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The US is offering foreign, minority investors in its companies an incentive to forgo board representation and other shareholder rights that convey “control” over a company, if they want to avoid a potential national security investigation.
As reported in the Financial Times, proposed regulations released by the US Treasury on Monday made clear that investments under 10 per cent may be investigated by the Committee on Foreign Investment, the executive branch body that vets foreign deals on national security grounds.
The proposed rule represents a departure from previous regulations, which said that, in most cases, investments under 10 per cent did not constitute a “change in control” and therefore did not come under the purview of Cfius.
But there is a silver lining for those foreign investors, including sovereign wealth funds, that may be seeking to avoid a national security review.
According to the proposed rules, the inter-agency panel would not have the authority to investigate an investment under 10 per cent if the interest were “held solely for the purpose of investment”. Under that test, the foreign investor could not have the direct or indirect power to decide important matters, including questions involving major expenditures, termination or agreement of contracts, the appointment or dismissal of executives and the power to transfer assets, among other indicators.
In seeking to clarify rules on whether or not an investor has “control” over an asset under the government’s definition, the Treasury has homed in on a grey, and often contentious, area of regulations.
In one recent case, the US private equity group Bain Capital insisted that a proposed joint takeover with Huawei of China of 3Com, the US technology group, would not give Huawei “control” of 3Com, because the Chinese equipment maker was due to acquire 16.5 per cent of the group. Ultimately, the transaction was reviewed by Cfius and the parties were forced to abandon the deal when it became clear that it would not receive regulatory approval.
“These regulations reflect America’s strong and continued commitment to safeguarding US national security in a manner that reinforces the long-standing US policy of welcoming foreign investment,” said Clay Lowery, assistant secretary for international affairs at the Treasury. “The proposed regulations increase clarity and make additional improvements based on experience.” The rules will be open to public debate for 45 days after they are published in the Federal Register.
The regulations encourage companies to make contact with the inter-agency panel to discuss a proposed transaction before formally submitting a deal for review. The formal submission to the panel, which is chaired by the Treasury Department and includes as members the departments of homeland security and defence, starts a 30-day review process that can be extended for an additional 45 days.