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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 4 minutes read

There’s a new CFIUS Excepted Foreign State, but status will still benefit relatively few investors

Qualifying investors from a list of “Excepted Foreign States” (colloquially referred to as the “whitelist”) enjoy certain privileges under the regulations of the Committee on Foreign Investment in the United States (“CFIUS”).  CFIUS regulations promulgated in 2020 provided that a country would be deemed an Excepted Foreign State if it was (a) identified by CFIUS as an “eligible” foreign state and (b) determined by CFIUS to have established and be effectively utilizing a robust process to review foreign investment and coordinate with the United States on such issues. However, CFIUS delayed the effectiveness of the second criterion for two years.

The news. On January 5, 2022, the U.S. Department of the Treasury (“Treasury”), as chair of CFIUS, made three announcements related to the whitelist. First, Treasury added New Zealand to the whitelist. New Zealand was the only U.S. Five Eyes (“FVEY”) intelligence partner (Australia, Canada, New Zealand, and the UK) not on the 2020 whitelist. Second, Treasury announced that Canada and Australia satisfied the requirements of the second criterion.  Finally, Treasury extended until February 2023 the period for determining whether the UK and New Zealand satisfy the second criterion.

Investor benefits. Investors from Excepted Foreign States benefit only if they meet certain rigorous criteria related to place of establishment, principal place of business, board composition, and ownership. Those that qualify as Excepted Foreign Investors are exempt from: (1) CFIUS jurisdiction over non-controlling investments; (2) CFIUS jurisdiction over certain real estate transactions; and, perhaps most importantly, (3) mandatory filing requirements.  For these Excepted Foreign Investors, CFIUS operates much as it did prior to the expansion of its jurisdiction under the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”): as a largely voluntary process with jurisdiction based on a foreign person obtaining control over a U.S. business.

The bottom line. Investors who are individuals, governmental entities, or closely held companies from Australia, Canada, the UK, and now New Zealand, are most likely to benefit or continue benefitting from this exception. Companies from these countries with a more diversified board and shareholder composition should consider whether they may qualify but are more likely to find that they will not. While it is theoretically possible that other countries could be added to the whitelist in the future, there are reasons to be doubtful that this will occur anytime soon.

Important take-aways from the changes:

  • Two years on, the Excepted Foreign States list remains an exclusively FVEY affair.  The long history of cooperation among the FVEY partners on matters of national security makes them logical “whitelist” Members.  Expanding the Excepted Foreign State list beyond the FVEYs would be consistent with the Biden administration’s goal of aligning allies’ approaches to China on the issue of economic security. Investors from strong U.S. allies that have strengthened their foreign investment review regimes and are among the biggest sources of foreign direct investment into the United States (including Japan and some countries in the European Union) may be logical candidates. However, once CFIUS goes beyond the FVEYs, it will become more difficult to draw a line and any line-drawing may irritate countries that are left out. Furthermore, with many countries only recently beginning to view China as the United States does, CFIUS may look for a longer track record before it is willing to accord them the same treatment as the FVEYs. CFIUS has not defined criteria for a country to be deemed an “eligible foreign state” (the first criterion for qualification), and so has left itself significant discretion.

  • CFIUS is structuring the rules to make sure that the FVEYs qualify.  As noted, CFIUS delayed effectiveness of the second criterion for a period of two years (i.e., February 2022).  This grace period was important because, at the time, the UK was still developing what would become its National Security and Investment Act (“NSI Act”).  Having confirmed that Australia and Canada‘s longstanding FIR processes satisfy this criterion, Treasury now has until February 2023 to determine whether the UK and New Zealand also pass muster.  With the UK’s NSI Act in effect as of January 4, 2022 and New Zealand’s National Security and Public Order regime in effect since mid-2021, it is likely that CFIUS will make both countries’ “probationary” membership in the Excepted Foreign States club final by February of next year. CFIUS’s approach shows its relative confidence in the FVEYs. At the moment, however, the FVEYs have not built in a similar mechanism to favor investors from other FVEYs.

  • With the criteria to qualify as an Excepted Foreign Investor unchanged, in practice relatively few companies will benefit. The prime beneficiaries of the exception are (a) individual Excepted Foreign State nationals not investing through a foreign entity, (b) government entities, and (c) closely held companies from one of these countries. This is because, generally speaking, for a non-governmental entity to qualify, not only must it be established and have its principal place of business in an Excepted Foreign State or the United States, but at least 75 percent of its directors, holders of the majority (greater than 50 percent for listed or 80 percent for other entities) of its interest, and all 10 percent or greater shareholders must be nationals of an Excepted Foreign State or the United States or be established in and have their principal place of business in an Excepted Foreign State or the United States. As a result, it is difficult for many multinational companies, particularly widely held public companies and foreign investment funds, to qualify.