Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 70702-70729 [E8-27525]

Agencies

• DEPARTMENT OF THE TREASURY
• Office of Investment Security
• Department of Treasury

[Federal Register Volume 73, Number 226 (Friday, November 21, 2008)]
[Rules and Regulations]
[Pages 70702-70729]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-27525]



[[Page 70701]]

-----------------------------------------------------------------------

Part II





Department of the Treasury





-----------------------------------------------------------------------



Office of Investment Security



-----------------------------------------------------------------------



31 CFR Part 800



 Regulations Pertaining to Mergers, Acquisitions, and Takeovers by 
Foreign Persons; Final Rule

Federal Register / Vol. 73, No. 226 / Friday, November 21, 2008 / 
Rules and Regulations

[[Page 70702]]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Office of Investment Security

31 CFR Part 800

RIN 1505-AB88


Regulations Pertaining to Mergers, Acquisitions, and Takeovers by 
Foreign Persons

AGENCY: Department of the Treasury.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This Final Rule amends regulations in part 800 of 31 CFR that 
implement section 721 of the Defense Production Act of 1950 (``section 
721''), as amended by the Foreign Investment and National Security Act 
of 2007, codified at 50 U.S.C. App. 2170. While the revised regulations 
retain many features of the prior regulations, a number of changes have 
been made to implement section 721, increase clarity, reflect 
developments in business practices over the past several years, and 
make additional improvements based on experiences with the prior 
regulations.

DATES: Effective date: This rule is effective December 22, 2008.
    Applicability date: See Sec.  800.103.

FOR FURTHER INFORMATION CONTACT: For questions about this Final Rule, 
contact: Nova Daly, Deputy Assistant Secretary, U.S. Department of the 
Treasury, 1500 Pennsylvania Avenue, NW., Washington, DC 20220, 
telephone: (202) 622-2752, e-mail: Nova.Daly@do.treas.gov; Welby 
Leaman, Senior Advisor, telephone: (202) 622-0099, e-mail: 
Welby.Leaman@do.treas.gov; Aimen Mir, Senior Policy Analyst, telephone: 
(202) 622-0184, e-mail: Aimen.Mir@do.treas.gov; or Mark Jaskowiak, 
Office Director, telephone: (202) 622-5052, e-mail: 
Mark.Jaskowiak@do.treas.gov.

SUPPLEMENTARY INFORMATION:

I. Background

    The Foreign Investment and National Security Act of 2007 
(``FINSA''), Public Law 110-49, 121 Stat. 246, which amends section 721 
of the Defense Production Act of 1950 (``DPA'') (50 U.S.C. App. 2170), 
requires the issuance of regulations implementing its provisions 
following public notice and comment.
    FINSA was passed by Congress as H.R. 556, which adopted the 
language of S. 1610. Senate Report 110-80, accompanying S. 1610, 
provides a useful history of the various bills leading to the enactment 
of FINSA. President Bush signed FINSA into law on July 26, 2007, and it 
became effective on October 24, 2007.
    Section 721 authorizes the President to review mergers, 
acquisitions, and takeovers by or with any foreign person which could 
result in foreign control of any person engaged in interstate commerce 
in the United States, to determine the effects of such transactions on 
the national security of the United States. FINSA codifies aspects of 
the structure, role, process, and responsibilities of the Committee on 
Foreign Investment in the United States (``CFIUS'' or ``the 
Committee'') and the role of executive branch departments, agencies, 
and offices in CFIUS's review of transactions for national security 
concerns. A brief summary of major aspects of the statute follows.
    FINSA formally establishes CFIUS in statute. (Previously, the sole 
basis for the existence of CFIUS had been Executive Order 11858 of May 
7, 1975, 40 FR 20263, 3 CFR, 1971-1975 Compilation, p. 990.) FINSA 
specifies the following as members of CFIUS: The Secretary of the 
Treasury (who serves as chairperson), the Attorney General, and the 
Secretaries of Homeland Security, Commerce, Defense, State, and Energy. 
FINSA also provides that CFIUS may include, generally or on a case-by-
case basis as the President deems appropriate, the heads of any other 
executive department, agency, or office. The President designated the 
U.S. Trade Representative and the Director of the Office of Science and 
Technology Policy as additional members of CFIUS in Executive Order 
11858, as amended most recently by Executive Order 13456, 73 FR 4677 
(Jan. 23, 2008). In the same Executive Order, the President directed 
that ``[t]he following officials (or their designees) shall observe 
and, as appropriate, participate in and report to the President on 
[CFIUS's] activities'': (i) The Director of the Office of Management 
and Budget, (ii) the Chairman of the Council of Economic Advisors, 
(iii) the Assistant to the President for National Security Affairs, 
(iv) the Assistant to the President for Economic Policy, and (v) the 
Assistant to the President for Homeland Security and Counterterrorism. 
FINSA also establishes the Director of National Intelligence (``DNI'') 
and the Secretary of Labor as ex officio members of CFIUS. FINSA 
specifies that the DNI is to provide independent analyses of any 
national security threats posed by transactions and is to have no other 
policy role. FINSA further provides that, for each transaction before 
CFIUS, the Department of the Treasury shall designate, as appropriate, 
one or more lead agencies. The lead agency, on behalf of CFIUS, may 
negotiate, enter into or impose, monitor, and enforce mitigation 
agreements or conditions with parties to a transaction to address any 
threats to national security posed by the transaction. FINSA requires 
regulations to provide for an appropriate role for the Secretary of 
Labor with respect to mitigation agreements.
    FINSA also formalizes the process by which CFIUS conducts national 
security reviews of any transaction that could result in foreign 
control of a person engaged in interstate commerce in the United 
States, which FINSA refers to as a ``covered transaction.'' 
Specifically, FINSA provides for CFIUS review of covered transactions, 
which must be completed within 30 days, to determine the effect of the 
transaction on national security and to address any national security 
concerns. Subject to certain exceptions discussed below, FINSA requires 
an additional investigation, which must be completed within 45 days, in 
the following types of cases: (1) Where the transaction threatens to 
impair U.S. national security and that threat has not been mitigated 
prior to or during the 30-day review; (2) where the transaction is a 
foreign government-controlled transaction; (3) where the transaction 
results in foreign control over critical infrastructure that, in the 
determination of CFIUS, could impair national security, if that 
impairment has not been mitigated; or (4) where the lead agency 
recommends, and CFIUS concurs, that an investigation be undertaken. 
Executive Order 11858 also provides that CFIUS shall undertake an 
investigation if a member of CFIUS advises the chairperson that it 
believes that the transaction threatens to impair the national security 
and that the threat has not been mitigated.
    To ensure accountability for CFIUS decisions, FINSA requires that a 
senior-level official of the Department of the Treasury and of the lead 
agency certify to Congress, for any covered transaction on which CFIUS 
has concluded action under section 721, that CFIUS has determined that 
there are no unresolved national security concerns. The certification 
must be made at a level no lower than an employee appointed by the 
President by and with the advice and consent of the Senate, for 
transactions on which CFIUS concludes action under section 721 after a 
review, and at the Deputy Secretary level or above for transactions on 
which CFIUS concludes action under section 721 after an investigation. 
If the President makes a decision on a transaction under section 721, 
then he must announce his

[[Page 70703]]

decision publicly within 15 days of the completion of the 
investigation.
    In addition, in order for CFIUS to conclude action under section 
721 for a foreign government-controlled transaction without proceeding 
beyond a review to an investigation, the Department of the Treasury and 
the lead agency must determine, at the Deputy Secretary level or above, 
that the transaction ``will not impair the national security.'' 
Similarly, in cases where the transaction would result in foreign 
control over critical infrastructure, the transaction could impair 
national security, but such impairment has been mitigated during the 
review period, CFIUS may conclude action under section 721 without 
proceeding beyond a review if the Department of the Treasury and the 
lead agency determine, at the Deputy Secretary level or above, that the 
transaction will not impair national security.
    Where a covered transaction presents national security risks, FINSA 
provides statutory authority for CFIUS, or a lead agency acting on 
behalf of CFIUS, to enter into mitigation agreements with parties to 
the transaction or to impose conditions on the transaction to address 
such risks. This authority enables CFIUS to mitigate any national 
security risk posed by a transaction rather than recommending to the 
President that the transaction be prohibited because it could impair 
U.S. national security. FINSA also provides CFIUS with authority to 
impose civil penalties for violations of section 721, including 
violations of any mitigation agreement.
    Finally, FINSA increases CFIUS's reporting to Congress concerning 
the work it has undertaken pursuant to section 721. In addition to the 
certifications described previously, which CFIUS must provide to 
Congress after concluding action on a transaction under section 721, 
CFIUS also must provide annual reports on its work, including a list of 
the transactions it has reviewed or investigated in the preceding 12 
months, analysis related to foreign direct investment and critical 
technologies, and a report on foreign direct investment from certain 
countries.

II. Comments on the Proposed Rule

    The Final Rule contained in this document is based on the Notice of 
Proposed Rulemaking published on April 23, 2008 (``Proposed Rule'') (73 
FR 21868), which proposed amendments to the regulations in part 800 of 
31 CFR. The comment period for the Proposed Rule ended on June 9, 2008. 
The Department of the Treasury received a total of 25 written 
submissions and some oral comments that were principally provided at a 
public meeting held at the Department of the Treasury on May 2, 2008. 
The written and oral submissions comprised approximately 200 distinct 
comments. The comments represented a wide range of interests, including 
foreign governments, U.S. business groups, law firms, and a member of 
Congress. All comments received by the end of the comment period were 
posted for public viewing at https://www.regulations.gov.
    Among the comments submitted were a number that welcomed the 
Proposed Rule as helping the Committee to safeguard U.S. national 
security in a manner consistent with the U.S. commitment to open 
investment. Although one commenter believed the Proposed Rule would 
result in the ``great majority'' of mergers and acquisitions being 
subject to reviews, the Committee does not expect the changes to the 
regulations to materially affect the number of transactions that it 
reviews. From 2005 through 2007, the Committee reviewed less than ten 
percent of foreign acquisitions in the United States.
    We respond to the comments submitted in the detailed section-by-
section analysis, below.

III. Discussion of Final Rule

Overview of Significant Issues

    The Final Rule retains many of the basic features of the existing 
regulations, which were adopted in 1991 after the 1988 enactment of 
section 721 of the DPA. The system continues to be based on voluntary 
notices to CFIUS by parties to transactions, although FINSA provides 
CFIUS with the authority to review a transaction that has not been 
voluntarily notified. The principal new development with regard to the 
procedures for filing notices with CFIUS is that the Final Rule makes 
explicit CFIUS's current practice of encouraging parties to contact and 
engage with CFIUS before making a formal filing. By consulting with 
CFIUS in advance of filing and, where appropriate, providing CFIUS with 
a draft notice or some portion of the information that later may be 
included in the notice, parties can help ensure that their notice, once 
submitted, will contain the information CFIUS needs to do its work. 
Such pre-notice consultations can help ensure that reviews of covered 
transactions are concluded as efficiently as possible. Consistent with 
the requirement set forth in section 721(b)(2)(E), the Department of 
the Treasury, as Chairperson of CFIUS, will also be publishing in the 
Federal Register guidance on the types of transactions that CFIUS has 
reviewed and that have presented national security considerations. The 
guidance, among other things, will include a discussion of certain 
types of information the Committee, based on past experience, considers 
useful for parties filing a notice to provide.
    The provisions of Subpart D pertaining to the contents of a 
voluntary notice have been expanded to reflect information that CFIUS 
now routinely seeks from notifying parties. By having the relevant 
information included in each notification, CFIUS will be better 
prepared to conduct an efficient and in-depth analysis as soon as a 
notice is accepted. As noted in the proposed regulations, personal 
identifier information, which is needed to examine the backgrounds of 
members of the boards of directors and senior company officials of 
entities in the ownership chain of the foreign acquirer, should be 
submitted in conjunction with each notification, and should be marked 
clearly and provided as a separate document to facilitate limited 
distribution of this information. In addition to the new information 
requirements, the Final Rule, consistent with FINSA, also requires each 
of the parties to a notified transaction to provide certifications 
regarding the accuracy and completeness of their notices, as to 
information about the party making the certification (including certain 
affiliated entities), the transaction, and all follow-up information. A 
notice will not be deemed complete if it lacks certifications that 
comply with these requirements, and CFIUS may reject a notice that has 
previously been accepted if the final certification required under 
Sec.  800.701(d) has not been received. Furthermore, material 
misstatements or omissions made by a party in connection with a review 
or investigation may result in the rejection of the notice or the 
reopening of a completed review or investigation.
    Consistent with the new authority provided by FINSA, the Final Rule 
provides for penalties for material misstatements or omissions made to 
CFIUS, for false certifications, or for breach of mitigation agreements 
or conditions entered into or imposed under section 721. The Final Rule 
also provides that a mitigation agreement may include provisions 
establishing liquidated damages for violations of the agreement. See 
Sec.  800.801. Parties that receive a notice of the imposition of 
penalties will have the opportunity to submit to CFIUS a petition for

[[Page 70704]]

reconsideration of the imposition of the penalties.
    Additional changes to the regulations have been made, including 
revisions to or deletions of existing examples or provisions, to take 
into account FINSA, and to otherwise add clarity to the regulations. 
The following discussion addresses changes to several of the key 
concepts of the regulations.
Covered Transaction
    FINSA introduced the term ``covered transaction'' to identify the 
types of transactions that are subject to review and investigation by 
CFIUS. The statutory definition of covered transaction maintains the 
scope of section 721 as pertaining to any merger, acquisition, or 
takeover by or with a foreign person that is proposed or pending after 
August 23, 1988, which could result in foreign control of any person 
engaged in interstate commerce in the United States (the latter type of 
person is defined in these regulations as a ``U.S. business'').
    The Final Rule further clarifies the meaning of the term ``covered 
transaction,'' see Sec.  800.207, by specifying the scope of important 
elements of the term, including ``transaction,'' ``control,'' ``U.S. 
business,'' and ``foreign person.'' The definitions and clarification 
of these terms appear in Subpart B (Definitions) and in Subpart C 
(Coverage).
Transaction
    The term ``transaction'' is defined in Sec.  800.224, and 
implements the statutory requirement that a covered transaction be one 
that involves a ``merger, acquisition, or takeover'' that is proposed 
or pending after August 23, 1988, by encompassing both proposed and 
completed transactions. This definition continues to exclude start-up 
or ``greenfield'' investments and includes only a very limited type of 
long-term lease.
Control
    FINSA does not define ``control,'' but rather requires that CFIUS 
prescribe a definition by regulation. See FINSA, Public Law 110-49, 
section 2, adding section 721(a)(2). ``Control'' is and always has been 
a key threshold concept in section 721, as the authority provided under 
that section, from the authority to review or investigate a notified 
transaction to the authority of the President to take action to suspend 
or prohibit a transaction, is predicated on foreign control of a person 
engaged in interstate commerce in the United States. This focus on 
control suggests a fundamental congressional judgment that national 
security risks are potentially highest in transactions that involve the 
acquisition by a foreign person of control of an entity operating in 
the United States. Indeed, Congress made clear in the 1988 Conference 
Report that accompanied the originally enacted version of section 721 
that ``[t]he Conferees in no way intend to impose barriers to foreign 
investment. * * * [section 721] is not intended to authorize 
investigations on investments that could not result in foreign control 
of persons engaged in interstate commerce * * *.'' See H.R. Conf. Rep. 
No. 100-576, at 926 (1988). Nothing in FINSA or its legislative history 
suggests any departure from this focus on control. Indeed, FINSA 
incorporates the concept of control in its definition of the new term 
``covered transaction,'' as discussed above.
    The Final Rule maintains the long-standing approach of defining 
``control'' in functional terms as the ability to exercise certain 
powers over important matters affecting an entity. Specifically, 
``control'' is defined as the ``power, direct or indirect, whether or 
not exercised, through the ownership of a majority or a dominant 
minority of the total outstanding voting interest in an entity, board 
representation, proxy voting, a special share, contractual 
arrangements, formal or informal arrangements to act in concert, or 
other means, to determine, direct, or decide important matters 
affecting an entity; in particular, but without limitation, to 
determine, direct, take, reach, or cause decisions regarding the 
[matters listed in Sec.  800.204(a)], or any other similarly important 
matters affecting an entity.'' See Sec.  800.204(a). Two points should 
be emphasized concerning this definition. First, it eschews bright 
lines. Consistent with the existing regulations, control is not defined 
in terms of a specified percentage of shares or number of board seats. 
Although share holding and board seats are relevant to a control 
analysis, neither factor on its own is necessarily determinative. 
Instead, all relevant factors are considered together in light of their 
potential impact on a foreign person's ability to determine, direct, or 
decide important matters affecting an entity. Second, echoing the 
congressional views expressed in the conference report accompanying the 
original legislation in 1988, the focus of the statute and therefore of 
these regulations is control. Even acknowledging the considerable 
flexibility necessarily inherent in a national security regulation, the 
statutory standard is not satisfied by anything less than control. 
Acquisition of influence falling short of the definition of control 
over a U.S. business is not sufficient to bring a transaction under 
section 721. See Sec.  800.302.
    Demonstrating its significance to this regulatory framework, the 
concept of control appears in several different places throughout the 
regulations, both in those sections that define the nature of the 
acquirer and those that define the transaction itself. For example, 
control is a key concept in the definitions of ``foreign person'' and 
``foreign government-controlled transaction.'' A foreign person is any 
foreign national (i.e., an individual who is not a U.S. national), 
foreign government, or foreign entity, or any ``entity over which 
control is exercised or exercisable by a foreign national, foreign 
government, or foreign entity.'' See Sec.  800.216 (emphasis added). A 
foreign government-controlled transaction is a covered transaction that 
``could result in the control of a U.S. business by a foreign 
government or a person controlled by or acting on behalf of a foreign 
government.'' See Sec.  800.214 (emphases added). Similarly, ``covered 
transaction'' is defined in this Final Rule as ``any transaction that 
is proposed or pending after August 23, 1988, by or with any foreign 
person, which could result in control of a U.S. business by a foreign 
person.'' See Sec.  800.207 (emphasis added).
    Conversely, transactions that could not result in foreign control 
of a U.S. business are not subject to section 721. Thus, a start-up or 
``greenfield'' investment is not subject to section 721. See Sec.  
800.301(c), Example 3. Moreover, as noted below, a foreign person does 
not control an entity if it holds ten percent or less of the voting 
interest in the entity and it holds that interest ``solely for the 
purpose of passive investment,'' as that term is defined in Sec.  
800.223. See Sec.  800.302(b). However, the regulations do not provide, 
and never have provided, an exemption based solely on whether an 
investment is ten percent or less in a U.S. business. If a foreign 
person holds ten percent or less of the voting interest in a U.S. 
business but does not hold that interest solely for the purpose of 
passive investment, then the transaction still may be a covered 
transaction. For example, a transaction involving a foreign person's 
acquisition of nine percent of the voting shares of a U.S. business in 
which the foreign person has negotiated rights to determine, direct, 
decide, take, reach, or cause decisions regarding important matters 
affecting that business would be a covered transaction.

[[Page 70705]]

    Section 800.204 lays out the basic definition of ``control,'' 
provides an illustrative list of matters that are deemed to be 
important, states that CFIUS will consider certain relationships 
between persons in evaluating whether an entity is considered to be 
controlled by a foreign person, and identifies certain minority 
shareholder protections that are not considered in themselves to confer 
control over an entity. The regulations add a number of examples to 
provide greater clarity as to the application of this definition.
U.S. Business
    Section 800.226 defines ``U.S. business,'' a term contained in the 
regulatory definition of ``covered transaction,'' to mean any entity 
engaged in interstate commerce in the United States, but only to the 
extent of its activities in interstate commerce in the United States. 
In determining whether a person is a U.S. business, CFIUS first will 
consider whether the subject of the transaction is an ``entity'' (which 
is defined to include any branch, partnership, group or sub-group, 
association, estate, trust, corporation or division of a corporation, 
or organization; assets, whether or not organized as a separate legal 
entity, operated by any one of the foregoing as a business undertaking 
in a particular location or for particular products or services; and 
any government). If the subject of the transaction is an entity, CFIUS 
will consider whether the entity is engaged in interstate commerce.
Foreign Person
    The term ``foreign person'' is defined in Sec.  800.216. The Final 
Rule introduces the new concept of a ``foreign entity,'' further 
discussed below in the section-by-section analysis of Sec.  800.212, 
and specifies that an entity that falls within the definition of a 
``foreign entity'' will be deemed a foreign person.
Transactions That Are and Are Not Covered Transactions
    Sections 800.301 and 800.302 illustrate the types of transactions 
that are and are not covered transactions, respectively. Section 
800.301(a) further develops the reference in Sec.  800.204 to ``power, 
whether or not exercised,'' by making clear that, if a foreign person 
has the ability to exercise control over a U.S. business at the time a 
transaction is consummated, whether at will or after a particular 
period of time, then the person cannot avoid a determination that 
``control'' exists for purposes of section 721 by voluntarily forgoing, 
or delaying, the exercise of control.
    Section 800.302(b) provides a very limited qualification to the 
application of the general control principle. Pursuant to Sec.  
800.302(b), a foreign person does not control an entity if it satisfies 
a two-pronged test: (1) It holds ten percent or less of the voting 
interest in the entity; and (2) its interest is held solely for the 
purpose of passive investment. Section 800.223 lays out the test for 
whether an interest is held solely for the purpose of passive 
investment. Under that test, an interest would be held solely for the 
purpose of passive investment if the foreign person has no plan or 
intent to control the entity, neither possesses nor develops any 
purpose other than passive investment, nor takes any action that is 
inconsistent with an intent to hold the interest solely for the purpose 
of passive investment. This special rule applies to all types of 
investors equally, rather than assuming that certain types of 
institutions are passive investors.
    Sections 800.301(c) and 800.302(c) further illustrate the extent to 
which particular types of transactions, such as greenfield investments; 
the acquisition of branch offices, assets from multiple sources, and 
defunct businesses; and the entry into commodity purchase contracts, 
service contracts, and technology license agreements, are or are not 
covered transactions. Section 800.301(d) addresses joint ventures, 
which may be covered transactions only if they involve the contribution 
of a U.S. business.
    Sections 800.302(d) and (e) and Sec.  800.303 establish special 
rules with regard to securities underwriting, insurance, and lending, 
to clarify certain circumstances in which a foreign person may obtain, 
in the ordinary course of its business, an interest in an entity that 
may not be considered control of that entity because of those 
circumstances.

Section-by-Section Analysis

Section 800.101--Scope

    Section 800.101 of the Proposed Rule states that the regulations 
implement section 721, which authorizes the President and the Committee 
to take certain actions with respect to covered transactions that 
threaten to impair U.S. national security. Several commenters noted 
that the regulations do not define ``national security'' and other 
related terms. A commenter suggested that there is a perception that 
the scope of CFIUS's reviews is broader than national security. Another 
suggested that ``national security'' be specifically defined to 
encompass economic security. A commenter also suggested that the 
Committee identify certain excepted industries or businesses, 
investments in which would not be subject to review.
    The Committee will continue its practice of focusing narrowly on 
genuine national security concerns alone, not broader economic or other 
national interests. The longstanding policy of the U.S. Government, 
which was reaffirmed in the President's Statement on Open Economies on 
May 10, 2007, is to welcome foreign investment. Section 1 of Executive 
Order 11858, as amended, applies that policy to the Committee's work: 
``It is the policy of the United States to support unequivocally 
[international] investment, consistent with the protection of the 
national security.'' The Committee reviews transactions for national 
security concerns on a case-by-case basis. This approach allows the 
Committee to fully address the national security concerns that a 
particular transaction may raise, rather than identifying certain 
sectors in which foreign investment is prohibited, restricted, or 
discouraged. As directed by FINSA, the Department of the Treasury is 
also publishing guidance regarding the types of transactions that the 
Committee has reviewed and that have presented national security 
considerations.

Section 800.103--Applicability rule/Section 800.210--Effective Date

    Several commenters expressed concern that new provisions in the 
regulations will cause uncertainty for transactions completed prior to 
the effective date of FINSA or this Final Rule and that parties should 
be given sufficient time to adjust to any new standards.
    As provided in section 721 as amended by FINSA and further 
elaborated in Sec.  800.207 and Sec.  800.601(b) of the Final Rule, the 
Committee has the authority to review any covered transaction. However, 
to allow parties time to adjust to this Final Rule, the amendments to 
part 800 made by this Final Rule will become effective thirty days 
after their publication in the Federal Register.
    With respect to actions already taken by parties to transactions, 
the Committee does not intend for this Final Rule to disrupt certain 
expectations created by the provisions of the regulations, prior to 
their amendment by this Final Rule. See 31 CFR Part 800 (July 1, 2008) 
(``the prior regulations''), available at https://www.access.gpo.gov/
nara/cfr/waisidx_08/31cfr800_08.html. Therefore, consistent with 
Sec.  800.103, the provisions of the prior regulations will

[[Page 70706]]

continue to govern certain questions pertaining to past transactions 
and acts.
    As provided in Sec.  800.103(a), the provisions of this Final Rule 
apply as of the effective date of this Final Rule, with certain 
exceptions. These exceptions are spelled out in Sec.  800.103(b), and 
consist of the various provisions that relate to whether a particular 
transaction is a covered transaction. Provisions that pertain to 
procedural matters are thus not listed in paragraph (b) but, rather, 
apply to all CFIUS reviews and investigations as of the effective date. 
Accordingly, for example, all notices filed with the Committee on or 
after the effective date of this Final Rule must contain the 
information specified in Sec.  800.402 of this Final Rule, regardless 
of when the transaction occurred or will occur. Notices filed with the 
Committee prior to the effective date of this Final Rule are required 
to contain at least the information specified in Sec.  800.402 of the 
prior regulations.
    As provided in Sec.  800.103(b), particular sections of subparts B 
and C of this Final Rule apply to any transaction for which the 
execution of the agreement, or other comparable action underlying the 
transaction, occurs on or after the effective date of this Final Rule. 
As noted above, these provisions concern the assessment of whether a 
transaction is a ``covered transaction.'' Paragraphs (b)(1) through 
(b)(4) of Sec.  800.103 specify the particular event that needs to 
occur on or after the effective date in order for the relevant 
provision of the Final Rule to apply to the transaction. For example, 
if a letter of intent establishing the material terms of a transaction 
is signed on or after the effective date of this Final Rule, then the 
provisions of the Final Rule will govern the analysis of whether the 
transaction is a ``covered transaction.'' Conversely, if the letter of 
intent was signed before the effective date of this Final Rule, then 
the Committee will look at the provisions of the prior regulations in 
analyzing whether the transaction is a ``covered transaction,'' even if 
the transaction was notified to the Committee after the effective date 
of this Final Rule.
    Note that if parties sign a letter of intent prior to the effective 
date of this Final Rule, but the material terms differ in the final 
definitive agreement signed by the parties, then the Committee would 
look to the date on which that final definitive agreement was signed to 
determine the rules under which the assessment of whether the 
transaction is a ``covered transaction'' will be made.
    When reviewing any transaction notified to the Committee on or 
after the effective date that falls within the scope of Sec.  
800.103(b) and that includes minority shareholder protections listed in 
Sec.  800.204(c), the Committee will take into account Sec.  800.204(c) 
of the Final Rule to the extent that doing so would support a 
conclusion that the transaction is not a covered transaction.
    As provided in subpart H, the provisions concerning penalties will 
apply to any action after the effective date of this Final Rule that 
constitutes a violation under subpart H, regardless of when the related 
transaction occurred or when the mitigation agreement was signed. If, 
for example, after the effective date of this Final Rule, a party 
intentionally violates a mitigation agreement signed in 2000, the party 
may be subject to civil penalties under Sec.  800.801(b) of the Final 
Rule. Damages provisions written into mitigation agreements entered 
into prior to the effective date of this Final Rule are independent of, 
and not affected by, this Final Rule.

Section 800.204--Control

    The Proposed Rule made a number of changes to clarify the 
definition of ``control,'' which is now at Sec.  800.204. These 
include, among other revisions, clarification that control depends on 
powers over ``important matters'' affecting an entity, expansion of the 
illustrative list of ``important matters,'' and the addition or 
revision of examples to demonstrate what constitutes control. The 
Overview of Significant Issues, above, like the preamble to the 
Proposed Rule, also explains that the acquisition of influence falling 
short of the definition of control over a U.S. business is not 
sufficient to bring a transaction under section 721. The Proposed Rule 
also introduced a new paragraph concerning minority shareholder 
protections, which is addressed below in the discussion of Sec.  
800.204(c) of the Final Rule.
    Several commenters suggested that the Proposed Rule provided too 
expansive a definition of control, or, by not providing a more 
objective standard, risked inappropriate expansion of the definition. A 
commenter suggested that the definition of control would cause foreign 
investors to disclaim pro rata rights they obtain simply by right of 
their shareholdings and suggested that this would be detrimental to 
good governance. Several commenters asked for additional clarification 
regarding the difference between ``control'' and ``influence falling 
short of the definition of control.''
    The Final Rule makes numerous modifications to the language of 
Sec.  800.204(a) to provide greater clarification of what constitutes 
``control,'' including by clarifying circumstances where influence does 
not rise to the level of control. Examples in this section show that, 
although an investor might have influence within a business--for 
example, through a board seat, exercising pro rata voting rights 
attendant with share ownership, or otherwise--it does not have control 
unless it is able to determine, direct, take, reach, or cause decisions 
regarding the types of important matters listed in Sec.  800.204(a).
    Commenters suggested further clarification of several specific 
important matters listed in Sec.  800.204(a). Several commenters 
suggested that the power to determine, direct, or decide a single 
important matter affecting an entity should not constitute control and 
that, at the least, the Committee should clarify that it will consider 
the totality of the circumstances in making its assessment. Another 
commenter asked whether there is an ownership threshold at which 
control will always be found.
    The Final Rule makes no changes to the list of important matters at 
Sec.  800.204(a) in response to the commenters' requests for specific 
clarifications. The Committee approaches its analysis of whether a 
transaction could result in foreign control on a case-by-case basis, 
considering the level of ownership interest, the rights that emanate 
from such ownership, other rights held, restrictions on the exercise of 
such rights, and all other relevant facts and circumstances. The 
examples in Sec.  800.204 demonstrate this approach of considering 
together all relevant facts and circumstances in light of their 
potential impact on a person's ability to determine, direct, or decide 
important matters affecting an entity. As a result of this approach, 
the regulations provide no ownership threshold or other bright lines 
above which CFIUS would find control in all circumstances.
    Several commenters suggested that the Proposed Rule did not 
adequately illustrate that ownership and control can be separated 
through certain transaction structures--for example, in private equity 
funds structured as limited partnerships. One commenter suggested that 
the Committee clarify that it will review transactions involving 
private equity funds. The Final Rule adds Examples 8 and 9 in Sec.  
800.204, which provide greater clarification of the relationship 
between ownership and control and make clear that the Committee will 
focus on ``control,'' as defined, within any transaction structure 
rather than

[[Page 70707]]

formalistically distinguishing among structures.
    A commenter asked for clarification of the meaning of ``indirect'' 
power in Sec.  800.204(a). The Final Rule, like the Proposed Rule, 
defines ``control'' in functional terms. Therefore, for example, a 
person that has the power to determine important matters of an entity 
does not avoid having control of that entity by voting the shares of a 
wholly-owned subsidiary that, in turn, votes the shares of the entity, 
or by acting through another intermediary or agent.

Section 800.204(b)--Arrangements to Act in Concert

    The Proposed Rule provided that, in examining questions of control 
in situations where more than one foreign person has an ownership 
interest in an entity, consideration will be given, pursuant to what is 
now Sec.  800.204(b), to whether the foreign persons are related or 
have formal or ``informal'' arrangements to act in concert. A commenter 
asked for clarification of what constitutes an ``informal'' arrangement 
and whether this would include a voting trust.
    The Final Rule makes no change to the proposed language, which is 
now at Sec.  800.204(b), in response to this comment. If a trustee has 
the legal authority to vote the shares of different parties, even if 
unrelated, then those shares would be considered as being voted in 
concert if the trustee can vote the shares according to its discretion 
or is required to vote all shares in the same way. Example 1 in Sec.  
800.204 illustrates an informal arrangement to act in concert, where no 
formal agreement is disclosed but it is clear from other evidence that 
the foreign persons have agreed to act as a group in the exercise of 
their powers over important matters affecting the U.S. business.
Section 800.204(c)--Minority Shareholder Protections
    The Proposed Rule identified several minority shareholder 
protections at what is now Sec.  800.204(c) and provided that the 
Committee will not deem those negative rights (i.e., rights to prevent 
certain events from occurring) to confer control in themselves. Many 
commenters suggested negative rights that they believe should be added 
to the list of minority shareholder protections.
    This Final Rule expands the list of minority shareholder 
protections, now at Sec.  800.204(c), to include two additional 
negative rights: The power to prevent an entity from voluntarily filing 
for bankruptcy or liquidation, and the power to prevent the change of 
existing legal rights or preferences of the particular class of stock 
held by minority investors as provided in the relevant corporate 
documents governing such shares.
    The list in Sec.  800.204(c), however, expressly is not intended to 
be exhaustive of the rights that shall not in themselves be deemed to 
confer control over an entity. Section 800.204(c) includes a list of 
negative rights that the Committee recognizes as minority shareholder 
protections because they protect the investment-backed expectations of 
minority shareholders and do not affect strategic decisions on business 
policy or day-to-day management of an entity or other important matters 
affecting an entity.
    The Committee recognizes, however, that other negative rights 
proposed by commenters for inclusion in Sec.  800.204(c) are often 
provided to minority shareholders. Section 800.204(d) explicitly 
provides that the Committee will consider, on a case-by-case basis, 
whether minority shareholder protections other than those listed in 
Sec.  800.204(c) do not confer control over an entity. Non-inclusion in 
Sec.  800.204(c) of any particular right does not mean that the 
Committee has determined that such a right necessarily results in 
control and does not prejudge whether the Committee would determine 
under Sec.  800.204(d) that such a right does not confer control in a 
particular transaction.
    The Committee will consider favorably in the context of specific 
transactions notified to the Committee the parties' opinion that the 
following minority shareholder protections do not in themselves confer 
control: The power to prevent changes in the capital structure of the 
entity, including through mergers, consolidations, or reorganizations, 
that would dilute or otherwise impair existing shareholder rights; the 
power to prevent the acquisition or disposition of assets material to 
the business outside the ordinary course of business; the power to 
prevent fundamental changes in the business or operational strategy of 
the entity; the power to prevent incursion of substantial indebtedness 
outside the ordinary course of business; the power to prevent 
fundamental changes to the entity's regulatory, tax, or liability 
status; and the power to prevent any amendment of the Articles of 
Incorporation, constituent agreement, or other organizational documents 
of an entity. The Committee's favorable consideration of these rights 
does not preclude it from finding that the existence of one or a 
combination of these rights confers control under the facts and 
circumstances of a particular transaction.
Section 800.204(e)--Incremental Acquisitions
    A commenter asked that the regulations clarify whether CFIUS will 
review voluntary notices when a foreign person acquires an additional 
interest in a U.S. business after the Committee has concluded its 
review of a prior covered transaction involving the same parties and 
the President did not prohibit or suspend the transaction. The Proposed 
Rule did not address this point explicitly. The commenter suggested 
that clarifying this point would help to ensure that the Committee is 
not overburdened and can focus its resources appropriately on 
transactions that raise national security concerns.
    This Final Rule adds Sec.  800.204(e) and accompanying Example 7 to 
clarify the Committee's approach to incremental acquisitions. Pursuant 
to Sec.  800.204(e), a transaction in which a foreign person acquires 
an additional interest in a U.S. business that was previously the 
subject of a covered transaction for which the Committee concluded all 
action under section 721 will not be considered a covered transaction.
    If a prior investment by a foreign person in a U.S. business was 
not notified to CFIUS, or if CFIUS determined that the prior investment 
was not a covered transaction, then the subsequent investment may be a 
covered transaction, depending on whether the subsequent investment 
could result in the foreign person's control of the U.S. business.
    With respect to any covered transaction, any mitigation agreement 
or conditions may include, subject to the requirements of section 721 
and Executive Order 11858, measures to address any national security 
risk posed by the covered transaction, including any increased risk if 
the foreign acquirer were to have a greater ownership interest in the 
U.S. business.
Section 800.207--Covered Transaction
    The Proposed Rule defined ``covered transaction'' consistent with 
the definition of that term in section 721. The Proposed Rule provided 
additional clarity about what transactions are covered by section 721 
in numerous other provisions, including Sec. Sec.  800.301 and 800.302 
and the definitions of ``control,'' ``foreign person,'' and a ``U.S. 
business.'' A commenter suggested that the Committee regularly release 
redacted descriptions of transactions that have been filed with the 
Committee, along with descriptions of

[[Page 70708]]

the Committee's assessment of whether they were covered transactions.
    The Final Rule does not adopt this suggestion. Public release of 
any assessment by the Committee of whether a transaction is a covered 
transaction would implicate significant potential national security and 
confidentiality concerns. The Final Rule, at Sec. Sec.  800.207, 
800.301 and 800.302, provides greater clarity regarding what 
transactions are covered by section 721. Parties to a transaction, at 
their own discretion, may make available to the public information 
about transactions that they have voluntarily notified to the 
Committee.

Section 800.208--Critical Infrastructure

    The Proposed Rule defined ``critical infrastructure'' consistent 
with the definition of that term in section 721 and clarified that, in 
determining whether a covered transaction involves critical 
infrastructure, the Committee would consider the ``particular'' systems 
or assets involved, rather than defining certain classes of systems or 
assets as critical infrastructure. Several commenters expressed support 
for this approach. Others suggested that the scope of ``critical 
infrastructure'' be further illustrated by identifying infrastructure 
that would or would not be considered critical.
    The Final Rule, at Sec.  800.208, continues the case-by-case 
approach of section 721 and the Proposed Rule towards identifying 
critical infrastructure. Under this approach, the Committee determines 
whether (1) a particular transaction notified to it is a ``covered 
transaction,'' (2) that particular covered transaction would result in 
foreign control of critical infrastructure of or within the United 
States, and (3) that particular covered transaction has potential 
national security effects. Accordingly, the definition of critical 
infrastructure turns on the national security effects of any incapacity 
or destruction of the particular system or asset over which a foreign 
person would have control as a result of a covered transaction. 
Consistent with this approach, the Committee will not deem classes of 
systems or assets to be, or not to be, critical infrastructure.

Section 800.211--Entity

    The Proposed Rule made clear that an entity need not have a 
distinct legal personality in order to fall within the definition of 
``entity'' under these regulations. A commenter asked for clarification 
of the circumstances in which assets with no distinct legal personality 
would be considered an ``entity.''
    The Final Rule amends the proposed text of Sec.  800.211 to add a 
cross-reference to Sec. Sec.  800.301(c) and 800.302(c), which provide 
additional clarity regarding when assets with no distinct legal 
personality can constitute an ``entity'' and, in turn, a ``U.S. 
business.'' This additional clarification is provided, in particular, 
by Examples 6 and 7 in Sec.  800.301(c) and Examples 1, 2, 4, and 5 in 
Sec.  800.302(c).

Section 800.212--Foreign Entity

    The Proposed Rule introduced a new term, ``foreign entity,'' to 
refer to entities the Committee considers to be foreign persons based 
on either their place of organization and foreign exchange listing or 
the extent of their foreign ownership, even if no single foreign person 
controls the entity. Commenters expressed concern that the definition 
of ``foreign entity'' in the Proposed Rule would have captured entities 
that were incorporated outside of the United States if they were 
primarily traded on foreign exchanges, even if the entities were in 
fact majority-owned by U.S. nationals.
    The Final Rule revises the proposed text of Sec.  800.212 to cover 
entities organized under the laws of a foreign state if either its 
principal place of business is outside the United States or its equity 
securities are primarily traded on one or more foreign exchanges. The 
Final Rule excludes from the definition of ``foreign entity,'' however, 
any entity that is able to demonstrate to the Committee that a majority 
of the equity interest in the entity is ultimately owned by U.S. 
nationals. Note that, under the definition of ``foreign person'' at 
Sec.  800.216(b), any entity over which control is exercised or 
exercisable by a foreign person would still itself be deemed a foreign 
person, even if that entity does not constitute a ``foreign entity.'' 
Accordingly, an entity controlled by a foreign person is itself a 
foreign person, even if it is majority owned by U.S. nationals.
    Commenters also asked whether a foreign person's ownership of 
shares of an entity could result in that entity being considered a 
``foreign entity'' if the right to vote that person's shares were 
transferred to U.S. nationals through a voting trust. Example 3 in 
Sec.  800.301(a) of the Final Rule illustrates that an agreement to 
delay the exercise of voting rights for a limited period of time does 
not preclude a finding of control. Similarly, if a voting trust is 
revocable or time-limited, the Committee would consider the foreign 
person that placed its shares in such a voting trust as still holding 
the shares.
    Finally, a commenter asked whether the definition of ``foreign 
entity'' was intended to be a standard for determining foreign 
government control. The definition of ``foreign entity'' is not 
intended to be a standard for determining foreign government control. 
If an entity could be controlled by a foreign government, the question 
of whether it is a ``foreign entity'' would never arise, as ``foreign 
entity'' is a term that is intended to cover situations where there is 
significant foreign ownership but ownership is dispersed.

Section 800. 213--Foreign Government

    The Proposed Rule defined the term ``foreign government'' to 
include non-elected heads of state with governmental responsibilities. 
A commenter said that the term ``head of state'' in Sec.  800.213 was 
unclear.
    The Final Rule amends Sec.  800.213 to delete the clause referring 
to certain heads of state, since it imprecisely defined the 
circumstances under which the Committee may treat an investment by a 
government official as being an investment by a foreign government. 
Consistent with the reference in Sec.  800.214 to a person ``acting on 
behalf of a foreign government,'' the Final Rule permits the Committee 
to treat investments by foreign government officials as investments by 
foreign governments where the circumstances so warrant, such as in 
certain cases where an official invests to advance governmental 
objectives.

Section 800. 214--Foreign Government-Controlled Transaction

    The Proposed Rule defined ``foreign government-controlled 
transaction'' to mean any covered transaction that could result in 
control of a U.S. business by a foreign government or a person 
controlled by or acting on behalf of a foreign government. Commenters 
suggested that, in considering whether a transaction is foreign 
government-controlled, the regulations should treat certain types of 
entities owned by foreign governments or that have a ``government 
background'' as not foreign government-controlled--for example, if they 
operate on a purely commercial and market-driven basis.
    The Final Rule makes no changes to the proposed text of Sec.  
800.214. ``Foreign government-controlled transaction'' is defined by 
statute at section 721(a)(4) and may not be modified by regulation in a 
manner that is inconsistent with the statute. The statute makes clear 
that transactions are ``foreign government-controlled transactions'' if 
they could

[[Page 70709]]

result in the control of any person engaged in interstate commerce in 
the United States by a foreign government or an entity controlled by or 
acting on behalf of a foreign government, regardless of whether the 
transaction has a purely commercial and market-driven basis. 
Accordingly, the regulations do not exclude transactions involving 
entities controlled by a foreign government, even if the entities 
operate on a commercial basis, nor entities that are controlled only 
indirectly by a foreign government through a person controlled by or 
acting on behalf of a foreign government. Consistent with section 
721(b)(2)(E), however, the Department of the Treasury, as Chairperson 
of the Committee, is publishing guidance regarding the types of 
transactions that the Committee has reviewed and that have presented 
national security considerations. That guidance clarifies that whether 
a foreign government-controlled entity operates on a purely commercial 
and market-driven basis is among the important factors that the 
Committee takes into consideration when assessing whether foreign 
government control in a particular transaction poses concerns about 
possible impairment of U.S. national security.

Section 800.216--Foreign Person

    The Proposed Rule expanded the definition of ``foreign person'' to 
include the term ``foreign entity'' and added a number of examples. A 
commenter suggested that the examples in Sec.  800.216 and Sec.  
800.226, which respectively define ``foreign person'' and ``U.S. 
business,'' be expanded to make clear that the two concepts are 
distinct. A commenter also expressed concern that an acquisition by an 
investment fund controlled by a foreign bank may be treated differently 
under the regulations than would an acquisition by an investment fund 
controlled by U.S. nationals.
    The Final Rule makes no changes to the proposed text of Sec.  
800.216 and Sec.  800.226. The terms ``foreign person'' and ``U.S. 
business'' are independent of one another and serve distinct purposes 
in the Final Rule. Accordingly, it is possible that a particular entity 
may be just a foreign person, just a U.S. business, both a foreign 
person and a U.S. business simultaneously, or neither a U.S. business 
nor a foreign person.
    Section 721 and this Final Rule, which implements section 721, 
cover transactions after a certain date that could result in control of 
a U.S. business by a foreign person. Accordingly, whether a party that 
controls an investment fund is, or is not, a foreign person is central 
to the statutory and regulatory framework.

Section 800.220--Party or Parties to a Transaction

    The Proposed Rule provided, at Sec.  800.220(f), that any party in 
a role comparable to a party listed in paragraphs (a) through (e) of 
Sec.  800.220 would also be deemed a ``party to a transaction.'' A 
commenter suggested that Sec.  800.220(f) provides the Committee with 
excessive discretion.
    The Final Rule makes no change to the proposed text of Sec.  
800.220. Paragraph (f) of that section does not expand the scope of 
what constitutes a covered transaction. Rather, it identifies what 
persons, in circumstances other than those covered by paragraphs (a) 
through (e), are considered to be a ``party to a transaction'' and, 
therefore, may file a voluntary notice with the Committee consistent 
with the requirements of Sec.  800.402.

Section 800.224--Transaction

    The Proposed Rule replaced the term ``acquisition'' with the term 
``transaction,'' at Sec.  800.224, in order to harmonize the 
terminology of the regulations with that of FINSA, and provided that a 
transaction is a ``proposed or consummated merger, acquisition, or 
takeover.'' One commenter suggested that the Committee should not have 
the authority to review transactions after they have been completed. 
However, if a transaction is proposed after August 23, 1988 and could 
result in foreign control of a U.S. business, then it would be a 
``covered transaction,'' as defined in section 721, even if the 
transaction has been consummated by the time of review.
    In addition to other clarifications of the definition, the Proposed 
Rule also clarified that certain joint ventures and long-term leases 
are ``transactions.'' In particular, the Proposed Rule provided that 
long-term leases are transactions when, because of the terms of the 
lease and the extent of the lessee's authority over the U.S. business, 
the lessee operates the business as if it were the owner. A commenter 
asked whether a long-term lease in which a lessor retained only minimal 
oversight responsibilities and the ability to impose penalties in the 
event of a contractual breach would not constitute a ``transaction'' 
under Sec.  800.224(f) and the example in Sec.  800.224.
    The Final Rule makes no change to Sec.  800.224(f) or the example 
in Sec.  800.224 in response to the comment. As a general matter, and 
as reflected in the example in Sec.  800.224, the more significant the 
substantive responsibilities retained by the lessor over the leased 
property, the likelier that the lease would not be viewed as a 
transaction.

Section 800.301(d)--Joint Ventures

    The Proposed Rule, in Sec.  800.301(d), harmonized the application 
of the term ``covered transaction'' to joint ventures with its 
application to all other transactions. Thus, the Proposed Rule provided 
that the creation of a joint venture is a covered transaction if a U.S. 
business is contributed to the joint venture and a foreign person could 
gain control of that U.S. business through the creation of the joint 
venture. Example 1 in Sec.  800.301(d) of the Proposed Rule stated that 
the creation of a 50/50 joint venture by a foreign person and a party 
that contributes a U.S. business is a covered transaction, with respect 
to the U.S. business. A commenter suggested that such a transaction 
should not be a covered transaction because the power that the foreign 
person has over the U.S. business is no greater than the other party's.
    The Final Rule makes no change in response to the comment described 
above. To the extent that a joint venture involves the contribution of 
a U.S. business, a foreign 50/50 joint venture partner would obtain the 
same degree of power over the important matters affecting that joint 
venture--and therefore the U.S. business--as if the foreign person had 
made a direct investment in that U.S. business to obtain a 50 percent 
interest. The acquisition of a 50 percent interest in an existing U.S. 
business is not viewed differently with regard to foreign control based 
on whether it is structured as a direct investment or a joint venture. 
When all ownership interests in a U.S. business are held by two equal 
partners, each partner is able to veto all important matters affecting 
the U.S. business, so each partner controls the U.S. business.

Section 800.302(b) of the Regulations Issued in 1991--Corporate 
Reorganizations

    The Proposed Rule omitted a provision that had been included in the 
1991 regulations, at Sec.  800.302(b). The omitted provision stated 
that an acquisition is not subject to review under section 721 if the 
parent of the entity making the acquisition is the same as the parent 
of the entity being acquired. A commenter suggested reintroducing the 
omitted provision or confirming that the principle continues to apply.

[[Page 70710]]

    The Final Rule does not reintroduce the omitted provision. Section 
721, as amended by FINSA, requires the Committee to review any 
transaction notified to it that could result in control of a U.S. 
business by a foreign person. A corporate reorganization that results 
in a new foreign person acquiring control of a U.S. business would be a 
covered transaction, even though the ultimate parent of the U.S. 
business may not have changed. Thus, the Committee must treat such a 
reorganization as a covered transaction. Such a reorganization, 
however, will present national security considerations only in 
exceptional cases, as is explained in greater detail in guidance that 
the Department of the Treasury, as Chairperson of the Committee, is 
publishing on the types of transactions that the Committee has reviewed 
and that have presented national security considerations.

Section 800.302(b)--Solely for the Purpose of Passive Investment

    The Proposed Rule provided in Sec.  800.302(c) that a transaction 
that results in a foreign person holding ten percent or less of the 
outstanding voting interests in a U.S. business is not a covered 
transaction if the transaction is ``solely for the purpose of 
investment.'' In Sec.  800.223, ``solely for the purpose of 
investment'' was defined to refer to ownership interests in which the 
person holding or acquiring such interests has no plan or intent to 
exercise control, and takes no actions that indicate otherwise. Some 
commenters suggested that the term ``solely for the purpose of 
investment'' was too vague and created additional uncertainty for 
portfolio investors. A commenter also suggested clarifying that 
investors holding less than ten percent of the interests of a business 
can wield significant influence.
    The Final Rule addresses these comments by clarifying that the rule 
for holdings of ten percent or less of the outstanding voting interests 
in a U.S. business--which is now at Sec.  800.302(b) of the Final 
Rule--applies only to interests that are held or acquired ``solely for 
the purpose of passive investment.'' The addition of the word 
``passive'' emphasizes that this rule does not pertain to a transaction 
if the foreign person plans or intends to gain control over the U.S. 
business. The example in Sec.  800.223 of the Final Rule also makes 
clear that the Committee will consider whether the foreign person's 
negotiation of rights constitutes evidence that the foreign person 
possesses a purpose other than passive investment. Under the Final 
Rule, a transaction would not be a ``covered transaction'' if the 
foreign person holds ten percent or less of the voting shares in a U.S. 
business and the investment is passive such as where, for example, the 
foreign investor has no affirmative rights other than the ability to 
vote its shares pro rata and no negative rights other than any minority 
shareholder protection listed in Sec.  800.204(c) or as considered by 
the Committee on a case-by-case basis under Sec.  800.204(d).
    A commenter also suggested that the Proposed Rule be revised to 
identify a mechanism for tracking whether, after the Committee 
determines that this rule applies to a transaction, the foreign person 
develops plans or an intent to control the U.S. business or takes 
action inconsistent with passive intent. The Final Rule makes no change 
to the proposed language in response to this comment. The Committee 
will inform the parties if it determines a notified transaction is not 
a covered transaction because the investment is held or acquired solely 
for the purpose of passive investment. Should material facts change in 
the future relating to whether the foreign person has control of the 
U.S. business, the transaction may become a covered transaction subject 
to section 721.
    A commenter also suggested that the rule regarding transactions 
solely for the pur