[Federal Register Volume 59, Number 32 (Wednesday, February 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3540]


[[Page Unknown]]

[Federal Register: February 16, 1994]


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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]
BILLING CODE 4810-25-M