This column previously has reported on the impact of the Committee on Foreign Investment in the United States (CFIUS) on the satellite industry. In November, the Treasury Department adopted final rules pursuant to the Foreign Investment and National Security Act of 2007, which modified the role of CFIUS in reviewing investments by non-U.S. entities in a U.S. enterprise. The new rules may facilitate U.S. investment by sovereign wealth funds and other non-U.S. private equity investors in investing in the U.S. satellite sector.

CFIUS is a 12-member interagency panel chaired by the secretary of the Treasury and includes the secretaries of State, Defense, Homeland Security, Energy and Commerce as well as the attorney general, the U.S. Trade Representative and the chair of the Council of Economic Advisors. CFIUS was established by the 1988 Exon-Florio amendment that authorized, and in some cases mandated, the president to review, on national security grounds, mergers, acquisitions and investments in U.S. businesses by non-U.S. persons. The investigation is mandatory when the acquirer is an entity controlled by or acting on behalf of a non-U.S. government and when the acquisition could affect U.S. national security. Even minority investments are implicated when effective control of the target enterprise is gained.

Under the new rules, pre-closing notification of a transaction to CFIUS remains voluntary but encouraged. CFIUS retains the authorization before or after closing to initiate review of a transaction on its own motion. Given the potential rescissionary remedy post-closing for an unnoticed transaction, voluntary notification for any potentially implicated transaction clearly is good practice. Upon notification, CFIUS has 30 days to decide whether to review the transaction, and if it does, 45 days to conduct its review and render a decision. The president then has 15 days to approve the decision. However, the new rules allow transaction parties to request modification of the voluntary notification requirements and provide for penalties for misstatements and breaches of the statute, regulations or CFIUS agreements or conditions.

In cases of minority investments, whether by strategic or financial investors, the analysis of when effective control is gained (thereby triggering CFIUS reviewability) remains case-by-case, but some guidance is given, although it does not rise to the level of a "safe harbor."

The final Treasury regulations enumerate several "negative" rights that will not be deemed to grant effective control, including the right to prevent changes to the preference attributes of stock held by investors (since minority investments are usually in the form of preferred stock), the right to prevent the sale of the target’s assets, and the right to prevent voluntary bankruptcy filings. Certain positive rights, such as the granting of a board of directors seat or voting of shares obtained through the investment, also will not necessarily be deemed to constitute effective control, unless the seat or voting rights can disproportionately influence enumerated major corporate decisions such as the sale of assets, dissolution or reorganization, dividends, changes to core businesses, change of senior officers, and incurring of debt or major expenditures.

Investments of 10 percent or less of the target’s voting securities that do not come with a board seat are exempt from CFIUS review if no effective control is gained or intended. Importantly, CFIUS now may review an investment that was ostensibly passive when made if there is reason to think that the passive intent has changed. Conversely, once a non-U.S. investor making a minority investment receives CFIUS clearance, additional incremental investments in the same enterprise by the same investor will not require CFIUS review. Ordinary loans are CFIUS exempt, notwithstanding the presence of negative covenants, as long as no equity investment-like attributes are attached, such as governance rights. By the same logic, convertible debt instrument investments may be reviewable.

The new rules should provide some comfort to sovereign wealth funds and other non-U.S. investors, although formal safe harbors are not granted. It will be interesting to see how aggressively the enumerated exemptions are relied upon and how aggressively CFIUS responds. Only accumulated practice under the case-by-case analysis will tell. It is safe to assume, though, that even a cleared transaction and investor will attract renewed CFIUS review if subsequent investor makeup or investments make obvious an intent to "fly under the radar screen" when clearance was originally sought and granted.