The US Department of the Treasury recently published two proposed regulations that would significantly impact cross-border business transactions with US companies. Kerr Russell international law attorney Chaoyi Ding explains how this may impact your business.
Foreign Involvement in US Companies Draws Heightened Scrutiny
The US Department of the Treasury recently published two proposed regulations. If adopted, these will expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). As a result, cross-border business transactions with US companies will be significantly impacted.
CFIUS is a federal inter-agency group, having jurisdiction over mergers, acquisitions, capital investments and other transactions involving foreign persons and US companies which could impact US national security. Covered transactions are subject to pre-closing review by CFIUS and in some cases, the Committee’s approval.
Foreign involvement in US companies and property, will now face heightened scrutiny under the new regulations. These regulations are scheduled to take effect no later than February 13, 2020.
Under the proposed regulations, CFIUS will now be able to review transactions related to US businesses that design, test, manufacture, fabricate, or develop one or more critical technologies. These are defined to include technologies currently subject to export controls and regulation, as well as emerging and foundational technologies controlled by the Export Control Reform Act of 2018.
CFIUS will also be able to review transactions related to US businesses that own, operate, manufacture, supply or service critical infrastructure. Examples of these includes telecommunications, utilities, energy, and transportation.
Foreign involvement in US businesses that maintain or collect sensitive personal data of US citizens like financial, geolocation and health information, will also be subject to increased CFIUS scrutiny.
Certain real estate transactions will be subject to review as well. Those subject to review include properties in or near specified airports, maritime ports, and military installations.
Foreign investors may choose to voluntarily file a notice or short-form declaration with CFIUS notifying the Committee of a covered transaction. Generally, if CFIUS does not initiate a review of the transaction, the foreign investor will be provided a “safe harbor” letter. However, filing a declaration is mandatory in covered transactions involving certain US businesses. These are businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies. A declaration is also mandatory for specified transactions in which a foreign government has a substantial interest.
Although the US remains an open market for investment, foreign companies (particularly, Chinese companies), must consider the new requirements of CFIUS early in the process. Foreign investors must analyze not only the transaction but, also the nature of the underlying US business. This will determine whether filing a declaration is advisable or even required, before completing the transaction. A failure to file a required CFIUS declaration can result in the assessment of monetary penalties up to the value of the transaction. CFIUS can also initiate a review of a covered transaction and impose conditions on the transaction. The President may even block or unwind the transaction.
The stakes are high.
Chaoyi Ding is an international lawyer, providing invaluable assistance to clients operating in the US and elsewhere. She specializes in registering Chinese owned enterprises in the US, cross-border business transactions, mergers and acquisitions and, joint ventures. She assists Chinese companies with commercial transactions, contracts, tax, employment, real estate and supply chain matters in the US. Chaoyi is knowledgeable in the law and regulation of foreign direct investments and in export control matters. She holds law degrees from Wuhan University in China and the Michigan State University College of Law. Chaoyi is fluent in both Mandarin and English.
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