The Coming Storm? CFIUS Reform and Considerations for Private Equity

by Dechert LLP

Dechert LLP

As the United States Congress debates new legislation to strengthen reviews of cross-border transactions for potential national security concerns, the Committee on Foreign Investment in the United States (CFIUS or the Committee) has already begun to increase its scrutiny of transactions involving non-U.S. investors. Congressional efforts to reform and strengthen CFIUS through the Foreign Investment Risk Review Modernization Act (FIRRMA) are expected to have significant implications for cross-border investment. Among other changes, FIRRMA would expand the scope of transactions subject to CFIUS review to include joint ventures and other transactions involving contributions of U.S. intellectual property, U.S. real estate transactions and other investments in U.S. technology or infrastructure companies. (See our recent report for a more detailed discussion of FIRRMA.) This briefing supplements the prior report by identifying CFIUS reform considerations relevant to the private equity community.

What is CFIUS?

CFIUS is an interagency committee principally comprising nine members, chaired by the Secretary of the Treasury, tasked with reviewing transactions that could result in control of U.S. businesses by non-U.S. persons to determine the effect of such transactions on U.S. national security. Parties to a covered transaction, which includes any merger, acquisition, or takeover by or with any non-U.S. person which could result in non-U.S. control of any person engaged in interstate commerce in the United States, may submit a voluntary notice to CFIUS to gain approval in anticipation of a deal. Upon receipt of a complete notice of a covered transaction, CFIUS commences a 30-day review and is authorized to conduct an additional 45-day investigation if warranted. As a condition of clearing the transaction, CFIUS may negotiate an agreement with one or more parties to a covered transaction to mitigate perceived threats to national security. If concerns remain unaddressed, CFIUS refers the transaction to the President, who enjoys broad discretion to suspend, prohibit, or unwind a covered transaction.

CFIUS Increases its Scrutiny under Existing Law

While the rules regarding CFIUS reviews have remained largely unchanged over the past decade, CFIUS has been operating under a new paradigm in its recent reviews. The Committee has been increasingly active in reviewing and even blocking some transactions over the past few years. In the over 40 year history of CFIUS, there were only two blocked transactions until 2016. Since 2016, Presidents Obama and Trump have blocked three more. In addition, each year some transactions are abandoned by the parties once it becomes clear that CFIUS has concerns that the parties cannot or will not take steps to address. While there is no public reporting of these figures, we know they are increasing as well.

The most recent blocked transactions provide insight into areas of concern for the Committee at this time. In November 2016, a U.S.-based private equity firm reportedly funded by the Chinese government, announced an intended acquisition of Lattice Semiconductor Corporation, which had previously sold chips to the U.S. military. CFIUS’ review produced a negative recommendation, leading President Trump to block the transaction in September 2017. The most recent blocked transaction involved Singapore-based semiconductor company Broadcom Limited’s attempted acquisition of U.S.-based Qualcomm Incorporated (“Qualcomm”). Some believed that the takeover would result in competitive advantages for Chinese telecommunications company Huawei in certain critical technology areas. That concern, combined with Qualcomm’s business as a supplier to the U.S. military and concerns regarding the potential impact of the deal on Qualcomm’s continued investment in research and development, reportedly contributed to the decision to block the transaction.

CFIUS Reform Overview

In response to concerns about the U.S. government’s ability to address Chinese investment in U.S. companies, and in particular with respect to the outbound transfer of technology to entities owned or controlled by non-U.S. governments, members of Congress introduced FIRRMA in 2017. FIRRMA seeks to overhaul CFIUS by expanding its jurisdiction, creating mandatory filings, and designating countries of special concern. FIRRMA is currently being considered by committees in the House and Senate and, while it is supported by the Trump Administration, it will likely undergo important changes that could impact private equity markets.

In relevant part, FIRRMA would empower the Committee to review transactions including:

  • Non-passive investments in critical technology and infrastructure companies.
  • Deals involving real estate in close proximity to national security facilities and military bases.
  • Changes in investor rights that would result in non-U.S. control of a U.S. business or a non-passive investment in critical technology or infrastructure.
  • Joint ventures involving the transfer of intellectual property and associated support to a non-U.S. entity.
  • Transactions intended to evade CFIUS review.

FIRRMA’s primary goal is to capture certain types of transactions, like intellectual property licensing and joint ventures, which CFIUS does not have jurisdiction to review under existing regulations. By granting CFIUS the authority to review a wider variety of deals that involve the transfer of industrial and technological capabilities to foreign investors, FIRRMA would allow the Committee to capture a greater share of the transactions that may affect U.S. national security.

Passive Investments

FIRRMA is expected to change how the Committee views “passive” investments, clarifying that there is no level of investment that precludes CFIUS review. Under existing regulations, CFIUS' jurisdiction generally excludes acquisitions of 10% or less of the voting interest in a U.S. business if the transaction is solely for the purpose of passive investment. Under FIRRMA, CFIUS’ determination of whether an investment is passive will be made irrespective of an investor’s ownership level (although the legislation does not preclude CFIUS from setting a threshold or floor for non-passive investments).

Change from Voluntary to Mandatory CFIUS Notifications

FIRRMA would also change the CFIUS regime from an entirely voluntary system to one where streamlined filings, or “declarations,” would be mandatory in certain circumstances. While regulators will decide which additional types of transactions trigger mandatory filings, the current FIRRMA legislation at a minimum would require mandatory declarations for transactions where non-U.S. investors acquire at least 25% of a U.S. entity and a non-U.S. government owns at least 25% of the non-U.S. investors’ voting interest.

Partnering with Investors from Countries of “Special Concern”

Placing a heavier focus on investments by potential adversaries, FIRRMA would allow the Committee to scrutinize transactions involving countries of “special concern” more closely. This provision largely targets China, due to its increasing investment in U.S. companies and the U.S. government’s belief that these investments are part of a strategic effort to gain a competitive advantage in certain critical industries and potentially siphon off critical U.S. technological advantages. Funds with non-U.S. limited partners (“LPs”) should be aware of Chinese exposure, and foreign government exposure more generally.

Non-U.S. Limited Partners

FIRRMA would likely further strengthen CFIUS’ ability to review a broader range of transactions, including those involving non-U.S. LPs. A fund’s non-U.S. LPs should expect additional CFIUS scrutiny during reviews/investigations. In anticipation of potential scrutiny, U.S. funds may begin to restrict participation of non-U.S. LPs on the basis of whether aspiring non-U.S. investors are from “special concern” jurisdictions and/or are subject to home country government ownership or control.

The potential for CFIUS review to inject uncertainty into investments could also impact the participation of funds with non-U.S. LPs in competitive auctions. In such a situation, a purely U.S. investor could find itself a preferred partner compared to a non-U.S. investor, and a private equity fund with certain non-U.S. LPs might be preferred to one with different non-U.S. LPs (e.g., LPs from “special concern” jurisdictions).

FIRRMA and U.S. Personhood Concerns

While FIRRMA does not provide a new definition of non-U.S. personhood for purposes of determining whether CFIUS jurisdiction exists, industry has urged Congress to make clear that the participation of non-U.S. LPs in a fund based in and run from the U.S. will not automatically result in a fund being considered a non-U.S. person, subjecting its investments to potential CFIUS review. Any entity raising capital from non-U.S. investors should be aware of potential CFIUS exposure that would be created by a broad interpretation of non-U.S. personhood.

“Critical Technology” and “Critical Infrastructure”

FIRRMA legislation also emphasizes increasing CFIUS’ authority to review transactions involving the “critical technology” and “critical infrastructure” sectors. FIRRMA defines these terms broadly. For example, critical technology currently includes technology, components, or technology items that are essential or could be essential for U.S. national security. Critical infrastructure companies include U.S. businesses that own, operate, or primarily provide services to entities that service or operate in a critical infrastructure sector. Congress is expected to refine these broad definitions because of the significant implications such a designation would have on the ability to attract non-U.S. investment. How these terms are ultimately defined by FIRRMA will have significant implications for investors/companies in “critical” sectors.

FIRRMA Investment Analysis

An expansion of CFIUS’ authority could have a number of effects on the private equity markets and ultimately on the United States’ ability to attract foreign investment. More aggressive CFIUS reviews could constrain foreign investment in U.S. markets from investors located in countries of “special concern” and outside of those countries as well. Even if non-U.S. investors show a continued willingness to invest in the United States, U.S. funds may be less willing to accept capital from non-U.S. investors – or at least some non-U.S. investors – because of the uncertainty a thorough CFIUS review poses to a transaction. Investors should also anticipate potential impacts to the timing of their transactions. Even under the current regime, we have seen reviews take longer in recent months. An overhaul of CFIUS would likely magnify that problem.

While FIRRMA may make regulatory compliance more complicated for certain transactions, there may be market opportunities associated with these changes. For example, non-U.S. investors from countries not covered by a “special concern” designation may have an advantage in acquiring U.S. companies. Further, because of the focus on critical technology and infrastructure industries, non-U.S. capital may flow more easily to other sectors.


Firms that are actively engaged in cross-border mergers and acquisitions – as well as joint ventures, licensing arrangements, and other cross-border activities – should be aware of both the increasingly active role the Committee is taking in scrutinizing covered transactions, and the potential for more regulatory oversight should FIRRMA become law. We are actively monitoring both CFIUS’ current review trends and the progress of the FIRRMA legislation in Congress. We will continue to provide updates as necessary.


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