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

DEPARTMENT OF THE TREASURY

Office of International Investment

31 CFR Part 800

Regulations Pertaining to Mergers, Acquisitions, and Takeovers by

Foreign Persons

AGENCY: Department of the Treasury.

ACTION: proposed rule.

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SUMMARY: These proposed 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 proposed 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.

DATES: Comments must be submitted on or before March 18, 1994.

ADDRESSES: Comments should be sent to: Donald Crafts, Director, Office

of International Investment, Department of the Treasury, room 5100,

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

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, DC

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 (P.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 has decided to provide thirty

days for these proposed regulations, which, with a few exceptions, are

of a relatively routine nature.

The preamble to these regulations, once published in final form,

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 proposed rule have been submitted to the Office of

Management and Budget for review in accordance with the Paperwork

Reduction Act of 1980 (44 U.S.C. 3504(h)). Comments on the collections

of information should be sent to the Office of Information and

Regulatory Affairs, Office of Management and Budget, Paperwork

Reduction Act Project (1501-0121), Washington, DC 20503, with copies to

the Office of International Investment at the address noted above.

The collection of information provided for in this proposed rule is

in section 800.402. Thus far, the regulations have requested parties

filing a notification under section 721 to provide 10 copies of the

notification. However, the Committee on Foreign Investment in the

United States has been expanded by Executive Order 12860 of September

3, 1993, to include three additional members: the Assistant to the

President for National Security Affairs, the Assistant to the President

for Economic Policy, and the Director of the Office of Science and

Technology Policy. The regulations have accordingly been amended to

request that three additional copies of the notifications be provided

by parties making a filing under section 721, for a total of 13 copies.

The regulations have also been amended to request more information

pertaining to foreign government control to assist the Committee in

implementing the amendment to section 721 pertaining to mandatory

investigations of certain acquisitions involving such control.

The information collected pursuant to these regulations is required

by the Committee to assist it in determining whether to investigate

mergers, acquisitions, and takeovers of persons involved in interstate

commerce in the United States by or with foreign persons for possible

threats to the national security, as required by section 721 of the

Defense Production Act. This information will be used to determine the

extent and nature of foreign control, as well as the national security

implications of the transactions at issue. The likely respondents are

individuals and businesses.

Estimated Total Annual Reporting Burden: 6000 hours

Estimated Average Annual Burden per Respondent: This varies, depending

on individual circumstances, with an average of 60 hours

Estimated Number of Respondents: 100

Estimated Annual Frequency of Responses: 1

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 (P.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 proposed rule to the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.). The impact of this proposed

rule on small entities is expected to be insignificant. This proposed

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 proposed rule will not have a significant economic impact on a

substantial number of small entities.

Discussion of the Proposed 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 proposed 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 proposed

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 proposed

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 is a

passive participant in an acquisition by a foreign person. 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).

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 proposed to be 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.

2. Section 800.208 and Secs. 800.209 through 800.221 are

redesignated as Sec. 800.209 and Secs. 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 Sec. 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, be 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 of the Department of Defense's needs

for a particular product or service;

* * * * *

(5) * * *

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

government, either 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 paragraphs (b) and (d) to read

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

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

read ``Section 721 (d) and (e)''.

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

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

12. The Appendix 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.

Dated: January 11, 1994.

Jeffrey R. Shafer,

Assistant Secretary (International Affairs).

[FR Doc. 94-3540 Filed 2-10-94; 8:45 am]

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