Energy Industry Impact of New CFIUS Pilot Program Rules

In August 2018, Congress enacted the Foreign Investment Risk Review Modernization Act (FIRRMA), expanding the authority of the Committee on Foreign Investment in the United States (CFIUS)—which determines whether foreign investments in US businesses present a threat to US national security—in numerous ways. Earlier this month, CFIUS began a pilot program to implement part of its new FIRRMA authority, with potentially significant implications for a certain set of investments.

The pilot program expands CFIUS jurisdiction to certain non-controlling “other investments” by foreign persons, regardless of country of origin, in US businesses that are involved in (1) “critical technologies,” where (2) the business falls within any of 27 specific industries, as defined by North American Industry Classification System (NAICS) codes. Nuclear electric power generation (NAICS Code 221113), Turbine and Turbine Generator Set Units Manufacturing (NAICS Code 333611), and Power, Distribution, and Specialty Transformer Manufacturing (NAICS Code 335311) are among the 27 industries.¹ The non-controlling “other investments” that are now subject to CFIUS jurisdiction under the pilot program are only those that provide: access to material nonpublic technical information; board representation or observership; or other involvement in substantive company decision-making.

A US business is involved in “critical technology” if it produces, designs, or uses goods, services, or technologies that are controlled for export purposes by the International Traffic in Arms Regulations, certain parts of the Export Administration Regulations, or specially designed nuclear equipment, parts, or technology controlled by the Department of Energy and Nuclear Regulatory Commission. This list will be expanded in the future to include certain “emerging” and “foundational” technologies that will be determined by an inter-agency review led by the Commerce Department.

In addition to broadening CFIUS’s jurisdiction, the pilot program requires parties to transactions subject to CFIUS jurisdiction to file short-form “declarations” for both controlling and non-controlling investments in US businesses involved in critical technologies within the 27 industries.

Declarations must be filed at least 45 days prior to a transaction’s completion date. Once CFIUS accepts the declaration for review, CFIUS will have 30 days to take one of four actions: request the parties file a notice; inform the parties that the declaration is insufficient for CFIUS to complete action and advise that the parties may file a notice; initiate a formal review of the transaction; or clear the transaction. Importantly, a transaction that is cleared on the basis of a declaration alone is not eligible for the regulatory safe harbor available to parties that file a notice.

Failure to file a required mandatory declaration can subject the transaction parties to a civil monetary penalty up to the value of the transaction. Therefore, careful consideration should be given to whether foreign investments fall within the scope of the pilot program.

¹ The other electric power generation industries in the NAICS (hydroelectric, fossil fuel, solar, wind, geothermal, and biomass) are outside the scope of the pilot program.