Locke Lord QuickStudy: Proposed CFIUS Rule Would Alter Mandatory Declaration Requirements

Locke Lord LLP
May 26, 2020

On May 21, 2020, the Treasury Department published a Proposed Rule that would alter the Committee on Foreign Investment in the United States (“CFIUS”) regulations at 31 C.F.R. Part 800 in two important respects. First, the Proposed Rule would modify the mandatory declaration filing provision for “critical technology” transactions by using export control regimes to assess whether parties to a transaction must file with CFIUS, and by eliminating prior reliance on North American Industry Classification System (“NAICS”) codes. Second, the Proposed Rule would change language in 31 C.F.R. § 800.244 to clarify the definition of “substantial interest,” a definition which also plays a role in determining whether parties have to file with CFIUS. The comment period for the Proposed Rule expires on June 22.

Emphasis on the Export Control Regimes

The Treasury Department issued the Proposed Rule pursuant to its authority under the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which significantly expanded the power of CFIUS to review foreign investments in U.S. businesses, including certain non-controlling investments in U.S. critical technology businesses. CFIUS first established the mandatory declaration as part of its “Pilot Program,” which launched in November 2018. Following the conclusion of the Pilot Program on February 12, 2020, CFIUS finalized its new regulations under FIRRMA at 31 C.F.R. Parts 800 and 802. In doing so, CFIUS expanded the mandatory declaration to encompass certain control transactions as well as certain non-control “covered investments,” which the regulations collectively describe as “covered transactions.” Importantly, the new regulations currently provide that a covered investment by a foreign investor in a U.S. business that produces, designs, tests, manufactures, fabricates, or develop a critical technology is subject to mandatory filing whenever the technology is designed for use in one or more industries. The new regulations identify the industries by reference to a list of NAICS codes set forth on an appendix thereto.

The Proposed Rule would delete the requirement that the critical technology bear a connection to a particular NAICS code. In its place, the Proposed Rule would compel parties to file a mandatory declaration for a covered transaction if critical technology that is produced, designed, tested, manufactured, fabricated, or developed by the U.S. business would require an authorization to export, re-export, transfer (in country), or retransfer the critical technology to the foreign parties involved in the transaction. In ascertaining whether the U.S. business would need an export authorization, the regulations instruct the parties to consult the four major export control regimes. These export control regimes are administered by the Departments of State, Commerce, and Energy, and the Nuclear Regulatory Commission, respectively.

Accordingly, if the U.S. business would need government authorization to export the critical technology to the controlling foreign persons involved in the transaction, including certain controlling foreign persons in the chain of ownership, then the parties to the transaction must file with CFIUS. Notably, a declaration filing with CFIUS would be mandatory even if a license exemption or exception is available under the State Department’s International Traffic in Arms Regulations (“ITAR”) or a license exception is available under the Commerce Department’s Export Administration Regulations (“EAR”). There is, however, a narrow exception at 31 C.F.R. § 800.401(e)(6) for license exceptions under the EAR at 15 C.F.R. 740.13, 740.17(b), and 740.20(c)(1). Therefore, if any of these three license exceptions under the EAR are available to the U.S. business, then there is no obligation to file with CFIUS.

Defining “Substantial Interest”

FIRRMA also requires parties to notify CFIUS of any covered transaction in which a foreign government holds a “substantial interest” in a foreign person that will itself acquire a substantial interest in certain types of U.S. businesses. The Proposed Rule clarifies the definition of “substantial interest” at § 800.244(b) and (c). Together, these provisions advise parties how to calculate the percentage of interest that one entity indirectly holds in another entity. The Proposed Rule leaves no doubt that § 800.244(b) applies solely to an entity whose “general partner, managing member, or equivalent” primarily directs, controls, or coordinates its activities. In that case, a foreign government would hold a substantial interest in the entity only if it held an interest of 49 percent or more in the general partner, managing member, or equivalent of the entity. The Proposed Rule also removes the word “voting” from § 800.244(c), which tells parties that “any interest of a parent will be deemed to be a 100 percent interest in any entity of which it is a parent.” By striking the word “voting” wherever it previously appeared next to the word “interest,” the Proposed Rule makes clear that the attribution rule contained in § 800.244(c) applies both to § 800.244(a), which analyzes a “voting interest” held by a foreign government, and to § 800.244(b), which analyzes an “interest” held by a foreign government.


The Proposed Rule would focus CFIUS’s analysis of investments in critical technologies on their nexus to the main export control regimes. Following implementation of the Proposed Rule, parties to a covered transaction will need to consider the applicability of the export control regimes to any critical technologies produced by the U.S. business when deciding whether they must file with CFIUS.