CFIUS updates for July 2020: Final rules for filing fees and "principal place of business"; annual report for 2019

In an active final week of July 2020, the Committee on Foreign Investment in the United States (CFIUS) issued final regulations locking in the filing fees that have been in effect since May 2020 and clarifying its definition of “principal place of business.” The latter rule will have implications for CFIUS jurisdiction over certain transactions—especially indirect foreign investments via U.S.-managed investment funds. CFIUS has also published the unclassified version of its 2019 annual report to Congress, confirming fewer reviews of transactions from China, a higher overall clearance rate, and a 37 percent clearance rate for short-form declarations filed under the CFIUS pilot program for critical technology transactions.

CFIUS Filing Fee

In April 2020, CFIUS issued interim rules, effective May 1, requiring filing fees for full notices submitted by the parties either voluntarily or in lieu of mandatory declarations. After reviewing public comments on the interim rules, CFIUS issued final regulations, effective August 27, 2020, adopting the same fee structure as in the interim rules:

These fees apply to corporate investments reviewable under Part 800 of the CFIUS regulations as well as real estate transactions subject to Part 802 of the CFIUS regulations.  For more information regarding the calculation of CFIUS filing fees and their strategic implications for parties considering a transaction subject to CFIUS review, please see our previous note on the interim filing fee rules.

Definition of “Principal Place of Business”

Even before the enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the CFIUS regulations referred frequently to an entity’s “principal place of business,” most importantly in the context of determining whether a transaction was being undertaken by a “foreign person” for purposes of establishing CFIUS jurisdiction.  The pre-FIRRMA regulations, however, left the term undefined. Now, with CFIUS’s issuance of regulations implementing FIRRMA, the term is used far more frequently and with far greater implications, especially with the introduction of mandatory pre-closing filings and exemptions for indirect foreign investments via U.S.-managed investment funds and “excepted investors” from certain countries.

The set of FIRRMA regulations that took effect in February 2020 included the interim definition of an entity’s principal place of business as the primary location where an entity’s management directs, controls, or coordinates the activities of the entity. Recognizing that many investment funds are offshore entities managed from other countries, the rule qualified the definition by saying the principal place of business of an investment fund is where the fund’s “activities and investments” are primarily directed, controlled, or coordinated “by or on behalf of the general partner, managing member, or equivalent.” Both parts of the definition were qualified by an important proviso: If the entity or fund had ever made a government filing, in the United States or elsewhere, that its principal place of business was outside the United States, the entity or fund could not claim a U.S. principal place of business for CFIUS purposes unless it can demonstrate that the principal place of business had been relocated to the United States since the conflicting representation had been made.

The final version of the definition is nearly identical to the interim definition; the only change is to the provision for investment funds, which deletes the reference to a fund’s “investments,” since they are already included within the definition’s reference to a fund’s “activities.” Notably, CFIUS received a request to modify the proviso regarding conflicting government submissions, but left it intact. In its comments on the final definition, CFIUS noted that identifying an entity’s registered office would not automatically be viewed as a representation of the entity’s principal place of business, as the functions performed at a registered office may not include management of the entity’s activities.

2019 Annual Report to Congress

On the heels of its release of its 2018 annual report to Congress, CFIUS has cleared its annual report backlog with last week’s publication of its 2019 annual report to Congress. Since the 2018 report was published alongside a set of high-level statistics for 2019, many of the key takeaways from 2019 were already addressed in our May 2020 note:

• The growth of CFIUS’s caseload, measured in terms of transactions;
• Greater efficiency as CFIUS begins to implement FIRRMA’s reforms; and
• Fewer transactions effectively blocked by CFIUS objections.

Additional details provided in the 2019 annual report offer some additional insights: