CFIUS Formally Determines United Kingdom and New Zealand Will Remain Foreign Excepted States

Key Points

• On February 10, 2023, CFIUS formally determined that the United Kingdom and New Zealand have established and are effectively utilizing robust processes to screen foreign investments for national security risks. CFIUS made such determinations for Australia and Canada in 2022.
• As a result, those four countries will remain “excepted foreign states” indefinitely until further notice, and certain qualifying investors from these states will be excepted from CFIUS’s expanded jurisdiction over noncontrolling investments and real estate transactions, as well as mandatory filing requirements.
• Going forward, additional foreign states that are identified by CFIUS as eligible for such status will no longer benefit from a grace period for the robustness determination. However, CFIUS has not indicated if and when countries beyond those in the “5 Eyes” intelligence sharing pact may be designated.

  ---

Background

The Committee on Foreign Investment in the United States (CFIUS) is the inter-agency body through which the U.S. government formally monitors and reviews foreign investment in the United States for possible national security concerns. In 2020, CFIUS implemented three significant changes pursuant to the Foreign Investment Risk Review Act of 2018 (FIRRMA) that, among other things:

• Expanded CFIUS’s jurisdiction beyond “control” transactions to include certain noncontrolling investments in critical technology, critical infrastructure and sensitive personal data companies (so-called “TID U.S. businesses”).
• Imposed mandatory filing requirements for certain sensitive transactions.
• Expanded CFIUS’s jurisdiction to include certain real estate transactions.¹

In parallel, FIRRMA also authorized CFIUS to exempt certain categories of foreign persons (i.e., “excepted investors” associated with “excepted foreign states”) from the expanded jurisdiction and mandatory filing requirements.² Although there is a high bar to qualifying as an “excepted investor,” the initial threshold requirement is that the investor be associated with an “excepted foreign state.”³

To qualify as an excepted foreign state, CFIUS needs to identify countries on its website for investors from those countries to be eligible for the “excepted investor” jurisdictional carve-outs and mandatory filing exemptions.⁴CFIUS must also make a formal determination as to whether an identified country has a robust foreign investment screening mechanism in place.⁵ Both requirements must now be met before an excepted foreign state is included on the list.

Australia, Canada and the United Kingdom (U.K.) were initially identified by CFIUS as excepted foreign states in February 2020. In January 2022, CFIUS made formal determinations that both Australia and Canada—but notably not the U.K., which had just begun implementing new investment review authority—met the investment screening criteria, while delaying until February 13, 2023 the deadline by which a formal robustness determination would be needed in order to achieve or maintain foreign expected state status.⁶ At the same time, CFIUS added New Zealand to its list of excepted foreign states based on, among other factors, “its intelligence-sharing relationship with the United States and its collective defense arrangement and cooperation with the United States.”⁷ Prior to this action, New Zealand was the only member of the 5 Eyes intelligence sharing pact to be excluded from the CFIUS excepted foreign state list. For both the U.K. and New Zealand to remain on the list of excepted foreign states after February 13, 2023, therefore, CFIUS needed to determine both countries had a robust foreign investment screening mechanism in place by that date.

Recent Developments

Effective February 10, 2023, CFIUS made formal determinations that the U.K. and New Zealand have met the robustness element of the excepted foreign state criteria, confirming that both have “established and [are] effectively utilizing a robust process to analyze foreign investment for national security and to facilitate coordinate with the United States on matters relating to investment security.”⁸ Consequently, the U.K. and New Zealand will remain excepted foreign states—and U.K. and New Zealand investors will remain eligible for “excepted investor” status—indefinitely, absent further CFIUS action and notice in the Federal Register.

Moving forward, before a state can join the group of foreign excepted states, CFIUS will now be required to both (1) identify that state as eligible and (2) determine that the foreign state has established and is effectively utilizing a CFIUS-style foreign investment screening mechanism. At this time, it is unclear whether CFIUS will expand this excepted foreign state status to countries outside of the 5 Eyes intelligence pact.

Implications

While it will help avoid CFIUS filings in certain cases, the recent developments are ultimately unlikely to significantly reduce the number of transactions that are subject to CFIUS review and mandatory reporting requirements. Though countries have expressed an eagerness to join the group of excepted foreign states, the practical utility for their investors is somewhat limited given the onerous eligibility criteria to qualify as an “excepted investor,” particularly for publicly traded companies and investment funds. For instance, not only must investors be organized under the laws of, and have their principal places of business in, an excepted foreign state (or the United States), but an investor must also be able to demonstrate with respect to itself and its parents that, among other things, a majority of its voting and economic interests are held by nationals⁹ or entities of an excepted foreign state¹⁰ (or the United States) and that any individual or entity holding more than a 10 percent voting or economic interest in it is a national or entity of an excepted foreign state (or the United States). This requirement poses significant challenges for publicly traded companies, which typically have little visibility into the identity and nationality of under 5 percent individual shareholders. Similarly, investment funds based in and managed by nationals of excepted foreign states can have difficulty qualifying due to, among other things, the requirement that the investment vehicle and each of its parents be located in an excepted foreign state or the United States, which often is not the case.

The decision to allow the U.K. and New Zealand to remain excepted foreign states largely maintains the status quo regarding the potential group of investors who can seek to qualify for excepted investor status and does not alter the stringent requirements that limit the exception’s utility in practice. Even so, many allies and partners of the United States view the excepted foreign state status as a seal of approval from the United States regarding its national security bona fides and are eager to join that group. To the extent that CFIUS chooses to expand the pool of excepted foreign states beyond the 5 Eyes in the future, it will increase the number of foreign investors who are eligible to qualify for the jurisdictional carve-outs and mandatory filing exemptions.

¹ For a more in-depth discussion of these changes, please see our prior alerts on this subject here and here.

² 50 U.S.C. § 4565(a)(4)(E); 31 C.F.R. §§ 800.211, 800.304, 800.401(e)(1) and 31 C.F.R. §§ 802.216, 802.302(a). Note that 31 C.F.R. Part 802 refers to “excepted real estate foreign state” and “excepted real estate investor,” however, for ease of review we use “excepted foreign state” and “excepted investor” for purposes of both Part 800 and Part 802 in this alert.

³ 31 C.F.R. § 800.219; 31 C.F.R. § 802.215.

⁴ 31 C.F.R. § 800.218(a).

⁵ 31 C.F.R. § 800.218(b); 31 C.F.R. § 800.1001.

⁶ For a more in-depth discussion of these changes, please see our prior alert on the subject: CFIUS Updates Excepted Foreign State Rules.

⁷ https://home.treasury.gov/system/files/206/Fact-Sheet-Final-Rule-Revising-EFS-Definitions-2.pdf.

⁸ 31 C.F.R. § 800.1001(a). The criteria for “excepted real estate foreign states” is slightly different under the CFIUS real estate regulations. Namely, CFIUS must determine that the eligible foreign state “has made significant progress toward establishing and effectively utilizing” a robust foreign investment screening process. 31 C.F.R. § 802.1001(a) (emphasis added).

⁹ Dual nationals with a second nationality that is not of an excepted foreign state or the United States are excluded. 31 C.F.R. § 800.219.

¹⁰ To qualify for “excepted investor” status entities must establish both that they are organized under the laws of an excepted foreign state or the United States and have its principal place of business in an excepted foreign state. 31 C.F.R. § 800.219.