ANALYSIS: CFIUS Can Review Investments in DPA Title III Entities

April 29, 2020, 5:04 PM

The Committee on Foreign Investment in the U.S. (CFIUS) is more prepared for the pandemic and economic downturn than you may have realized.

The Committee—which derives its legal authority for national security reviews of transactions involving foreign investment under Title VII of the Defense Production Act (DPA)—has jurisdiction over investments in companies operating facilities that have received funding within the prior 60 months under Title III of the DPA. Such facilities are deemed “covered investment critical infrastructure” under the Committee’s new regulations that went into effect this February. This is just one small component of the Committee’s newly broadened jurisdiction that may come into play during the crisis. With its tightly drafted regulations that close past loopholes, CFIUS is well-positioned to tackle problematic transactions during this time of heightened national vulnerability.

60 Months Is Five Years

The main achievement of the recent reforms to the CFIUS mandate effected by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) was the expansion of the Committee’s jurisdiction to cover certain non-controlling investments in U.S. businesses involved in critical infrastructure, critical technologies, and sensitive personal data—uncanny timing, considering that the novel coronavirus outbreak and concurrent economic troubles have put U.S. businesses in these areas (e.g., the health, biotech, and energy sectors) at the fore of national security concerns. Most notably prescient, though, was the inclusion, in the exhaustive list of types of critical infrastructure within CFIUS’s mandate (contained in “Appendix A to Part 800—Covered Investment Critical Infrastructure and Functions Related to Covered Investment Critical Infrastructure”), of investments in U.S. businesses that:

manufacture any industrial resource other than commercially available off-the-shelf items, as defined in 41 U.S.C. 104, as amended, or operate any industrial resource that is a facility, in each case, that has been funded, in whole or in part, by […] (a) Defense Production Act of 1950 Title III program, as amended (50 U.S.C. 4501 et seq.). (31 CFR Part 800 Appendix A)

Title III of the DPA, which “allows the President to provide economic incentives to secure domestic industrial capabilities essential to meet national defense and homeland security requirements,” was recently invoked to procure more than 39 million N95 respirator masks from 3M Co., Honeywell International Inc., and a unit of Owens & Minor Inc. to help combat the novel coronavirus.

As a result of how critical infrastructure is defined in the new CFIUS regulations, certain foreign investments in these companies—and others party to new coronavirus-related DPA Title III contracts—would be subject to CFIUS review for a period of 60 months following the receipt of such funding. That’s 5 years. This means that for U.S. companies getting tapped to aid their country, there is the following caveat and condition to receiving DPA Title III funding: For five years after funding is received, all non-controlling foreign investments in the company are subject to CFIUS review. Though such investments may have already been subject to CFIUS review even if no Title III funding had taken place—which is likely the case with respect to large U.S. defense contractors—it’s still important fine print to be aware of as the DPA’s Title III surges in importance.

Before the declaration of a national emergency and the WHO’s pandemic declaration, Honeywell International Inc.—which is reportedly due to receive $27.4 million under its Title III contract for N95 masks announced in April—was reported to be “exploring a sale of its personal protective equipment unit that makes everything from gas masks to goggles to work boots” in February. If Honeywell is still considering the rumored $2 billion deal after the completion of its Title III contract, and to the extent that the transaction would involve foreign investment, CFIUS review would be all but guaranteed.

Critical Infrastructure & Critical Technologies

Critical infrastructure under the CFIUS regulations also covers, among other things, oil and gas manufacturing, refining, and pipelines; internet-related infrastructure; electric power generation; and public water systems. Regarding the list of critical infrastructure contained in Appendix A, the preamble to the regulations states that:

Appendix A reflects extensive consultation with subject matter experts at CFIUS member agencies, as well as other relevant U.S. Government agencies, who, in developing appendix A, considered, among other factors, whether other U.S. Government authorities provided adequate protections for national security. The Treasury Department will evaluate implementation of the rule, and when necessary, revise the regulations (and any appendices) to address changes in the national security landscape. (31 CFR Part 800)

CFIUS’s jurisdiction also covers certain investments in U.S. businesses that produce, design, test, manufacture, fabricate, or develop critical technologies for use in the following industries (based on their corresponding NAICS codes) that now may be particularly vulnerable as a result of the current crisis (the list below is not exhaustive of all industry sectors covered in the regulations):

· Aircraft Manufacturing
· Aircraft Engine and Engine Parts Manufacturing
· Petrochemical Manufacturing
· Petrochemical Manufacturing Powder Metallurgy Part Manufacturing
· Other Basic Inorganic Chemical Manufacturing
· Research and Development in Nanotechnology
· Research and Development in Biotechnology
· Semiconductor and Related Device Manufacturing
· Semiconductor Machinery Manufacturing


In addition to the above, the new regulations were deliberately drafted with the aim of closing any potential loopholes or gaps in CFIUS jurisdiction. That’s because prior to the reforms, investments that put national security at risk were bypassing CFIUS. As stated in the legislative documents, these changes were undertaken in response to shifts in the national security landscape and shifts in the “nature of the investments that pose the greatest potential risk to national security.”

In nearly every key definition or provision of the regulations, there is a catch-all added to ensure that the scope goes beyond any of the specifically enumerated scenarios. The most potent and expansive catch-all included, however, is added as a category of “covered transactions”:

(d) Any other transaction, transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent the application of section 721. (31 CFR § 800.213(d))

This very broadly construed category of covered transactions gives CFIUS the ability to review and block transactions that are structured outside of classic investment structures and may come into play as risks shift shape in the crisis.

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