31 C.F.R. Subpart C—Coverage
Title 31 - Money and Finance: Treasury
(a) Section 721 applies to acquisitions: (1) Proposed or pending on or after the effective date (2) By or with foreign persons (3) Which could result in foreign control of persons engaged in interstate commerce in the United States. (b) Transactions that are acquisitions under section 721 include, without limitation: (1) Proposed or completed acquisitions by or with foreign persons which could or did result in foreign control of a U.S. person, irrespective of the actual arrangements for control planned or in place for that particular acquisition. Example 1. Corporation A, a foreign person, proposes to purchase all the shares in Corporation X, which is organized in the United States and engages in interstate commerce in the United States.
Under the applicable law, Corporation A will have the right to elect directors and appoint other primary officers of Corporation X, and those directors will have the right to reach decisions about the closing and relocation of particular production facilities, and the termination of contracts. They also will have the right to propose (for approval by Corporation A as a shareholder) the dissolution of Corporation X and the sale of its principal assets. For purposes of section 721, the proposed acquisition of Corporation X by Corporation A would result in control of a U.S. person (Corporation X) by a foreign person (Corporation A). Example 2. Same facts as in Example 1, except that Corporation A plans to retain the existing directors of Corporation X, all of whom are U.S. nationals.
Although, under these plans, Corporation A may not in fact exercise control over Corporation X (because the directors as U.S. nationals may exercise that control), the acquisition of Corporation X by Corporation A still would result in foreign control over a U.S. person for purposes of section 721. (2) A proposed acquisition by or with a foreign person, which could result in foreign control of a U.S. person, including, without limitation, an offer to purchase all or a substantial portion of the securities of a U.S. person. Example. Corporation A, a foreign person makes an offer to purchase all the shares in Corporation X, a U.S. person. That acquisition is “proposed” and subject to section 721. (3) Proposed or completed acquisitions, even by entities organized in the United States, if those entities are “foreign persons,” and if those acquisitions could or did result in a different foreign interest controlling the U.S. person to be acquired. Example 1. Corporation X is organized and operates in the United States. Its shares are held by a foreign person. While Corporation X is a “U.S. person,” it is also a “foreign person” within the meaning of section 721, because control over it is or could be exercised by a foreign person. Its acquisition of a U.S. person is subject to section 721 because that acquisition could result in control by Corporation X (a “foreign person”) of a U.S. person. Example 2. Same facts as Example 1, except that Corporation Y, a foreign person, seeks to acquire Corporation X from its existing shareholder. That proposed acquisition is subject to section 721 because it could result in control of Corporation X (in this context a “U.S. person”) by a different foreign person (Corporation Y). (4) Proposed or completed acquisitions by or with foreign persons which involve acquisitions of businesses and could or did result in foreign control of businesses located in the United States. Example 1. Corporation A, a foreign person, proposes to buy a branch office business in the United States of Corporation X, which is a foreign person. For purposes of these regulations, the branch office business of Corporation X is a United States person to the extent of its business activities in the U.S., and the proposed acquisition of the business in question is subject to section 721. Example 2. Corporation A, a foreign person, buys a branch office business located entirely outside the United States of Corporation Y, which is incorporated in the United States. The branch office business of Corporation Y is not deemed to be a United States person, and the acquisition is not subject to section 721. Example 3. Corporation A, a foreign person, makes a start-up or “greenfield” investment in the United States. That investment involves such activities as separately arranging for the financing of and the construction of a plant to make a new product, buying supplies and inputs, hiring personnel, and purchasing the necessary technology. The investment may involve the acquisition of shares in a newly incorporated subsidiary. Corporation A will not have acquired the “business” of a U.S. person, and its greenfield investment is not subject to section 721. (5) Joint ventures in which a United States person and a foreign person enter into contractual or other similar arrangements, including agreements on the establishment of a new entity, but only if a United States person contributes an existing identifiable business in the United States and a foreign interest would gain control over that existing business by means of the joint venture. Example 1. Corporation A, a foreign person, and Corporation X, a United States person, form a separate corporation, JV Corp., to which Corporation X contributes an identifiable business in the United States. There is no foreign interest which does or could exercise control over Corporation X. 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. The formation of JV Corp. could result in foreign control of a U.S. person and is an acquisition subject to section 721. Example 2. Same facts as in Example 1, except that Corporations A and X each own 50 percent of the shares of JV Corp. and, under the Articles of Incorporation of JV Corp. both A and X have veto power over all decisions by JV Corp. identified under §800.204(a) (1) through (5). The formation of JV Corp. is not an acquisition subject to section 721. Example 3. Corporation A, a foreign person, and Corporation X, a United States person, form a separate corporation, JV Corp., to which Corporation A contributes funding and managerial and technical personnel, while Corporation X contributes certain patents and equipment that do not under these circumstances constitute an identifiable business. The formation of JV Corp. is not an acquisition subject to section 721. [56 FR 58780, Nov. 21, 1991, as amended at 59 FR 27179, May 25, 1994] The following transactions are not considered acquisitions for purposes of section 721: (a) An acquisition of voting securities pursuant to a stock split or pro rata stock dividend which does not involve a change in control. (b) An acquisition in which the parent of the entity making the acquisition is the same as the parent of the entity being acquired. Example. Corporation A, a foreign person, merges its two wholly owned U.S. subsidiaries S1 and S2, and in addition creates a new U.S. subsidiary, S3. S3 then buys a business from S4, another wholly-owned U.S. subsidiary of Corporation A. These acquisitions are not subject to section 721. (c) An acquisition of convertible voting securities that does not involve control. Example. Corporation A, a foreign person, buys debentures, options and warrants of Corporation X, a U.S. person. By their terms, the debentures are convertible into common stock, and the options and warrants can be exercised for common stock. The acquisition of those debentures, options and warrants is not subject to section 721 so long as it does not involve control. The conversion of those debentures into common stock, or the exchange of those options and warrants for common stock, may be an acquisition for purposes of section 721. See §800.201. (d) A purchase of voting securities or comparable interests in a United States person solely for the purpose of investment, as defined in §800.219, if, as a result of the acquisition, (1) The foreign person would hold ten percent or less of the outstanding voting securities of the U.S. person, regardless of the dollar value of the voting securities so acquired or held, or (2) The purchase is made directly by a bank, trust company, insurance company, investment, company, pension fund, employee benefit plan, mutual fund, finance company or brokerage company in the ordinary course of business for its own account, provided that a significant portion of that business does not involve the acquisition of entities. Example 1. In an open market purchase solely for the purpose of investment, Corporation A, a foreign person, acquires 7 percent of the voting securities of Corporation X, which is incorporated under the laws of the United States. The acquisition of those securities is not subject to section 721. Example 2. Same facts as Example 1 except Corporation A is an investment company which makes only portfolio investments. It purchases 14 percent of the voting securities of Corporation X for its own account, solely for the purpose of investment. The acquisition of those securities is not subject to section 721. Example 3. Same facts as Example 2 except that a significant portion of the business of Corporation A is acquiring control over corporations. Its purchase of 14 percent of the shares of Corporation X is subject to section 721. (e) An acquisition of assets in the United States that does not constitute a business in the United States. See §§800.201 and 800.301(b)(4). Example 1. Corporation A, a foreign person, acquires, from separate United States nationals, (a) products held in inventory, (b) land, and (c) machinery for export. Corporation A has not acquired a “business” within the meaning of section 721. Example 2. Corporation X produces armored personnel carriers in the United States. Corporation A, a foreign person, seeks to acquire the annual production of those carriers from Corporation X under a long-term contract. Neither the proposed acquisition of those carriers, nor the actual acquisition, is subject to section 721. Example 3. Same facts as Example 2, except that Corporation X, a U.S. person, has developed important technology in connection with the production of armored personnel carriers. Corporation A seeks to negotiate an agreement under which it would be licensed to manufacture using that technology. Neither the proposed acquisition of technology pursuant to that license agreement, nor the actual acquisition, is subject to section 721. Example 4. Same facts as Example 2, except that Corporation A enters into a contractual arrangement to acquire the entire armored personnel carrier business of Corporation X, including production facilities, customer lists, technology and staff. This acquisition is subject to section 721. See §800.201. (f) An acquisition of securities by a person acting as a securities underwriter, in the ordinary course of business, and in the process of underwriting. (g) An acquisition pursuant to a condition in a contract of insurance relating to fidelity, surety, or casualty obligations if the contract was made by an insurer in the ordinary course of business. (h) An acquisition of a security interest, but not control, in the voting securities or assets of a U.S. person at the time a loan or other financing is extended (see §800.303). (i) An acquisition of voting securities or assets that does not involve an acquisition of control of a person engaged in interstate commerce in the United States. Example 1. Corporation A, which is organized under the laws of a foreign state and is controlled by foreign persons, advises the Committee that it intends to acquire seven percent of the voting securities of Corporation X, which is organized under the laws of the United States and engaged in interstate commerce within the United States. In this particular case, Corporation A's purchase of this interest in Corporation X would not be sufficient to permit Corporation A to control Corporation X for purposes of §800.204. This transaction is not an acquisition for purposes of section 721. Example 2. Corporation A, which is organized under the laws of a foreign state and controlled by foreign persons, acquires from Corporation B 100 percent of the voting securities of Corporation X, a wholly-owned subsidiary of Corporation B that is organized under the laws of the United States. Corporation X currently has no employees, plants, equipment or subsidiaries in the United States. Corporation B maintains records in the United States on behalf of Corporation X and uses U.S. mail and telecommunications facilities on its behalf. For purposes of section 721, Corporation X is not engaged in interstate commerce in the United States, and the acquisition by Corporation A of securities of Corporation X is not an acquisition for purposes of section 721. [56 FR 58780, Nov. 21, 1991, as amended at 59 FR 27179, May 25, 1994] (a) The extension of a loan or similar financing by a foreign person to a U.S. person, accompanied by the creation in the foreign person of a secured interest in securities or other assets of the U.S. person, does not, by itself, subject the transaction to section 721. However, if control is acquired by the foreign person at the time the loan or other financing is extended, then the transaction may be subject to section 721. (1) The Committee will not, at the time of extension of the loan or other financing, accept notices from parties to a loan or other financing transaction in which control is not acquired by the foreign person at that time. (2) The Committee will accept notices concerning transactions that involve loans or financing by foreign persons where, because of imminent or actual default or other condition, there is a significant possibility that the foreign person may obtain control of the U.S. person. (3) For purposes of this section, in determining whether an acquisition of a U.S. person by a foreign person results in foreign control under section 721, the Committee will take into account arrangements which the foreign person might establish to transfer day-to-day control over the U.S. person to U.S. nationals. (b) Control will not be deemed to be acquired for purposes of section 721 in cases involving an acquisition of voting securities or assets of a U.S. person by a foreign person upon default, or other condition, involving a loan or other financing, provided that the loan was made by a syndicate of banks in a loan participation where the foreign lender (or lenders) in the syndicate: (1) Needs the majority consent of the U.S. participants in the syndicate to take action, and cannot on its own initiate any action vis-a-vis the debtor; or (2) Does not have a lead role in the syndicate, and is subject to a provision in the loan or financing documents limiting its influence, ownership or control of the debtor such that control for purposes of §800.204 could not be acquired.
Title 31: Money and Finance: Treasury
PART 800—REGULATIONS PERTAINING TO MERGERS, ACQUISITIONS, AND TAKEOVERS BY FOREIGN PERSONS
Subpart C—Coverage
§ 800.301 Transactions that are acquisitions under section 721.
§ 800.302 Transactions that are not acquisitions under section 721.
§ 800.303 Lending transactions.
