Regardless of where you live in Alabama, or where you get your news, there has been an increasing stream of stories touting non-U.S. businesses locating or investing in Alabama. The news reports detail the financial infusion into the state, as well as the high paying jobs to follow. What the articles don’t mention are the regulatory requirements on Alabamians involved in the sale of their businesses, land or joint ventures with non-U.S. parties — or what they must do to protect themselves from the maze of federal laws regarding foreign direct investment in the United States.
Having represented Alabama-based businesses in international and cross-border matters for more than 25 years, I thought it helpful to alert my fellow Alabamians of the legal requirements they face in selling their businesses or land, licensing their technology, or joint venturing with non-U.S. parties.
Critical Shift in Diligence
First and foremost, Alabamians need in early diligence to determine if there are approval or reporting requirements for a proposed transaction with a foreign party locating to Alabama, and if so how and where to file. Some initial pre-deal diligence should be conducted at the “letter of intent” stage — before a definitive agreement is executed.
This article outlines the pertinent regulations that Alabamians should review and assess when presented with the opportunity to sell a businesses, technology, land or joint venture with foreign parties locating to Alabama.
Critical International Considerations
A phrase that is becoming generally adopted for transactions or investments with non-U.S. parties is foreign direct investment or FDI. FDI is being used in the U.S. and abroad to describe and regulate non-domestic investment in countries around the world. I would recommend that you add “foreign direct investment” and “FDI” to your list of key words when assessing a prospective deal with a non-U.S. party.
In the United States, FDI triggers various regulations governing investment in business, technology, assets and real estate, as well as the export of controlled technologies, payment of customs and duties, avoidance of anti-corruption and related reporting obligations.
New obligations have arisen in the last year regarding FDI in the U.S. and abroad, including new filing and approval requirements for foreign ownership, control and influence (FOCI) of U.S. businesses, technology and real estate. These new regulations include enhanced enforcement powers and penalties, which are already being aggressively enforced.
Foreign Direct Investment in Alabama
As background, the initial source of U.S. FDI regulation came about with the creation of the Committee on Foreign Investment in the U.S. (CFIUS) by Executive Order of President Gerald Ford in 1975. Later in 2007, the Foreign Investment and National Security Act further refined the CFIUS process by providing congressional oversight and increasing transparency and reporting of decisions by the committee. The act also broadened the definition of national security and required greater scrutiny by CFIUS of certain types of foreign direct investment. In general, CFIUS was limited to technology, industries and infrastructure directly involving national security. It was also a voluntary filing.
Foreign investors were quick to adapt and began structuring investments to avoid national security reviews, including utilizing joint ventures and multiple entities in multiple jurisdictions to obfuscate ultimate parents and controlling parties. Despite a heavily polarized Congress, a bipartisan CFIUS reform bill moved rapidly through committee, Congress and the White House to respond to the increasing investment of foreign state sponsored parties in the U.S. — principally China. The U.S. regulation of FDI changed dramatically on August 13, 2018, when President Donald Trump signed the CFIUS reform act titled the Foreign Investment Risk Review Modernization Act (FIRRMA). FIRRMA was intended to close the loopholes exploited by China and others, and to better protect U.S. critical technologies, assets and businesses. In doing so, FIRMMA dramatically increased the authority of the CFIUS and the remedies available to it.
FIRRMA restricts FDI in U.S. businesses that could harm U.S. national security. It applies to U.S. businesses that design, develop, test, produce or manufacture critical technologies. FIRRMA defines “critical technologies” to include ‘‘material nonpublic technical information.’’
With corresponding speed to Congress’ passage of FIRRMA, the U.S. Treasury Department implemented a pilot program less than three months later in October 2018, creating the first mandatory CFIUS filing. The pilot program applies to investments by any non-U.S. person in a U.S. business not contractually agreed to before October 11, 2018.
Pursuant to the FIRRMA Pilot Program, CFIUS is no longer voluntary for covered transactions, and requires the filing of a CFIUS notice or a new FIRRMA declaration. Failure to file can result in a reversal of the deal, divestiture and/or civil penalties up to the value of the transaction.
For the first time FIRRMA also covers 1) real estate proximate to government installations or with risk of foreign surveillance, or critical U.S. infrastructure (e.g. airports and ports); 2) sensitive personal data of U.S. citizens (i.e. U.S. businesses engaged in collection, use, development, acquisition, maintenance or safekeeping of personal data); and 3) bankruptcy section 363 asset sales involving covered technologies and parties.
Increase in Enforcement
Enforcement has also increased with the same speed as the passage and implementation of FIRRMA. Recent FIRRMA enforcement accentuates the focus and change in U.S. FDI policy:
- First $1 million civil penalty imposed for violations of CFIUS mitigation
- Beijing Kunlun Tech Co. Ltd. required to divest its acquisition of Grindr LLC.
- iCarbonX required to divest its majority stake in PatientsLikeMe Inc.
- Pamplona Capital Management required to divest its minority stake in a U.S. cybersecurity business
As a result, FIRRMA necessitates Alabamians exercise early pre-deal diligence for purchases, investments, acquisitions, mergers or joint venture opportunities to determine the:
- Existence of non-U.S. investors?
- Critical or export controlled technologies?
- Correct classification of the businesses involved?
- U.S. classified information, facilities personnel or contracts?
FDI in the European Union and Elsewhere
The U.S. is not alone: The European Union Parliament, Council and Commission established Regulation 2017/0224 on November 20, 2018, which provided a framework for the screening of FDI in the EU. EU 2017/0224 mimics FIRRMA to protect the essential interests “of the EU and its Member States” from FDI. U.K., Germany and France also have FDI screening mechanisms, and 14 other member states have adopted some form of foreign investment screening. Other industrialized countries, such as Australia and Japan, have followed suit.
Export, Customs, Anti-corruption and Anti-boycott
U.S. export, customs, anti-corruption and anti-boycott regulations are also intended to protect U.S. national security and foreign policy interests, by denying means to adverse militaries, limiting or prevent terrorist activities and implementing foreign policy objectives.
Export control regulations prohibit the “export” of certain controlled items and information, to excluded foreign persons or entities, both inside and outside the U.S. Pertinent agencies and regulations include the U.S. Treasury Department – Office of Foreign Asset Control (OFAC); U.S. State Department – International Traffic in Arms Regulations (ITAR) – Directorate of Defense Trade Controls (DDTC); and Commerce Department – Export Administration Regulations (EAR) – Bureau of Industry and Security (BIS). U.S. foreign subsidiaries of U.S. companies are subject to U.S. export control laws and regulations, including classification of products, technologies and data. Most other countries have similar export control regulations, which can subject your clients to conflicting regulations.
The most recent update to U.S. export control was passed in association with FIRMMA and was enacted as the Export Control Reform Act (ECRA). ECRA applies to “critical, foundational emerging” technologies of U.S. origin, currently including but not limited to: AI, AR, Additive Manufacturing, AVs, Batteries, Big Data, Encryption, Fuel Cells, Gene Editing, Nanotech, MilTech, Semiconductors, Superconductors and Robotics. It also enhances U.S. anti-boycott regulations and includes additional restrictions on international licensing and distribution of technology. ECRA is still in the rule making process, which will likely be formalized in Q3 or Q4 of 2019.
At a minimum, Alabamians should make sure that they screen foreign parties against the OFAC list of “Specially Designated Nationals,” have an Export Compliance Plan, Technology Control Plan, designated “Empowered Official,”and export control requirements in contracts, as well as provide training of all personnel and a process for periodic assessment of export compliance.
Customs and Duties
The news has also been inundated with reporting on the U.S.’ imposition of tariffs and duties on foreign goods — so it’s likely helpful to have some background on U.S. customs and duties. The U.S. applies the Harmonized Tariff System for the determination and application of customs, tariffs and exclusions on goods imported into the U.S. It is critical to know the country of origin, shipment and HTS classification of a good in order to determine the duty that will be assessed on its importation to the U.S., or to apply for exclusions from applicable tariffs or countervailing duties. This will likely entail obtaining information and documentation from the importer, shipping agent or export/import agent. Parties should also carefully review agency contracts and powers of attorney typically required from an export/import agent.
Anti-Corruption / Anti-Boycott
As part of pre-deal diligence, Alabamians should also determine if a foreign party is owned or controlled in whole or in part, direct or indirect, by a foreign government. If so, then they should be aware of the U.S. Foreign Corrupt Practices Act (FCPA), which prevents payments or other means of conveyance of value to government representatives. Similar to U.S. export control laws, subsidiaries of U.S. companies are subject to the U.S. FCPA. If your pre-deal diligence discloses ownership or control by a U.K.-based party, then your client should be aware that it can be subject to the British Bribery Act, which limits payments and kickbacks to both governmental and commercial parties. Most other countries have similar anti-corruption laws, but whether they are enforced or not is another matter. However, the U.S. and the U.K. aggressively enforce their respective anti-corruption laws.
As recently reported in the news, the U.S. also has an anti-boycott law that prohibits boycotts of other countries without U.S. government approval. U.S. law currently provides specific prohibition of boycotts against Israel. Alabamians should be aware that most Arab League countries have laws compelling government agencies and companies based in those countries to boycott Israel. Alabamians are prohibited from entering into agreements that include language to restrict the use of products, services, designs or manufacturing from Israel. Such clauses are often very cleverly hidden within other clauses or use terms of art to hide the true intention.
Commerce and Agriculture Reporting
The U.S. Department of Commerce / Bureau of Economic Analysis (BEA) oversees a variety of data collection requirements from non-U.S. investors in U.S. businesses and operations. The Department of Agriculture oversees similar data collection requirements for non-U.S. investors in agricultural assets and real estate.
The BEA prepares statistics about the U.S. economy to assess the performance of the U.S. economy. It does so by collecting information from U.S. businesses and foreign businesses operating in the U.S. A failure to report can result in civil penalties of between $2,500 and $25,000, criminal penalties up to $10,000, and up to one year imprisonment and/or injunctive relief commanding compliance.
Per the Agricultural Foreign Investment Disclosure Act of 1978 (AFIDA), a report must be filed with the U.S. Department of Agriculture Farm Service Agency when a foreign person acquires or transfers an interest in U.S. agricultural land, more specifically:
- 10% foreign interest by individual, entity or government
- 10% foreign interest by multiple individuals or entities acting in concert
- 50% foreign interest by individuals or entities not acting in concert
- Leases over 10 years
Penalties for failure to comply can be up to 25% of fair market value of a foreign person’s interest.
My friends and colleagues joke that I live in a realm of acronyms and alphabet soup, but like anything else advance preparation and action can clear the confusion surrounding the meaning of acronyms. Alabamians who are fortunate enough to have the opportunity to benefit from one of the many foreign investments in Alabama just need to remember to:
- Exercise early pre-deal diligence and assessments
- Document and follow compliance with applicable regulations
- Be consistent in their processes and procedures in dealing with foreign parties
As the old Alabama maxim goes, an ounce of prevention is worth a pound of cure.
The original article, "Increased Foreign Investment in Alabama & Due Diligence," first appeared in Business Alabama on July 26, 2019.