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New CFIUS Regulations Finalized by Department of Treasury

November 18, 2008

On November 14, the Department of Treasury released the final version of the new Committee on Foreign Investment in the United States (CFIUS) regulations, promulgated pursuant to the Foreign Investment and National Security Act (FINSA) of 2007. 

CFIUS notices and reviews have become an increasingly regular and important part of transactional due diligence for companies involved in international investment and acquisitions. Failing to prepare and submit a CFIUS notice can result in delays to transactions, and in some cases may result in a transaction being re-worked or unwound at the direction of government officials.  As a result of FINSA, it has become more important than ever to consider CFIUS issues early in a transaction, determine if a notice should be filed, and begin the informal and formal aspects of working with CFIUS.

Technically, the final regulations become effective 30 days after publication in the Federal Register, but most aspects of the regulations are already familiar to seasoned CFIUS practitioners because CFIUS has been requiring the additional information during their review process since FINSA became effective.

While the rules largely mirror the proposed rules published earlier this year, some of the important concepts codified by the final regulations include:

  1. Clarification of What Constitutes a “Covered Transaction”: Only “covered transactions” are subject to CFIUS review, and the final regulations define a covered transaction as any transaction proposed or pending after August 23, 1988, by or with any foreign person, which could result in control of a U.S. business by a foreign person.
  2. Codification of What Is Not a "Covered Transaction": “Greenfield” investments are excepted from CFIUS review and asset acquisitions are not considered covered transactions if the assets acquired by a foreign person do not constitute a “U.S. business.”
  3. Substantial Discretion Regarding Jurisdiction Is Left in the Hands of CFIUS:  The regulations make it clear that many transactions may or may not be subject to CFIUS review, depending on individual facts.  For example, long-term leases, lending transactions and incremental acquisitions all require careful scrutiny of individual situations.
  4. Codification of the Functional "Control" Test:  CFIUS will only review transactions that result in a foreign person or government obtaining "control" over a U.S. business, and the new regulations clarify how CFIUS will determine the control issues.  The regulations state that CFIUS will consider all relevant facts and circumstances, rather than applying a bright-line test to determine whether a transaction results in foreign control. This process is highly discretionary and subjective, and CFIUS has refused to adopt any absolute or quantitative measures to evaluate control issues.