On January 5, 2022, the U.S. Department of the Treasury, as Chair of the Committee on Foreign Investment in the United States (“CFIUS”), determined that Australia and Canada have established and are effectively utilizing robust processes to analyze foreign investments for national security risks and facilitate coordination with the United States on matters relating to investment security. As a result, Australia and Canada are and will remain “excepted foreign states” for CFIUS purposes unless and until the U.S. Government deems otherwise.[1] The United Kingdom and New Zealand, both of which also currently are treated as excepted foreign states,[2] have until February 2023 to fulfill the criteria necessary to remain excepted foreign states. It is possible that additional countries may be designated in the future as the global foreign direct investment (“FDI”) trend, particularly in U.S. ally countries, continues.
What does this mean for investors from excepted foreign states?
Historically, CFIUS only had jurisdiction over investments by foreign persons that resulted in the foreign person obtaining “control” over a U.S. business. The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) expanded the jurisdiction of CFIUS to cover certain types of non-controlling investments in more sensitive U.S. businesses (so-called “TID U.S. businesses”)[3] and investments involving real estate located in close proximity to sensitive U.S. government facilities (such transactions previously were outside the jurisdiction of CFIUS because pure real estate was not considered a “U.S. business”). FIRRMA also imposed mandatory CFIUS filing requirements for certain types of investments, which we previously wrote about here. As excepted foreign states, investments by qualified investors from Australia, Canada, New Zealand, and the United Kingdom (“excepted investors”), including state-owned or affiliated entities, are excepted from the above-described expanded jurisdiction, such that CFIUS only has jurisdiction over transactions undertaken by excepted investors if such investors obtain control over a U.S. business (as was the case prior to the implementation of FIRRMA). In addition, excepted investors are exempt from mandatory CFIUS filings (as, again, was the case pre-FIRRMA).
How do investors know whether they qualify as excepted investors?
To qualify as an excepted investor, an investor must satisfy the following criteria:
- A national of an excepted foreign state (who is not a dual-national from a non-excepted foreign state);
- The government of an excepted foreign state; or
- An entity that meets the following conditions with respect to itself and each of its intermediary parent(s)/ultimate parent:
- The entity must be organized under the laws of, and have its principal place of business in, an excepted foreign state (or the United States);
- At least 75 percent or more of the board members (or equivalent governing body) and at least 75 percent or more of the board observers (or equivalent governing body) must be either U.S. nationals or nationals of an excepted foreign state (and not also nationals of any non-excepted foreign state).
- Any foreign persons who individually (or as a group) hold 10 percent or more of the voting interest, or rights to 10 percent or more of the profits or of the assets upon dissolution of an entity, or that could otherwise control the entity (as broadly defined by CFIUS), must be: (i) exclusively a national of an excepted foreign state; (ii) the government of an excepted foreign state; or (iii) organized under the laws of, and have its principal place of business in an excepted foreign state (or the United States).
- For any entity whose equity securities are not primarily traded on an exchange in an excepted foreign state or the United States, at least 80 percent of its voting interest, profit interest, or asset interest upon dissolution must be held individually (or in the aggregate) by persons who are not considered foreign persons by CFIUS or that otherwise qualify as (i), (ii) or (iii) as described in (c) above. For entities publicly traded on an exchange an excepted foreign state or the United States, the relevant threshold is a majority of the entity’s interests (not 80 percent).[4]
An equally significant aspect of the excepted investor criteria is a required history of compliance with U.S. laws and regulations, including the CFIUS regulations. Indeed, an investor will not be treated as an excepted investor if, during the previous five years, the investor:
- Received written notice from CFIUS that it made a material misstatement or omission in a CFIUS filing or made a false certification to CFIUS, or that it violated a material provision of a CFIUS mitigation agreement, condition, or order;
- Has been the subject of a CFIUS Presidential blocking order;
- Has been the subject of an enforcement action from the U.S. Department of the Treasury, Office of Foreign Assets Control under U.S. economic sanctions laws;
- Received written notice of debarment from the U.S. Department of State, Directorate of Defense Trade Controls;
- Has been a respondent or party in a final order from the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) regarding violations of the U.S. export control laws administered by BIS;
- Received a final decision from the U.S. Department of Energy, National Nuclear Security Administration imposing a fine for certain violations of the Atomic Energy Act of 1954; or
- Has been convicted of, or entered into a deferred prosecution agreement or non-prosecution agreement, with the U.S. Department of Justice for any felony in the United States.
In addition, an investor will not be treated as an excepted investor if the investor or any of its parents, or any entity of which the investor is a parent, is on the Unverified List or Entity List maintained by BIS when the document establishing the material terms of the transaction is signed.
What should foreign investors expect in the future?
As noted above, the United Kingdom and New Zealand, which also currently are considered excepted foreign states, have until February 2023 to fulfill the criteria necessary to remain excepted foreign states. In other words, both countries have a little more than one year to demonstrate that they have established and are effectively utilizing robust processes to analyze foreign investments for national security risks and facilitate coordination with the United States on matters relating to investment security. The United Kingdom, along with Australia and Canada, was originally treated as an excepted foreign state. We suspect that CFIUS did not include the United Kingdom in its recent determination with respect to Australia and Canada because the United Kingdom only very recently implemented a new (as of January 4, 2022) broad FDI regime, which we recently wrote about here. It is possible that CFIUS will designate other countries as excepted foreign states as the global FDI trend, particularly in the European Union and ally countries in Asia, continues.
[1] See https://www.federalregister.gov/documents/2022/01/06/2021-28598/determination-regarding-excepted-foreign-states.
[2] The United Kingdom has been an excepted foreign state since February 2020. New Zealand became an excepted foreign state on January 5, 2022.
[3] The T stands for critical technology, the I stands for critical infrastructure, and the D stands for sensitive personal data.
[4] See 31 C.F.R. Section 800.219.