On September 15, 2020, the Treasury Department published the anticipated final rule modifying the scope of the critical technology filing requirement under the regulations of the Committee on Foreign Investment in the United States (CFIUS). The final rule tracks the proposed rule issued on May 21, 2020 in aligning more closely filing requirements for foreign investments with export licensing requirements.
Effective October 15, 2020, filings will be mandatory for foreign investments in US critical technology businesses if the technologies would require a “U.S. regulatory authorization” under the relevant US export control regime for export, reexport, or transfer (in-country) to the foreign investor or certain foreign persons in the ownership chain. This modification replaces the industry-focused prong of the current critical technology filing test, which requires filings for foreign investments in US businesses that develop, test or produce critical technologies used in 27 industries identified by reference to the North American Industry Classification System.
Under the CFIUS regulations, “critical technologies” have been and continue to be defined by reference to certain US export control regimes. Specifically, these are the State Department’s International Traffic in Arms Regulations (“ITAR”), the Commerce Department’s Export Administration Regulations (“EAR”), the Energy Department’s regulations applicable to certain foreign atomic-energy activities, the Nuclear Regulatory Commission’s regulations applicable to the export and import of certain nuclear equipment and material, and the Select Agents and Toxins list. The final rule ties the critical technologies filing trigger to export authorization requirements under these regimes. Under the final rule, parties need to determine whether an export authorization would be required under one or more of the above-referenced regulatory regimes if the investor (or certain other parties in the ownership chain) were an end user of the critical technologies developed, tested, or produced by the US business. Parties would analyze whether:
- the US business develops, tests or produces a critical technology;
- authorization would be required to export/reexport/transfer such critical technology to any of the following persons, based on principal place of business; nationality (for individuals); or other reasons (e.g. if the person is designated on the Entity List under the EAR):
- any person that could “directly control” the US business as a result of the covered transaction;
- any person that is “directly acquiring an interest” or already has a “direct investment” in the US business and is acquiring certain relevant non-controlling rights;
- individually holds, or is part of a group of foreign persons that holds, a 25% or more voting interest in a foreign person described in the two lines immediately above.
If the relevant critical technologies and the foreign persons involved meet the eligibility criteria of License Exception TSU and certain provisions of License Exceptions ENC and STA, a CFIUS filing would not be required. Other license exceptions under the EAR or exemptions under the ITAR are not relevant to the mandatory filing determination. The final rule clarifies that only pre-export requirements in the relevant license exceptions would need to be met to establish the applicability of the relevant license exception, e.g., submission of a classification request to the Commerce Department in connection with certain encryption items eligible for License Exception ENC. Obligations in the license exceptions that would arise post-export, e.g., reporting or recordkeeping, would not need to be fulfilled.
Recognizing the potential for changes in US export controls to occur during the course of a transaction, the final rule clarifies that the “critical technology” analysis is valid as of the earlier of the transaction’s closing or the signing of a binding written agreement establishing the terms of the transaction (or, if relevant, a public offer to buy shares or solicitation of proxies for a board election). This clarification also applies to the “substantial interest” mandatory filing trigger– filings would be required for acquisitions by certain state-affiliated entities of 25% or more voting interest in a US business that develops, tests, or produces “critical technologies” as of the earlier of the signing or closing date. This timing-related clarification only applies to the determination regarding what constitutes a critical technology.
The final rule highlights the importance of export control due diligence as part of a CFIUS risk assessment and strategy. By tying mandatory filing requirements for foreign investments in US critical technology businesses to US export controls, the final rule will provide a relief from filing requirements to close allies of the United States in the context of some investments that have been caught under the mandatory filing provisions prior to the implementation of the final rule.