CFIUS Adds New Zealand to List of Countries Eligible for Preferential Treatment and Determines Australia and Canada Meet Requirements for Key CFIUS Exemptions

The United States recently announced several changes to the foreign investment review process administered by the Committee on Foreign Investment in the United States (“CFIUS”) aimed at encouraging its allies to implement their own foreign investment review processes in coordination with the United States. Pursuant to the Foreign Investment Risk Review Modernization Act of 2018’s requirement that CFIUS specify criteria to limit the application of its expanded jurisdiction to review certain investments, CFIUS has taken several concurrent actions related to its rules for “excepted foreign states” that receive preferential treatment under the CFIUS regulations. Most notably, CFIUS designated New Zealand as an “excepted foreign state” — joining Australia, Canada, and the United Kingdom — investors from which are eligible for certain exemptions from CFIUS jurisdiction and mandatory filing requirements. CFIUS also issued a final rule determining Australia and Canada have established foreign investment review processes that will enable those countries to remain as “excepted foreign states” absent further action by the Committee. New Zealand and the United Kingdom have until February 13, 2023 to meet the same requirements. In the interim, CFIUS will continue to have the authority to add one or more countries to the list of “excepted foreign states” if it determines such countries have established and are effectively utilizing processes to review foreign investments for national security risks and are coordinating with the United States on matters relating to investment security.

Updates to Excepted Foreign States List

As discussed in our previous alert, CFIUS Extends Deadline for Australia, Canada, and UK to Implement Eligibility Requirements for Key CFIUS Exemptions, the Foreign Investment Risk Review Modernization Act of 2018 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 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.”

Second, by the end of a two-year delayed effectiveness period (originally February 13, 2022), CFIUS was required to 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.

Regarding the first part of the “excepted foreign state” rule, CFIUS identified New Zealand as an eligible foreign state under Parts 800 and 802 because of its “intelligence-sharing relationship with the United States and its collective defense arrangement and cooperation with the United States.” As a result, investors from New Zealand that otherwise meet the requirements for “excepted investors” are now exempt from CFIUS’s jurisdiction over covered investments and real estate transactions as well as the CFIUS mandatory filing requirement.

Regarding the second part of the “excepted foreign state” rule, CFIUS made formal determinations that Australia and Canada have satisfied the requirements necessary to remain excepted foreign states and excepted real estate foreign states. As a result, absent further action by the Committee, Australia and Canada will remain on the list of “excepted foreign states.”

Finally, CFIUS issued a final rule, effective February 4, 2022, that extended the delayed effectiveness period in the second part of the “excepted foreign state” rule an additional year as applied to New Zealand and the United Kingdom. CFIUS now has until February 13, 2023 to determine whether the two 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, New Zealand, and the UK will receive preferential treatment under the CFIUS regulations.

Impact of “Excepted Foreign State” Status on Filing Decisions

As discussed in our prior alert, CFIUS’s actions related to the list of “excepted foreign states” 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 would be within CFIUS jurisdiction and/or mandatory for investors from non-excepted foreign states. 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, New Zealand, and the UK will take 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. (Though not an excepted foreign state in 2020, there was only one filing from New Zealand in 2020 and none in 2019.)

• 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.

O’Melveny recognizes law clerk Dillon Roseen for his valuable contribution in researching and drafting this article.

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, David J. Ribner, an O’Melveny counsel licensed to practice law in the District of Columbia and New York, and Dillon Roseen, an O’Melveny law clerk, 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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