DEPARTMENT OF THE TREASURY

SUMMARY: These final regulations implement amendments to Section 721 of

Title VII of the Defense Production Act of 1950 (the ``DPA''), as added

by section 5021 of the Omnibus Trade and Competitiveness Act of 1988,

relating to mergers, acquisitions, and takeovers of U.S. persons by or

with foreign persons, and as amended by section 837 of the National

Defense Authorization Act for Fiscal Year 1993. That amendment requires

that the President or his designee undertake an investigation under

Section 721 of certain acquisitions which could result in control of

U.S. persons by foreign government controlled entities. It also expands

the factors the President must consider in making a determination under

Section 721, modifies the existing congressional reporting requirement

under Section 721, and requires that any designee of the President

under Section 721 share with any other designee a copy of an assessment

made in a particular case of the risk of diversion of a defense

critical technology.

These final regulations implement only those provisions relating to

mandatory investigations, and also make a few technical and conforming

changes to the existing regulations. The statutory amendments

pertaining to the factors for Presidential decisionmaking and report

sharing, which do not directly affect the behavior of parties filing

under Section 721, were deemed sufficiently straightforward not to

require any implementing regulations.

EFFECTIVE DATE: May 25, 1994.

FOR FURTHER INFORMATION CONTACT: Marilyn L. Muench, Deputy Assistant

General Counsel for International Affairs, or Francine McNulty Barber,

Attorney-Adviser, Department of the Treasury, 15th Street and

Pennsylvania Ave., NW., Washington, D.C. 20220, (202) 622-1947. For

further information regarding procedures for giving notice, contact

Donald E. Crafts, Staff Chairman of the Committee and Acting Director,

Office of International Investment, Room 5100, Department of the

Treasury, 15th Street and Pennsylvania Ave., NW., Washington, DC 20220,

(202) 622-1860.

SUPPLEMENTARY INFORMATION: Section 136 of the Defense Production Act

Amendments of 1992 (Pub. L. 102-558) amended section 709 of the DPA by

requiring that any regulation issued under the DPA be published in the

Federal Register and that opportunity for public comment be provided

for not less than thirty days. Although the Treasury Department elected

to provide a sixty day comment period for the regulations originally

proposed to implement section 721, it provided thirty days for public

comment on these regulations, in light of their relatively routine

nature. The proposed regulations were published on February 16, 1994;

just one written comment was received during the thirty-day comment

period. The preamble to the final regulations has been clarified to

reflect this comment, and a few minor changes have been made to the

regulations themselves in response to suggestions from staff members of

the Committee on Foreign Investment in the United States.

The preamble to these regulations will be preserved with the

preamble to the original regulations as an appendix in the Code of

Federal Regulations.

Executive Order 12866

These regulations are not subject to the requirements of Executive

Order 12866 because they relate to a foreign and military affairs

function of the United States.

Paperwork Reduction Act

The collections of information provided for in this final rule have

been reviewed and approved by the Office of Management and Budget in

accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 3504(h))

under OMB control number 1505-0121.

The estimated average annual burden per respondent varies,

depending on individual circumstances, with an average of 60 hours.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be directed to Donald

Crafts, Staff Chairman of the Committee on Foreign Investment in the

United States and Acting Director of the Office of International

Investment, Room 5100, Department of the Treasury, 15th Street and

Pennsylvania Ave., NW, Washington, DC 20220, and to the Office of

Management and Budget, Paperwork Reduction Project (1505-0121),

Washington, DC 20503.

Regulatory Flexibility Act

These regulations implement amendments to Section 721 of the

Defense Production Act of 1950 (50 U.S.C. App. 2170)(``DPA''). Section

709 of the DPA (50 U.S.C. App. 2159) provides that the regulations

issued under it are not subject to the rulemaking requirements of the

Administrative Procedure Act (5 U.S.C. 553). Notwithstanding this

exemption, section 709 of the DPA was amended by section 136 of the

Defense Production Act Amendments of 1992 (Pub. L. 102-558) to require

any regulation issued under the DPA to be published in the Federal

Register for at least thirty days to provide for public comment. This

requirement subjects this final rule to the Regulatory Flexibility Act

(5 U.S.C. 601 et seq.). The impact of this final rule on small entities

is expected to be insignificant. This final regulation imposes

additional informational requirements on entities controlled by foreign

governments. Most businesses affected by this rule will likely be large

businesses, because these are the most likely to be controlled by a

foreign government. Accordingly, it is certified that the final rule

will not have a significant economic impact on a substantial number of

small entities.

Discussion of the Final Rule

Section 837(a) of the Defense Authorization Act creates for the

first time a mandatory investigation provision under Exon-Florio. There

are three points worth noting about this provision. First, this

provision is limited in application to certain types of acquisitions.

Specifically, the acquirer in question must be a foreign government

controlled entity, or an entity acting on behalf of a foreign

government. Furthermore, the acquisition must be one which ``could

result in control of a person engaged in interstate commerce in the

United States that could affect the national security of the United

States'' (emphasis added). Thus, even where the other specified

criteria are met, this provision does not mandate an investigation for

cases that could not ``affect the national security of the United

States.''

Second, for purposes of determining whether the acquisition results

in foreign government control, CFIUS is applying the same functional

test for control as provided in section 800.204.

Third, in contrast to the criterion for Presidential action under

Exon-Florio, i.e., that the foreign party acquiring control might take

action that ``threatens to impair the national security,'' the

criterion for undertaking an investigation of transactions involving

government controlled entities is that there could be an effect on the

national security.

The term ``foreign government'' has been broadly defined for

purposes of these regulations to include any government or body

exercising governmental functions, and includes but is not limited to

national as well as various regional and local levels of government. It

is important to note that the definition is not limited to the

particular levels of government that are specified in the regulation,

and that other governmental bodies, including supra-national entities

such as the European Union (including its component parts), are covered

by this regulation.

For purposes of the mandatory investigation provision, the

regulations define the term ``engage in'' as used in the phrase ``seeks

to engage in any merger, acquisition or takeover * * *'' to mean

``seeks to acquire control through.'' The purpose of this regulation is

to clarify that the mandatory investigation provision would not be

triggered in cases where a foreign government controlled entity's

participation in an acquisition is solely for the purpose of

investment, as defined in section 800.217 of the regulations. The

Committee believes that this reading is supported by the legislative

history, and particularly floor statements made by members of Congress

who sponsored this particular amendment. See, e.g., Cong. Rec., Sept.

18, 1992, pages S 14050 through 14053 (comments of Senators Exon,

Sarbanes and Riegle); and Cong. Rec. Oct. 3, 1992, page H 10986

(comments of Representative Collins). Subparagraph 800.402(c)(5)(iii)

has been changed in the final regulations by the addition of the words

``for example'' to clarify that an agency or representative role are

examples of ways in which a foreign person can act on behalf of a

foreign government, but are not the only ways in which such a

relationship could be conducted.

Drafting Information

The principal author of this document is the Office of the

Assistant General Counsel (International Affairs). However, personnel

from other offices of the Treasury Department and from other agencies

that are members of the Committee participated extensively in its

development.

List of Subjects in 31 CFR Part 800

Foreign investments in United States, Investigations, National

defense, Reporting and recordkeeping requirements.

For the reasons set out in the preamble, Title 31, Chapter VIII,

Part 800 of the Code of Federal Regulations is amended as set forth

below.

PART 800--[AMENDED]

1. The authority citation for part 800 is revised to read as

follows:

Authority: Section 721 of Pub. L. 100-418, 102 Stat. 1107, made

permanent law by section 8 of Pub. L. 102-99, 105 Stat. 487 (50

U.S.C. App. 2170) and amended by section 837 of the National Defense

Authorization Act for Fiscal Year 1993, Pub. L. 102-484, 106 Stat.

2315, 2463; E.O. 12661, 54 FR 779, 3 CFR, 1988 Comp., p. 618.

Sec. 800.208 [Redesignated as Sec. 800.209].

2. Section 800.208 and sections 800.209 through 800.221 are

redesignated as sections 800.209 and sections 800.211 through 800.223,

respectively.

3. Sections 800.208 and 800.210 are added to read as follows:

Sec. 800.208 Engage in.

The term engage in, as used in the phrase seeks to engage in any

merger, acquisition or takeover in section 721(b), means seeks to

acquire control through.

Sec. 800.210 Foreign government.

The term foreign government means any government or body exercising

governmental functions, other than the government of the United States,

a State of the United States, or a political subdivision of the United

States or a State. The term includes but is not limited to national,

state, provincial and municipal governments, including their respective

departments, agencies, government-owned enterprises and other agencies

and instrumentalities.

4. Newly designated section 800.222 is amended by revising the

reference ``Sec. 800.211'' in Example 1 to read ``Sec. 800.213''.

5. Section 800.301 is amended by revising the third sentence in

Example 1 of paragraph (b)(5) to read as follows:

Sec. 800.301 Transactions that are acquisitions under Section 721.

* * * * *

(b) * * *

(5) * * *

Example 1. * * * Under the Articles of Incorporation of JV

Corp., Corp. A through its shareholding in JV Corp. may elect a

majority of the Board of Directors of JV Corp. * * *

* * * * *

6. Section 800.302 is amended by revising the reference

``Sec. 800.217'' in paragraph (d) introductory text to read

``Sec. 800.219''.

7. Section 800.401 is amended by revising ``ten copies'' in

paragraph (a) to read ``thirteen copies''.

8. Section 800.402 is amended by revising paragraph (c)(3)(v)(A),

by removing the word ``and'' at the end of paragraph (c)(5)(i), by

removing the period at the end of paragraph (c)(5)(ii)(E), and

replacing it with a semicolon, by adding paragraphs (c)(5) (iii) and

(iv), and by adding paragraph (i) to read as follows:

Sec. 800.402 Contents of voluntary notice.

* * * * *

(c) * * *

(3) * * *

(v) * * *

(A) It is a supplier, for example, a prime contractor, or a first

tier subcontractor, or, if known, a subcontractor at any tier, to the

Department of Defense or any component of the Department of Defense, or

a seller to any such prime contractor or subcontractor, and, to the

knowledge of the parties submitting notice, to what extent the U.S.

person is a sole-source supplier to the Department of Defense for a

particular product or service;

* * * * *

(5) * * *

(iii) Whether the foreign person is acting on behalf of a foreign

government, for example, as an agent or a representative, or in some

similar capacity; and

(iv) Whether a foreign government or an entity controlled by a

foreign government--

(A) Has the power or right to determine, direct, take, reach or

cause decisions of the acquirer with respect to any of the matters

listed in section 800.204, and, if so, the source of that power or

right (e.g., shareholders agreement, contract, statute, regulation) and

the mechanics of its operation;

(B) Owns or controls voting or convertible securities of the

acquiring foreign person or any affiliate of the acquiring foreign

person, and if so, the nature and percentage amount of any such

securities;

(C) Has the right or power to appoint any of the principal officers

or the members of the board of directors of the acquiring foreign

person or any affiliate of the acquiring foreign person; or

(D) Holds any contingent interest (e.g., such as might arise from a

lending transaction) in the foreign acquiring party and, if so, the

rights that are covered by this contingent interest, and the manner in

which they would be enforced.

* * * * *

(i) Persons filing a voluntary notice shall include a copy of the

most recent asset or stock purchase agreement or other document

establishing the terms of the acquisition.

9. Section 800.504 is amended by revising the references

``subparagraphs (d) (1) and (2)'' in the second sentence of paragraph

(b) to read ``subparagraphs (e) (1) and (2)''.

10. Section 800.601 is amended by revising the references ``Section

721(c)'' and ``Section 721(d)'' in paragraph (b) to read ``Section

721(d)'' and ``Section 721(e)'', respectively; by revising the

reference ``Section 721 (c) and (d)'' in paragraph (c) to read

``Section 721 (d) and (e)''; and by revising the reference ``Section

721(c)'' in paragraph (d) to read ``Section 721(d)''.

11. Section 800.702 is amended by revising the reference ``Section

721(h)'' in paragraph (a) to read ``Section 721(c)''.

12. The existing appendix to part 800 is redesignated as appendix A

to part 800, the heading of the appendix is revised, and a new sentence

is added at the end of the note at the beginning of the appendix, to

read as follows:

Appendix A to Part 800--Preamble to Regulations on Mergers,

Acquisitions, and Takeovers by Foreign Persons (Published November 21,

1991)

Note: * * * Certain sections of the regulations were renumbered

in a final rule published on May 25, 1994, and those number changes

are reflected in the ``Section-by-Section Discussion of Changes'' in

this appendix. (See appendix B of this part for the preamble of the

May 25, 1994, final rule.)

* * * * *

Appendix A to Part 800 [Amended]

13. Appendix A to part 800 is amended in III. Section-by-Section

Discussion of Changes, by revising the paragraph headings ``Section

800.211'', ``Section 800.214'', ``Section 800.217'', and ``Section

800.220'' to read ``Section 800.213'', ``Section 800.216'', ``Section

800.219'', and ``Section 800.222'', respectively.

14. A new appendix B is added to part 800 to read as follows:

Appendix B to Part 800--Preamble to Regulations on Mergers,

Acquisitions, and Takeovers by Foreign Persons (Published May 25, 1994)

Note: For the convenience of the reader, this appendix contains

the text of the preamble to the final rules amending the regulations

on mergers, acquisitions, and takeovers by foreign persons beginning

at the heading ``Discussion of the Final Rule'' and ending before

``List of Subjects in 31 CFR Part 800'' (59 FR [Insert FR page

cite]; May 25, 1994).

15. The discussion contained in the SUPPLEMENTARY INFORMATION

section of this document beginning with the heading ``Discussion of the

Final Rule'' and ending before ``List of Subjects in 31 CFR part 800''

is added to appendix B immediately following the note.

Dated: May 5, 1994.

Jeffrey R. Shafer,

Assistant Secretary, (International Affairs).

[FR Doc. 94-12451 Filed 5-24-94; 8:45 am]

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