CFIUS Abruptly Imposes New Notice Filing Fees

Source: Dorsey & Whitney
Article Authors: Laurence Ward & Nelson Dong
Published: April 2020

Beginning May 1, 2020, the
Committee on Foreign Investment in the United States (“CFIUS”) will require a
filing fee in connection with any formal notice of a “covered transaction” or a
“covered real estate transaction.” The U.S. Treasury Department made the
announcement of the implementation of these filing fees on April 27, 2020
through an interim rule with its request for public comments until June 1,
2020. (See the interim rule here.) As of the date of this alert, CFIUS has set the escalating
amount of the filing fee based on the value of the underlying transaction
according to the following tiers:

Historically, CFIUS has not had any authorization from Congress
to charge any filing fee. However, under Section 1723 of the Foreign Investment
Risk Review Modernization Act of 2018 (“FIRRMA”), Congress for the first time
gave CFIUS the power to begin collecting such filing fees  to help offset
its expenses in conducting national security reviews and investigations of
foreign investments or acquisitions under Section 721 of the Defense Production
Act. Under FIRRMA, CFIUS was authorized to collect fees in connection with any
formal written notices filed but not with any of the new mandatory declarations
that were also created by FIRRMA.

However, despite having had this authority for nearly two years,
CFIUS had chosen not to announce the adoption of filing fees even as it went
ahead with a number of other key changes. (See our earlier alerts here: February 7, 2020; October 30, 2019; October 23, 2018; and August 15, 2018.) In connection with FIRRMA, CFIUS initially implemented a
critical technologies Pilot Program in November 2018 that contained no filing
fees. Additionally, in October 2019, CFIUS announced further significant
amendments to its existing regulations that finally became effective on February
14, 2020, but again without any filing fees. Nevertheless, on March 9, 2020,
CFIUS published a notice of proposed rulemaking to establish filing fees for
“covered transactions” under the Regulations Pertaining to Certain Investments
in the United States by Foreign Persons found in 31 CFR Part
800 (“Part 800”) and for “covered real estate transactions” under the Regulations
Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in
the United States (“Part 802”). The proposed rule created a
new Subpart K to Part 800 and 802.

Under the proposed rule, CFIUS was accepting comments on the
proposed filing fees only until April 3, 2020. CFIUS appears to have received
only five comment letters.¹ Importantly, the timing of the
release of the proposed rule and the date on which comments were originally due
coincided with the time that virtually all U.S. companies were very distracted
by the adverse effects of the COVID-19 pandemic. CFIUS itself acknowledged the
impact of the COVID-19 pandemic on public comments and so has extended the new
comment period until June 1, 2020.

Despite requesting additional comments, given the growing volume
of CFIUS’s work and the added government resources that must be devoted to that
work, on April 27, CFIUS determined that implementing filing fees in line with
the 2018 FIRRMA authorization was appropriate at this time. Moreover, the U.S.
Government is now facing massive new federal expenditures to respond to the
COVID-19 crisis even as its own income tax revenues will fall sharply because
the nation faces a deep recession and many millions of Americans have lost
their jobs. CFIUS will only charge the filing fee in connection with formal
written notices filed with it but not in connection with mandatory declarations
that were also created under FIRRMA. Importantly, however, if the parties to a
mandatory declaration ultimately file a formal written notice with CFIUS, then
the relevant filing fee would apply to that notice.

In practice, since 2018, in connection with certain mandatory
declarations filed under the CFIUS Pilot Program, CFIUS had ultimately still
required the parties to those declarations to submit formal written notices
after reviewing those declarations, which then elongated the entire CFIUS
process and thus significantly delayed closing of those transactions. Because
of these potential timing uncertainties created by the added risk CFIUS would
still insist upon a formal notice even after a mandatory declaration, many
parties strategically opted to skip the mandatory declaration step altogether
and just to file a full written notice instead.  Now, with the new filing
fee requirement and such declaration-type transactions, parties will be faced
with a new threshold choice between paying the filing fee in connection with a
written notice or the timing uncertainties involved with filing only a
mandatory declaration and then being required by CFIUS to file a full written
notice (that would then have further legal costs plus the applicable filing
fee).

Under the new rule, the parties must pay the filing fee
electronically to the U.S. Treasury Department and CFIUS will not begin its
45-day review until the applicable filing fee has been paid. Under the rule,
the transaction value is “the total value of all consideration that has been or
will be provided in the context of the transaction by or on behalf of the
foreign person that is a party to the transaction, including cash, assets,
shares or other ownership interests, debt forgiveness, or services or other
in-kind consideration.” The new rule also provides detailed guidance on
determining the value of consideration, including determining valuation in
connection with multi-phase and contingent equity interest or earn-out
transactions. Additionally, the new rule makes clear that CFIUS is not bound by
the parties’ determination of the transaction value and so CFIUS might
potentially impose a filing fee based upon its own assessment of the
transaction value and presumably could force the parties to pay that fee or CFIUS
would just refuse to start its review of the transaction.

Dorsey attorneys are available to advise both U.S. and foreign
parties to international investments or acquisitions and to navigate these
unique national security review procedures under the CFIUS laws and
regulations.

¹ One comment letter from an anonymous source requested that
filing fees not be implemented at this time. Another comment letter requested
that CFIUS lower the proposed filing fees, adjust how the value of the
transaction would be calculated, and requested that the filing fee be due
within 15 days of CFIUS beginning its review (as opposed to before CFIUS starts
its review). Still another comment letter requested that CFIUS determine the
transaction value (and thus the filing fee due) based on the U.S. operations of
the target company. In its April 27 notice, CFIUS rejected this important
comment by indicating that parties to a transaction negotiate and arrive at the
overall transaction value in the standard course of deal making but did include
a very limited exception for transactions where the value of the U.S. business
is less than $5,000,000 but the overall transaction value is $5,000,000 or
greater.

For questions regarding this resource, kindly
contact Catherine X. Pan-Giordano（pan.catherine@dorsey.com）.