The Effect of the Defense Production Act and New CFIUS Filing Fees
The last two years have seen an expansion of regulations related to Foreign Direct Investment (FDI), both in the United States and abroad. COVID-19 is driving further expansion of FDI in the U.S. and elsewhere.
Whether by intent or coincidence, the U.S. Treasury Department’s FIRRMA regulations that took effect February 13, 2020, included provisions that expanded CFIUS/FIRRMA based upon the invocation of the Defense Production Act (DPA) – such as with President Trump’s recent Executive Orders placing some U.S. medical and food production under the DPA.
As background, the U.S. regulation of foreign investment in the U.S. began in 1975 with the creation of the Committee on Foreign Investment in the U.S. (CFIUS). The 2007 Foreign Investment and National Security Act refined CFIUS and broadened the definition of national security. Historically, CFIUS was limited to technology, industries and infrastructure directly involving national security. It was also a voluntary filing. Foreign investors began structuring investments to avoid national security reviews. As a result, a CFIUS reform act titled the “Foreign Investment Risk Review Modernization Act” (FIRRMA) was signed into law in August 2018. FIRRMA’s enabling regulations took effect in February 2020.
It is not surprising that there are national security implications of U.S. medical supplies and food production, particularly based upon the COVID-19 based shortages. What is surprising is that the February FIRRMA regulations provide for the application of CFIUS to medical supplies and food production based upon COVID-19 related Executive Orders bringing such under the DPA.
The Impact of COVID-19 Presidential Executive Orders
The February 2020 FIRMMA regulations included an exhaustive list of “critical infrastructure” that fall within CFIUS’s jurisdiction. Appendix A to the regulations details “Covered Investment Critical Infrastructure and Functions Related to Covered Investment Critical Infrastructure” and includes the following language:
“manufacture any industrial resource other than commercially available of-the-shelf items …. or operate any industrial resource that is a facility, in each case, that has been funded, in whole or in part, by […] (a) Defense Production Act of 1950 Title III program …..”
Title III of the DPA “allows the President to provide economic incentives to secure domestic industrial capabilities essential to meet national defense and homeland security requirements.” This was arguably invoked by Trump’s COVID-19 related Executive Orders regarding medical supplies (such as PPEs, tests and ventilators, etc.) and food production. Additionally, based on the intent of FIRRMA to close gaps in prior CFIUS coverage, the FIRRMA definition of “covered transactions” includes the following language:
“(d) Any other transaction, transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent the application of section 721.”
Taken together, the foregoing provision potentially gives CFIUS jurisdiction to review non-U.S. investments in U.S. companies covered by COVID-19 DPA Executive Orders that are outside of traditional M&A structures. This means that even non-controlling foreign investments in U.S. companies (such as medical or food producers) who receive DPA funding are subject to CFIUS review. Further, such U.S. companies could be subject to CFIUS review for a period of 60 months following the receipt of any DPA funding. As a result of the continuing expansion of FDI COVID-19 related coverage, early diligence should be utilized to determine the 1) existence of non-U.S. investors and 2) funding under the Defense Production Act.
New CFIUS Filing Fees
In the midst of the foregoing, the U.S. Treasury Department also announced the future filing fees for CFIUS/FIRRMA filings. The new filing fees took effect May 1, 2020, and are tiered based on the value of the transaction. The value of the transaction is to be calculated on the total value of all consideration to be paid by the non-U.S. investor, including but not limited to cash, ownership interests, debt forgiveness, physical assets, intangible assets, services or other in-kind consideration. The regulations require that payment must be received before a formal CFIUS notice will be accepted for review. Significantly, there is no filing fee for submitting a FIRRMA declaration. Additionally, a filing fee will be refunded if CFIUS determines the filing is not a “covered transaction.”
Transaction Value Filing Fee
Less than $500,000 $0
$750,000,000 and greater than $300,000
Non-U.S. Expansion of FDI Regulations
As noted, FDI is not exclusive to the U.S., rather it has been adopted in most industrialized countries to regulate non-domestic investment in domestic businesses. Nor is the U.S. alone in expanding its COVID-19 related FDI protections. Notably, Germany and France are both increasing FDI protections for their domestic businesses. The German Federal Ministry for Economic Affairs and Energy recently published a proposed amendment to their FDI regulations focused on protecting the German healthcare sector from the impact of the COVID-19 pandemic. Similarly, the French Minister of the Economy recently announced two new measures aimed at protecting French companies from opportunistic buyouts. Other EU member states, including Hungary, Italy, Netherlands, and Spain, have also amended their FDI regulations or are proposing to do so. As a result of the current expansion of European FDI regulations, U.S. companies investing abroad should determine the application of local European FDI regulations to their proposed transactions.