e nationality of the individuals or entities nich control it." To underscore the signifince of that qualifier to the definition, a ird example has been added to this section. he example describes the acquisition by a reign person of a foreign subsidiary of a S. corporation. In the facts presented by e example, the foreign subsidiary has no ked place of business in the United States, it merely exports goods to the U.S. parent id to unaffiliated companies in the United ates. The acquisition of such an entity by foreign person would not constitute the acisition of a U.S. person under section 721 cause the mere export of goods to the nited States by a foreign subsidiary with > fixed place of business in this country es not constitute "business activity in terstate commerce in the United States" r purposes of the section.

Section 800.301. A few points pertaining to int venture transactions have been claried in this section. First, a joint venture ansaction is subject to section 721 only if existing, identifiable business in the nited States is contributed to the venture. joint venture transaction in which the S. contribution is a company founded for e purposes of the transaction would not be bject to section 721. Moreover, even where I identifiable business has been contributed the venture, the transaction is not subject section 721 unless the foreign party would ntrol the venture. Therefore, joint venture ansactions in which control is equally ared by the U.S. partner and the foreign rtner, i.e., where each party has a veto wer over all the decisions of the joint venre, would not be subject to section 721. It important to note, however, that this rule es not apply to other forms of business ornization, such as when a foreign person acires 50 percent of the stock of an existing S. company. In such cases, the Committee ay, depending on the other facts surunding the transaction, conclude that the ock acquisition confers control on the forgn person.

Section 800.302. Subsection (i) has been Ided to $800.302 as a corollary to section 1(b)(1), which provides that proposed or mpleted acquisitions by or with foreign rsons which could or do result in foreign ntrol of a U.S. person would be subject to ction 721. Subsection (i) of § 800.302 provides at an acquisition (1) that does not involve e acquisition of control of (2) a person enged in interstate commerce in the United sates (i.e., a U.S. person) would not be subct to section 721. Two examples are proded to illustrate the two components of is provision. First, with respect to the acisition of control, when a foreign person equires an interest, such as stock, in a U.S. erson, but that interest is insufficient to onfer control, the acquisition is not subject › section 721. The Committee's options for

handling a notice of such a transaction are set out in §800.403 of the regulations.

Second, with respect to the component pertaining to being engaged in interstate commerce in the United States, Example 2 is intended to illustrate that the acquisition of a business that is essentially a non-operational shell-i.e., having no employees, plants, equipment, or subsidiaries in the United States-would not satisfy this component and would therefore not be an acquisition subject to section 721.

Section 800.303. This section has been added to the regulations to clarify the Committee's treatment of lending transactions. As explained under § 800.302 above, the acquisition of a security interest by a foreign lender in a lending transaction does not, without control, subject a transaction to section 721. Section 800.303 provides that the Committee will not accept notices of such transactions. However, the Committee will accept notice of such transactions where, because of actual or imminent default or other condition, the foreign lender is likely to obtain control of the U.S. person. In general, the Committee will accept the parties' view of the imminence of default, recognizing that in some cases waiting too long before filing notice could affect the lender's recourse to certain remedies, or the willingness of the borrower to cooperate fully in the preparation of a filing.

Some commenters argued that if the Committee does not accept notices of lending transactions until actual or imminent default, the lender will never have adequate assurance of the value of its security interest, which may eventually discourage foreign lenders from entering into financing transactions that may be subject to section 721. Some argued that the acquisition of stock or assets as a result of a default should be exempt from section 721, because it is essentially similar to an acquisition pursuant to an insurance contract made in the ordinary course of business, which is exempt under § 800.302(g). The Committee does not find it appropriate to exempt the acquisition of a U.S. person that results from a borrower's default. However, to help alleviate the lenders' concerns in such circumstances, the Committee will take into account steps the lender takes to transfer day-to-day control over the U.S. person to U.S. nationals, pending final sale of the U.S. person. For example, in appropriate cases, the Committee could determine that the lender does not control a company acquired through default when it appoints a trustee to run the company and commits to sell it within a specified reasonable period of time.

Section 800.303 also contains a special provision-subsection (b) for foreign banks participating in loan syndications. In view of the limitations on control of the borrower by any one bank that are often inherent in the

197-116 D-34

structure of a syndicate of banks in a loan participation, the Committee will deem any foreign lender in a syndicate not to have control for purposes of section 721 where such lender needs the consent of the majority of the U.S. participants to take action, or does not have a lead role in the syndicate and is subject to a special provision limiting its influence, ownership or control over the borrower.

Section 800.401. This section contains a new provision with respect to non-notified transactions. No agency notice can be made with respect to such a transaction more than three years after the date it was concluded unless the Chairman of the Committee, in consultation with other members of the Committee, requests an investigation. This provision was added to assuage public concern that non-notified transactions are indefinitely subject to divestment by the President. The President's powers under section 721 are not affected by this provision.

Section 800.402. Until now, the Committee has been willing to accept notices of transactions from just one of the parties to a transaction, recognizing that in some cases one of the parties alone will be able to provide answers and materials responsive to the questions posed in §800.402. Although the Committee will continue to accept joint notices prepared by just one party to a transaction that give information with respect to all the parties, the final regulations require all the parties to sign such a filing, thereby indicating to the Committee that each party is satisfied that the information in the filing pertaining to it is accurate and complete.

With respect to filings submitted by a party independently of the other parties, several points are worth noting. First, a minor wording change has been made in paragraph (1) of subsection (b) of this section for purposes of clarity: "Such information" has been replaced by "the information set out in this section." Although the phrase in that paragraph, "to the extent known or reasonably available to it," remains unchanged from the proposed regulations, it merits discussion here in order to remove any uncertainty. When a party giving notice is unable to answer fully a question pertaining to the other party, it is not excused by the words "to the extent known or reasonably available to it" from submitting a complete and accurate filing, as has evidently been assumed by some parties. The Committee expects that in such a case either the party giving notice will obtain the assistance of the other party or parties, or that the latter independently will make a filing to the Committee, supplying the relevant information.

In any case, the Committee will delay beginning the initial thirty-day review period until the filing is complete with respect to both parties. Subsection (b) makes clear that the Staff Chairman of the Committee, when

necessary, will contact directly the party or parties that did not file the notice and request that information responsive to § 800.402 be filed within seven days of receipt of the request.

A new provision has been added to subsection (c), requesting parties to submit a summary of the transaction. The Committee requests that the party(ies) that give notice be as clear and concise as possible. A readily understandable summary will expedite the Committee's work.

Paragraph (3) of subsection (c) has also been modified to lengthen the period of time from three to five years for which contracts involving classified information should be described in a filing. As for contracts with the Department of Defense or any other agency of the U.S. Government with national defense responsibilities (such as the Department of Energy or the Nuclear Regulatory Commission), which contracts do not involve classified information, parties should continue to provide information for the past three years only.

Section 800.403. This new section sets out the Committee's options for handling certain voluntary notices; most of these points have been addressed in the preceding discussion. The Committee will delay acceptance of a notice that does not comply with §800.402. It reserves the right to reject a voluntary notice at any time before action by the Committee or the President has been concluded. if there has been a material change in the notified transaction.

As provided in §800.403(a)(4), the Committee will also inform the party submitting a voluntary notice if it decides not to undertake a substantive review of a transaction because it has determined that the notified transaction is not subject to section 721. For example, where the Committee determines that a notified transaction will not result in foreign control, the Committee would inform the parties of the nature of its determination, (e.g., no foreign control) and advise them to consider filing at a later date should an acquisition of control be contemplated.

Section 800.404. A technical wording change has been made to this section (which was numbered § 800.403 under the proposed regulations). The words "has been accepted" in the first sentence of that section replace "is received" to underscore that the 30-day review period does not begin until the Chair has determined that the voluntary notice complies with the requirements of §800.402. Further technical changes were made to subsection (a) to reflect changes made in §800.401 concerning agency notice.

Section 800.501. Subsection (b) has been added to this section to make explicit a practice the Committee has been following since it began receiving notices under section 721, i.e., inviting the parties to certain

otified transactions to meet with the Comittee. The Staff Chairman, at his discreion, may invite the parties to a meeting to larify certain issues with respect to the filng; such a meeting may occur either during he 30-day review period or during the invesigation. When the parties involved in invesigations request a meeting with the Comittee, the request is ordinarily granted. Section 800.601. A number of commenters xpressed concern that the finality of Comittee or Presidential action under section 21 is called into question if there is a right > reopen consideration of a case on the basis f material omissions or material isstatements. This section has been exanded in an attempt to allay some of those oncerns. Subsection (f) has been added to larify the matters the Committee considers material": These are confined to informaion requested by § 800.402 of the regulations; formation requested by the Committee uring the course of an initial review, an inestigation, or the Presidential determinaion period; or information provided by the arty(ies) sua sponte. However, the Comittee will generally not find information to e "material" if it concerns purely commerial matters having no bearing on national ecurity, such as the price of stock.

DRAFTING INFORMATION

The principal author of this document is he Office of the Assistant General Counsel International Affairs). However, personnel om other offices at the Treasury Departent and from other agencies that are memers of the Committee participated extenively in its development.

6 FR 58780, Nov. 21, 1991. Redesignated and mended at 59 FR 27180, May 25, 1994]

PPENDIX 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, his appendix contains the text of the premble to the final rules amending the reguitions on mergers, acquisitions, and takevers by foreign persons beginning at the eading "Discussion of the Final Rule" and nding before "List of Subjects in 31 CFR 'art 800" (59 FR 27178, May 25, 1994).

DISCUSSION OF THE FINAL RULE

Section 837(a) of the Defense Authorization .ct creates for the first time a mandatory nvestigation provision under Exon-Florio. 'here are three points worth noting about his provision. First, this provision is limted in application to certain types of acquiitions. Specifically, the acquirer in question must be a foreign government controlled enity, or an entity acting on behalf of a for

eign 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 § 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 inIcludes 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 § 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.

[59 FR 27180, May 25, 1994]