17(b)); and
- Strategic Trade Authorization (STA) (15 C.F.R. § 740.20(c)(1)).
While the final rule is for the most part substantively the same as the proposed rule, CFIUS did address some of the public comments it received on the proposed rule by making minor changes, including the following:
- Given the potential for immediately effective changes to the export control regulations, the assessment of what constitutes a critical technology in connection with a given transaction will be made as of the first date on which one of the following occurs: the completion date of the transaction, the parties executing a binding written agreement establishing the material terms of the transaction, the making of a public offer to buy shares of the US business, or a shareholder soliciting proxies in connection with an election of the board of the US business or an owner of a contingent equity interest requesting conversion.
- As noted above, in response to requests for clarification of what "eligible" for the qualifying EAR license exceptions means, the final rule clarifies that eligibility for the enumerated EAR license exceptions, and thus exemption from the mandatory filing requirement, refers to any requirements imposed by the EAR that must be satisfied prior to export (even if no export is to occur).
- The final rule makes certain additional clarifying changes to the definition of "voting interest for purposes of critical technology mandatory declarations" and to the provision describing when mandatory filings for critical technologies transactions are required, as well as clarifications to certain examples of when a critical technology mandatory filing would be required. These are minor changes that do not substantively impact the provisions.
The new rule will take effect on October 15, 2020. The current critical technology mandatory filing requirements based on the industry test will continue to apply to transactions where any of the following occurs on or after February 13, 2020 and before October 15, 2020:
- The completion date;
- The parties to the transaction have executed a binding written agreement, or other binding document, establishing the material terms of the transaction;
- A party has made a public offer to shareholders to buy shares of a US business; or
- A shareholder has solicited proxies in connection with an election of the board of directors of a US business or an owner or holder of a contingent equity interest has requested the conversion of the contingent equity interest.
1 Mandatory CFIUS filing requirements also apply if an entity with substantial foreign government ownership acquires a 25-percent-or-greater voting interest in a "TID US business" (i.e., certain businesses involved with critical technologies, critical infrastructure, or sensitive personal data of US citizens).
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