CFIUS Extends Deadline for Australia, Canada, and UK to Implement Eligibility Requirements for Key CFIUS Exemptions

The Committee on Foreign Investment in the United States (“CFIUS”) has issued a proposed rule that would extend the deadline for “excepted foreign states” (Australia, Canada, and the United Kingdom) to establish national security-based investment review processes to remain eligible for certain exemptions from CFIUS jurisdiction and mandatory filing requirements. Under the proposed rule, CFIUS would have until February 13, 2023 to determine whether the three countries have satisfactorily implemented processes for analyzing foreign investments for national security risks and to facilitate coordination with the United States on matters related to investment security. In the interim, assuming all other applicable regulatory requirements are met, investors from Australia, Canada, and the UK will continue to receive preferential treatment under the CFIUS regulations. The data remain unclear whether these preferential rules are in fact working as intended by leading to fewer CFIUS reviews for investors from these close U.S. allies.

Current Regulations

As described in our prior alert, Treasury Finalizes New CFIUS Regulations, the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) expanded CFIUS’s authority to review certain “covered investments” in the critical technology, critical infrastructure, and sensitive personal data industries (“Part 800 Regulations”) as well as certain real estate transactions (“Part 802 Regulations”), and implemented a mandatory filing requirement for certain “covered transactions.” The Part 800 and Part 802 Regulations became effective on February 13, 2020.

Both Parts 800 and 802 also included rules excluding investors who meet certain criteria establishing sufficiently close ties to foreign states closely allied to the United States from CFIUS’s expanded jurisdiction over “covered investments” and real estate transactions, as well as from CFIUS’s new mandatory filing requirement. In order to be eligible for such exclusions, the foreign investor must be from an “excepted foreign state,” which is defined by a two-part test.

First, CFIUS is required to identify whether a foreign state is an “eligible foreign state.” On January 17, 2020, CFIUS identified Australia, Canada, and the UK as the initial eligible foreign states because of certain aspects of their “robust intelligence-sharing and defense industrial base integration mechanisms with the United States.” CFIUS has not designated any other country as an “eligible foreign state,” but it retains the authority to do so.

Second, by the end of a two-year delayed effectiveness period (originally February 13, 2022), CFIUS must determine: (1) under the Part 800 Regulations, that an eligible foreign state “has established and is effectively utilizing a robust process” to analyze foreign investments for national security risks and to facilitate coordination with the United States on matters relating to investment security; and (2) under the Part 802 Regulations, that the eligible foreign state has “made significant progress” in establishing and effectively utilizing a robust foreign investment review process in coordination with the United States.

The proposed rule proposes a one-year extension over the previous deadline that will provide CFIUS with an additional year to determine whether Australia, Canada, and the UK are meeting the requirements that will enable them to remain “excepted foreign states.”

Impact of “Excepted Foreign State” Status on Filing Decisions

The proposed rule raises the question of whether investors from “excepted foreign states” are taking advantage of their preferential status by choosing not to seek clearance from CFIUS for transactions that for non-expected foreign states are mandatory. Since the concept of an “excepted foreign state” has only been in existence since 2020 and the public availability of CFIUS filing data is limited, it may be too soon to assess whether investors from Australia, Canada, and the UK are in fact taking advantage of their preferred status and, in turn, whether there would be a negative impact of losing such status. CFIUS’s most recent annual report however, may provide some insight.

Based on a year-on-year comparison of filings from parties from Australia, Canada, and the UK, the preferential status may not have had a material impact on the decision-making of investors from excepted foreign states in 2020.

• In 2019, investors from Australia, Canada, and the UK accounted for 21.5% of the total filings (declarations and notices) – 70 of 326. By comparison, in 2020, investors from those three countries accounted for approximately 22% of the total filings – 69 out of 313.
• The number of filings from each of the three countries also did not change materially between 2019 and 2020: (1) Australia – 11 in 2019 and 12 in 2020; (2) Canada – 35 in 2019 and 31 in 2020; (3) UK – 24 in 2019 and 26 in 2020.
• Finally, the ranking of each country among the top sources of filings also did not change materially. In both years, Canada was the source of the second most filings and Australia was the source of the ninth most filings. The UK was the source of the fourth most filings in 2019 and third most in 2020.

Additional data will be required to draw further insights into the impact of the preferential status of being an investor from an “excepted foreign state,” but early data indicate it may not be leading to fewer filings, even with their exclusion from CFIUS’s jurisdiction over “covered investments” and real estate transactions under the Part 802 Regulations. Various factors could be at play, including increased investment from excepted foreign state investors in sectors of the U.S. economy where voluntary filings are nevertheless merited or the insistence of investors on the certainty that comes with CFIUS clearance. Ultimately, if the number of filings do not decrease, the utility of the “excepted foreign state” concept in the CFIUS regulations may merit reconsideration.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, and David Ribner, an O’Melveny counsel licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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