Treasury's Proposed Rules for Foreign Investment in the United States

On Monday, the Treasury Department issued proposed regulations amending the rules for review of foreign investment in the United States under the Foreign Investment and National Security Act of 2007 (FINSA).  The review of foreign purchases of US business to be conducted by the Committee on Foreign Investment in the United States (CFIUS) has been expanded, but not as much as some have called for.  A publc meeting on the rule will be held May 2.

The proposed rule includes the following provisions (generally stated).

• An acquisition that does not constitute control is still not subject to the Exon Florio notification provision of the Defense Production Act under FINSA.
• The definition of control is expanded to include the power to block key corporate decisions, which have also been expanded to include decisions that affect minority rights.  As a result, fairly common supermajority voting provisions on basic business decisions are included.
• The acquisition of convertible interests that will convert with the passage of time is also an event that calls into play the Exon Florio provision, if the conversion will result in control under the expanded definition.
• The safe harbor for passive investments of less than 10% is retained; but the proposed rules make clear that the safe harbor does not apply to investments where the investor intends to acquire control at a later time or where the investor also acquires governance rights, such as a seat on the board of directors.
• The definition of foreign persons covered has been expanded, so that offshore vehicles that are more than 50% owned by non US persons will be treated as foreign persons, even if they are controlled by US persons.
• There is no mandatory investigation of purchases by entities controlled by foreign governments, though the Treasury Department and responsible agency must approve the decision not to investigate.
• When notification is required, considerably more information must be provided and more time may be taken by the CFIUS.