By: Elena F. Mitchell and Frank Schall. Further implementing the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA“), the U.S. Department of the Treasury recently published a proposed rule to establish filing fees for parties filing voluntary notices of certain transactions for review by the Committee on Foreign Investment in the United States (“CFIUS”). Under the proposed rule, CFIUS would accept a transaction for review only after payment of the filing fee. The proposed rule remains subject to public comment through April 8, 2020, and does not specify when the filing fee requirement would begin to apply to transactions under the final rule. The final rule likely will increase CFIUS’s scrutiny of transaction valuations to ensure appropriate fees are paid pursuant to the new fee structure.
CFIUS is an interagency committee chaired by the U.S. Department of the Treasury and tasked with evaluating certain foreign investments and transactions for national security-related concerns. In connection with these reviews, and as advised by CFIUS, the President may suspend or prohibit a transaction when there is credible evidence that the transaction may threaten national security. Thus, failing to receive CFIUS’s approval of a transaction can subject that transaction to substantial risk if national security concerns are determined to be involved. On the other hand, once CFIUS approves a transaction, that transaction generally will not be subject to further review unless false, incomplete, or misleading information was provided to CFIUS during the review and approval process.
Section 1723 of FIRRMA directs CFIUS to establish filing fees based on transaction value, taking into account the following factors: (1) the effect of the applicable filing fee on small business concerns; (2) expenses of CFIUS associated with review activities; (3) the effect of the applicable filing fee on foreign investment; and (4) any other matters CFIUS considers appropriate. Section 1723 of FIRRMA also provides that the maximum fee for a transaction may not exceed the lesser of one percent (1%) of the value of the transaction, or $300,000, adjusted annually for inflation.
New CFIUS Filing Structure Generally
The proposed rule would establish filing fees for voluntary written notices. It would not establish filing fees for short-form declarations submitted to CFIUS, or for unilateral reviews of a transaction based on agency notices filed by CFIUS members. However, if CFIUS completes an initial assessment of a short-form declaration and is not able to approve a transaction based on information in the declaration alone, a filing fee would apply to any subsequently filed notice. A filing fee would also apply if parties choose to notify CFIUS of a transaction subject to a mandatory filing requirement through a written notice instead of a short-form declaration.
Proposed Fee Structure
Under the proposed rule, for those transactions subject to a filing fee, the filing fee would be based on the value of the transaction as follows:
- Less than $500,000 – no filing fee
- $500,000 to $5 million – filing fee of $750
- $5 million to $50 million – filing fee of $7,500
- $50 million to $250 million – filing fee of $75,000
- $250 million to $750 million – filing fee of $150,000
- $750 million and up – filing fee of $300,000
The proposed rule establishes a maximum fee of $300,000, with the applicable fee representing not more than 0.15% of the transaction’s value (substantially lower than the maximum 1% authorized by FIRRMA).
As noted above, parties would be required to pay the applicable filing fee prior to CFIUS accepting a notice for review.
Determining Transaction Value
The proposed rule explains how to determine the value of a transaction for purposes of calculating the applicable fee.
- Typically, the transaction value would be the total value of consideration paid by the foreign investor(s), including cash, assets, shares, debt forgiveness, services, or other payments.
- If a transaction involves acquisition of, or investment in, one or more non-U.S. businesses, the transaction value would be assessed based on the global value of the transaction.
- There is one exception intended to mitigate the fee posed to parties filing a notice with CFIUS in cases in which a target company only has a limited presence in the U.S. If the transaction value would be equal to or greater than $5 million, but the value of the interests acquired in the U.S. business would be less than $5 million, the transaction value would be assumed to be equal to or greater than $500,000 but less than $5 million, resulting in a filing fee of $750. This exception should help incentivize the filing of voluntary notices of smaller foreign investments in U.S. companies.
- For covered real estate transactions, the value of the transaction would be the total value of consideration paid by the foreign investor(s), including lease inducements, fixed payments, certain variable lease payments, and other types of consideration applicable to real estate transactions.
- For transactions involving payment in securities, through non-cash assets, by services, or by other means, the proposed regulation sets forth the following guidelines for determining transaction value:
- For securities traded on a national exchange, the transaction value would be determined by the last published closing price of the securities prior to the date of filing of the CFIUS notice.
- For non-cash assets, interests, services, or other means, the transaction value would be the fair market value of those items as of the date of notice filing with CFIUS.
- For a loan or financing agreement, the transaction value would be the cash value of the loan or financing agreement.
- For conversions of a contingent equity interest previously acquired by a foreign person, the value of the transaction would include the initial purchase by or on behalf of the foreign person to obtain the equity interest in addition to any other payments made.
- In rare circumstances when consideration for a transaction has not yet been determined, the value of the transaction would be based on the fair market value of the overall business or real estate being acquired.
Parties submitting a notice to CFIUS would be required to include a short explanation in the notice regarding their calculation of the transaction value and applicable fee.
Fee Refunds, Withdrawals, and Waivers
Under the proposed rule, CFIUS would not provide refunds of fees without determining that a transaction was not a covered transaction or real estate transaction. Parties could petition CFIUS for partial refunds if they could demonstrate that they paid more than was required at the time of filing.
The proposed rule would not require parties to pay an additional fee if CFIUS allows the parties to withdraw and refile a notice, unless CFIUS determines that a material change to the transaction occurred, or that a material inaccuracy or omission was made by the parties in the information initially provided.
The proposed rule would permit the CFIUS Staff Chairperson to waive a filing fee if warranted by “extraordinary circumstances” relating to national security.
Payment of the Filing Fee
The proposed rule does not specify who pays an applicable filing fee, so the parties may decide who will pay or how to split payment for an applicable filing fee. The proposed rule states that payment instructions will be available on the Treasury website prior to the effective date of the final rule implementing the new filing fee structure.
The proposed rule constitutes an important next step in the implementation of FIRRMA. When the final rule on filing fees is published, it will impact investors in a range of sectors, including commercial and residential real estate, government contracting, private equity and other investment, telecommunications, and others. We will continue to track CFIUS-related developments.
Elena Mitchell is an Associate with the Litigation team in Moore & Van Allen’s Charlotte office. Her practice primarily focuses on complex litigation matters in state and federal court. Mitchell’s practice also includes representing clients in internal investigations and white collar criminal defense matters. In addition, she frequently assists clients with financial regulatory and compliance issues, such as recovery and resolution planning, corporate governance matters, and Comprehensive Capital Analysis and Review (“CCAR”) exercises. Mitchell earned her J.D. from the University of Virginia School of Law. View Ms. Mitchell’s full bio.