[Federal Register Volume 59, Number 100 (Wednesday, May 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12451]
[[Page Unknown]]
[Federal Register: May 25, 1994]
BILLING CODE 3510-22-P
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Part IV
Department of the Treasury
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Office of International Investment
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31 CFR Part 800
Regulations Pertaining to Mergers, Acquisitions, and Takeovers by
Foreign Persons; Final Rule
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: Final rule.
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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]
BILLING CODE 4810-25-P
