Foreign companies establishing new U.S. operations or acquiring U.S. companies could easily make a very simple but potentially costly error with a seemingly small oversight.
These companies may be obligated under U.S. law to file reports with Bureau of Economic Analysis (the BEA), an agency of the U.S. Department of Commerce.
The reporting requirements arise under the International Investment and Trade in Services Survey Act of 1976 and apply even to very small transactions. The act is a relatively obscure piece of legislation and, as a result, the reporting requirements it imposes likely are often overlooked. Such an oversight could have serious consequences—penalties as high as $25,000 and prison sentences of up to one year could potentially be imposed for failure to file. Therefore, it is important that parties to cross-border M&A transactions and their U.S. lawyers be cognizant of, and comply with, the act's provisions.
Congress passed the act in 1975 to collect meaningful information on international investment in the United States. Under the act and its implementing regulations, a U.S. enterprise in which a foreign entity directly or indirectly acquires a 10-percent or more voting interest must file a report on Form BE-13 with the BEA no more than 45 days after completing the acquisition. This requirement applies to all but the smallest of transactions—a Form BE-13 must be completed and filed if the total assets of the acquired business exceed $3 million or if the transaction involves the acquisition of 200 or more acres of U.S. land.
This $3 million threshold is measured on the basis of the aggregate size of the U.S. business without regard to the percentage of that business held by foreign interests. Thus, even if a foreign parent owns only 10 percent of a U.S. business with total assets of $3,000,001, the U.S. business will be required to file a Form BE-13.
The regulations implementing the act are broadly written and capture a wide variety of transaction structures, including mergers, consolidations, asset purchases and stock acquisitions. A direct or indirect acquisition by a foreign investor of even just a business segment or operating unit of an existing U.S. business enterprise that is then organized as a separate legal entity would also fall within the reporting requirements, so long as the segment or unit meets the threshold. If the foreign acquirer has an existing U.S. affiliate (i.e., a business enterprise in the United States in which the foreign person or entity owns 10 percent or more of the voting securities) and that affiliate acquires a U.S. business enterprise or unit and merges it into itself, the U.S. affiliate must file a Form BE-13 if the total cost of the acquisition was $3 million or more or involved 200 acres or more of U.S. land.
Although the regulations refer primarily to acquisitions of existing businesses, the reporting requirements under the act are potentially applicable to startup greenfield operations. The commencement by a foreign individual or entity of business activity in the United States will trigger the reporting requirements if the new U.S entity, together with any U.S. affiliates with which it is consolidated, meets the $3 million or 200-acre thresholds. While the act at least exempts the very smallest transactions from the obligation to prepare and file a Form BE-13, this exemption is not automatic. The rules require that an "Exemption Claim, Form BE-13" be filed in order to "validate" the exemption. Thus, a U.S. entity with less than $3 million in assets (and owning less than 200 acres of U.S. real estate) will be required to file this Exemption Claim if a foreign person or entity owns more than 10 percent of its voting securities or equivalent interest.
This requirement has no de minimus exemption and therefore apparently will apply to even absurdly small transactions—such as an uncle who lives abroad that wishes to teach his 8-year-old American niece about business by giving her $5 to set up a lemonade stand on the sidewalk in front of her house, with any profits to be shared on some basis that gives the aunt or uncle more than a 10 percent say in the business. Although the BEA presumably is not interested in tracking the activity of sidewalk lemonade stands, the lawyer advising them would nonetheless have to sheepishly advise that the rules technically require the niece to file the Exemption Claim.
The act and its regulations do allow for a few exemptions. Acquisitions of more than 200 acres of land do not trigger any reporting requirements if the land is residential real estate held exclusively for personal use and not for profit. Moreover, if this land is used as the owner's primary residence, the owner can lease it for a period while he or she is outside of the United States, so long as the owner intends to reoccupy the premises.
Responsibility for preparing and filing the Form BE-13 (and, if applicable, the other reports described below) falls upon the acquired U.S. business enterprise or on the foreign holder's existing U.S. affiliate, if that affiliate acquired a U.S. business and then merged it into itself. If the transaction involved two or more unaffiliated foreign parent companies, separate reports must be filed describing the interest of each company.
The initial report on Form BE-13 calls for some basic information on the ownership chain of the reporting entity, as well as the transaction giving rise to the filing. The bureau also wants to know the total assets, net income, and number of employees of the U.S. business (on a consolidated basis, including all U.S. subsidiaries, but excluding foreign subsidiaries) and, for businesses operating in more than one industry, a breakdown of sales into separate industry segments, based on International Surveys Industry codes.
In addition to the initial report on Form BE-13, the act imposes quarterly and annual reporting requirements, as well as a quinquennial (every five years) survey. The thresholds at which these reports become applicable are somewhat higher than those for the Form BE-13.
The BEA has prepared a guide that summarizes the reporting requirements described in this article. The link to this guide can be found at http://www.bea.gov/surveys/pdf/2008fdius_report_req.pdf.
The act provides that reports filed with the BEA are confidential and may be used only for analytical or statistical purposes. The information provided in reports filed with the BEA cannot be presented in a manner that allows the filer to be individually identified. Information in the reports cannot be used for purposes of taxation, investigation, or regulation. Copies of reports retained in the files of the filing person are immune from legal process.
As mentioned above, failure to comply with the requirements under the act could result in fines and even prison sentences. Persons failing to report are subject to a civil penalty of $2,500 to $25,000, and to injunctive relief commanding such person to comply. (These civil penalties are subject to inflationary adjustments.) Willfully failing to report as required by the act could lead to additional fines of up to $10,000 and, if the person is an individual, he or she could face imprisonment for up to one year. (It is not clear to what extent these penalties are actually imposed, if ever.)
The BEA monitors the business media and notifies parties to pending cross-border M&A transactions that may be required to submit reports to the BEA. However, smaller transactions that do not warrant attention from the business press will likely go unreported unless counsels to the parties are aware of the act's requirements and advise their clients accordingly.
Reprinted with permission from New York Law Journal, © ALM Media Properties LLC. All rights reserved.