On May 21, the U.S. Treasury Department, as chair of the Committee on Foreign Investment in the United States (“CFIUS”), issued a proposed rule that more directly links mandatory filing obligations with export control restrictions administered by other federal agencies, including the Bureau of Industry and Security (“BIS”) and the Directorate of Defense Trade Controls (“DDTC”). The rule is open for comment until June 22.
Pursuant to amendments implementing the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which expanded CFIUS jurisdiction in several respects, certain types of transactions are subject to mandatory declarations with CFIUS. Currently, one type of transaction that requires a mandatory filing is one in which: 1) the target company produces, designs, tests, manufactures, fabricates, or develops a “critical technology.” A “critical technology” is an item that is included on one of the U.S. export control lists, including the Commerce Control List (“CCL”), included within the Export Administration Regulations (“EAR”); and 2) the target company uses the critical in a sensitive industry, identified in Appendix B to the CFIUS regulations (31 C.F.R. Part 800). This two-prong test is slightly more strict than the export control regulations themselves because an item included in the CCL is not generally restricted for export to all destinations. For example, transactions with NATO allies are generally subject to more permissive restrictions than are transactions with other countries. The current CFIUS mandatory declaration framework does not account for this distinction.
The proposed rule would more closely align the mandatory filing obligations with the export control analysis. Under the proposed rule, the mandatory declaration obligation would be amended to apply to transactions in which the export, re-export, or transfer of a critical technology would require an authorization from one of the export controls regulators. Specifically, CFIUS would consider the nationality of the transaction parties and non-U.S. parties in the ownership chain of the acquiring entity. Further, under the proposed rule, CFIUS would no longer consider the industry in which the target company operates. Overall, we expect that the proposed rule would result in fewer mandatory declarations from countries subject to relatively permissive U.S. export controls.
If implemented, this rule would increase the importance of transaction due diligence clearly identifying what export-controlled items and know-how a target company produces or develops. Because mandatory declarations are required prior to the completion of a transaction and failure to timely file can result in a penalty of up to the transaction value, all parties must clearly understand the export controls implications of a proposed transaction well in advance of a transaction’s close.