New Outbound Investment Guidance Covers Liability for Lawyers, Knowledge Standard, More
The Treasury Department recently published more guidance on its outbound investment prohibition and notification rules (see 2412160044), including new FAQs on how certain portions of the rules apply to in-house lawyers, the rule’s “knowledge standard,” the scope of transactions that are covered, and joint filings.
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One of the new FAQs, released Jan. 17, appears to carve out in-house lawyers and compliance advisers from certain liability under 850.303 -- the provision that blocks a U.S. person from “knowingly directing" an outbound investment by a "non-U.S. person entity" if they know the deal would normally be blocked if it was carried out by a U.S. person. Treasury said that provision, under certain circumstances, doesn’t block U.S. people from giving certain “legal and compliance advice” to a foreign investor, even at the investment decision-making stage.
The agency described an example scenario in which a U.S. person is working as a lawyer for Company C -- which is a “not a U.S. person” -- and the lawyer doesn’t have the authority to make decisions on behalf of Company C. Treasury said the company's management then orders the lawyer to carry out a “legal analysis” and advise the company on the tax implications of a potential investment, and the company then makes the investment. In this scenario, the lawyer didn’t violate the regulations.
“Absent additional facts, the U.S. person attorney has not knowingly directed an otherwise prohibited transaction under section 850.303(a), because the U.S. person attorney did not have the authority to make decisions on behalf of Company C and did not order, direct, decide upon, or approve the transaction,” Treasury said.
Another FAQ further clarifies the rule’s knowledge standard under the same provision: 850.303. If the non-U.S. person or entity in that case carries out its own due diligence on a transaction, Treasury said the U.S. person who is “knowingly directing" the transaction is “expected to carefully consider any red flags, contradictory information, or warning signs that may arise in connection with such diligence.”
In this scenario, the U.S. person may need to evaluate whether the diligence carried out by the non-U.S. entity “is sufficient to meet the standard of a ‘reasonable and diligent inquiry,’” Treasury said, “and there may be instances where the U.S. person should not solely rely on the non-U.S. person entity’s diligence work.”
Another FAQ said that in certain situations, a U.S. person won’t be liable under the rules if they begin negotiating a "potential investment in a person of a country of concern," but they later learn that the investment would normally be blocked and they “immediately" stop their "involvement with the transaction prior to the non-U.S. fund approving and engaging in the transaction.”
Treasury described a hypothetical scenario in which a U.S. person, sitting on the investment committee at a non-U.S. pooled investment fund, begins negotiating a potential investment in “Company A,” which is located in a country of concern, such as China. If the U.S. person later “obtains knowledge” that Company A is involved in a covered activity that would normally be blocked if carried out by a U.S. person, the U.S. person wouldn’t be liable if they “immediately” end negotiations and don’t “participate in any further actions or decisions related to the transaction” -- even if the investment fund follows through with the transaction.
“Absent additional facts, the U.S. person would not be liable” because “they did not knowingly order, direct, decide upon, or approve the prohibited transaction,” the FAQ said.
Other FAQs clarify which types of “indirect transactions” by a U.S. person may be subject to the regulations, including by providing several example scenarios. One example describes a situation in which a U.S. person buys shares in a “special purpose vehicle” created to invest in a covered foreign person, and the special purpose vehicle "acquires such equity interest following the U.S. person’s investment.” Without “additional facts,” this transaction would be covered under the rules -- and prohibited -- “because the U.S. person has used an intermediary to engage in a transaction that would be a covered transaction if engaged in directly by the U.S. person,” Treasury said.
Treasury also stressed that each U.S. person that is part of a transaction must submit their own notification notice to Treasury if the deal is subject to the agency's notification requirements. They can’t submit a “joint notice,” the agency said. “A U.S. person must certify to the accuracy” of their submitted information, Treasury added, “including with respect to any information provided by a covered foreign person or other recipient of financing that the U.S. person includes in the submission.”