Top Takeaways from CFIUS Reform

by Bryan Cave Leighton Paisner
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On August 13, President Trump signed into law the National Defense Authorization Act of 2019 (NDAA), a $716 billion defense spending bill that includes the Foreign Investment Risk Review Modernization Act (FIRRMA), which contains the first significant revisions to the process and jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) in more than a decade.  Some of the provisions of FIRRMA go into effect immediately upon enactment of NDAA while others require the drafting and adoption of rules and regulations by the U.S. Treasury Department before their full extent and application can be realized. 

In addition, the NDAA includes the Export Controls Reform Act of 2018 (ECRA), which, among other things, expands the definition of “technology” subject to export control laws and requires the Department of Commerce to identify and design protections for “emerging and foundational technologies.”  The ECRA also directs the President to establish a new interagency process to identify “emerging and foundational technologies” that are essential to the national security of the United States but do not otherwise fall within the definition of “critical technologies” under FIRRMA.  Further, the Secretary of Commerce is mandated to establish appropriate export controls for these types of technologies, including, at minimum, requiring licenses for the export, re-export, or in-country transfer of such technologies to or within a country subject to any U.S. imposed embargo.

While this legislation addresses a wide variety of substantive and procedural issues, below we discuss the most significant changes to CFIUS contained in FIRRMA:

  • Expansion of “covered transactions” subject to CFIUS review;
  • Mandatory filings in cases involving state-owned investment;
  • Changes in the length of time allotted for reviews; and
  • Imposition of fees.

Expansion of "Covered Transactions"

CFIUS has jurisdiction to review "covered transactions," defined as those in which a foreign person will gain control, whether or not exercised, over certain types of U.S. businesses.  FIRRMA expands the definition of covered transactions to include the following:

1)         Effective immediately, CFIUS has authority to review real estate transactions (including leases) involving a foreign person if the real estate is proximate to (1) an air or maritime port or (2) a U.S. military or other government facility if the site could be used to collect intelligence.  There is an exception built into the legislation for single units and property in urban areas.

This provision is an example of FIRRMA codifying in statute an existing CFIUS practice.  The Committee has considered real estate transactions as potentially covered since at least 2012 when President Obama issued an order that prohibited the acquisition of a windfarm development company with land rights to property overlooking a military air base in Oregon by Ralls Corporation, a Delaware-based corporation owned by two Chinese nationals.  The President barred Ralls from accessing its own property, and required it to destroy items located on the property.  While Ralls successfully challenged the administrative due process afforded to it in the United States Court of Appeals for the District of Columbia Circuit, the court there stated that “it [was] clear that Ralls intends to enter into covered transactions subject to CFIUS jurisdiction.”

2)         CFIUS may review and take action regarding less than-controlling, non-passive investments by foreign persons in a U.S. entity that: (1) owns, operates, manufactures, supplies, or services critical infrastructure; (2) produces, designs, tests, manufactures, fabricates, or develops critical technology; or (3) maintains or collects sensitive personal data of US citizens that may be exploited in a manner that threatens national security.  

3)         FIRRMA also expands CFIUS jurisdiction to include changes to a foreign person’s existing rights with respect to a U.S. business that ultimately could result in control of any U.S. business with critical infrastructure or technologies, or sensitive data.

4)         Finally, FIRRMA specifically brings within CFIUS' jurisdiction any transaction structured in such a way as to seek to avoid CFIUS jurisdiction. 

FIRRMA directs CFIUS to implement regulations providing guidance on the types of transactions that will be covered under the above provisions.  These regulations will be key in determining the extent to which the legislation truly expands CFIUS jurisdiction beyond its current practice.

At the same time that FIRRMA expands the jurisdiction of CFIUS, it also explicitly exempts indirect investments by foreign investors through an investment fund provided that the fund is managed and controlled exclusively by a U.S. general partner, managing member, or equivalent, and no foreign investor has access to material non-public information from the to-be-acquired U.S. business.

Mandatory Filings

Historically, participation in the CFIUS review process has been voluntary, though the President has the authority to act pursuant to recommendations from CFIUS even if the parties declined to participate in a review.  Under FIRRMA, however, parties to a transaction are required to inform CFIUS if the foreign person is one in which a foreign government has a “substantial interest” and the foreign person would acquire a “substantial interest” in a U.S. business that involves critical infrastructure, critical technologies, or that maintains or collects sensitive personal data. The term “substantial interest” remains to be defined in regulations.  CFIUS may waive the mandatory filing requirement if the foreign person sufficiently demonstrates that it is not controlled by or subject to direction from a foreign government and that it has a history of cooperating with CFIUS. 

Mandated reporting could be met either through a standard filing or a “declaration,” a new, stream-lined short form notice provided for under FIRRMA.  CFIUS staff must respond to such a declaration within 30 days and may clear the transaction on the basis of the information in the notice, request the parties file a full written notice, or initiate a review of the transaction based upon the declaration.  Apart from mandatory filings, FIRRMA allows parties to make use of a voluntary declaration, as opposed to a full notice, in order to inform the CFIUS staff of a pending transaction.  Declarations may be of particular use to parties that wish to obtain safe harbor treatment for transactions that are not likely considered to pose national security risks.

Time periods for Review

Until now, CFIUS was allotted 30 days in which to review an investment.  If CFIUS could not reach a conclusion within that time frame, then it could unilaterally initiate an investigation, which could last an additional 45 days.  Additionally, however, the clock for review of the notice did not start until the CFIUS staff formally accepted the notice.  While acceptance used to be fairly quick, in recent practice it could substantially increase the real review period for many notices.  Under FIRRMA, the initial review period is expanded to up to 45 days.  While the period for an investigation remains 45 days, CFIUS may extend an investigation for an additional 15 days under extraordinary circumstances.  Significantly, in a change from current practice, under FIRRMA, the CFIUS staff must provide comments on a draft or submitted notice within 10 days and cannot string out the initial, pre-formal notification period as occurs now.

Under the prior CFIUS regime, many transactions were deferred to an expanded investigation period not because they presented national security concerns but rather because the over-worked staff of the Committee was not able to complete its review of the relevant submission in the first 30 days after accepting the filing.  Similarly, if the Committee was still negotiating with the parties to the transaction or otherwise unable to come to a conclusion with respect to the implications of the transmission, the staff frequently would ask the parties to voluntarily withdraw the notice and re-file it at a later date, thus restarting the clock on CFIUS review.  The increase in the length of time available to CFIUS during the review may result in more transactions being cleared during that statutory review period.

Fees and a CFIUS Fund

In recent years, CFIUS has been hamstrung by a lack of funding preventing sufficient personnel increases to handle the growing number and complexity of filings.  Along with expansions to jurisdiction and process, FIRRMA provides an avenue of support for augmenting the CFIUS staff and expediting reviews.   Effective immediately, CFIUS may impose filing fees not to exceed the lesser of 1 percent of the value of the transaction or $300,000.  Any filing fees collected must be deposited into a newly created Committee on Foreign Investment in the United States Fund (the CFIUS Fund) to be used solely for the purposes of supporting CFIUS’ activities.  In addition, FIRRMA includes a $20 Million appropriation to the CFIUS Fund each year between 2019 and 2023.

Interestingly, FIRRMA also instructs CFIUS to conduct a study regarding the use of a “prioritization fee” that parties could pay in addition to the filing fee in order for CFIUS to prioritize a response to the parties’ draft or formal filing.

In addition to the provisions discussed above, several other reforms were left out of the final version of the law, despite being included in the versions of FIRRMA passed by the House of Representatives or the Senate.  Most significantly, forms of FIRRMA passed by both bodies included designations of particular countries as either exempt from CFIUS review or subject to heightened scrutiny.  Earlier versions of FIRRMA called for the identification of “countries of special concern” that present “a significant threat to the national security inters of the United States” and/or a list of countries from which foreign direct investments could be excluded from CFIUS review.  The final version of FIRRMA includes neither a “black list” nor a “white list,” but it does authorize CFIUS to publish regulations identifying “certain categories of foreign persons” that may be subject to varying levels of review. The use of such categories could have a substantial effect on foreign direct investment in the United States going forward.

Any transactions involving non-trivial investment by foreign persons or entities in U.S. companies must consider the authority of CFIUS, as enlarged by FIRRMA and pending regulations, as part of its regulatory consequences calculation.  The current Administration has made clear its intent to use the CFIUS authority as an instrument of foreign policy and neither the U.S. target of such investment nor the potential foreign investor can reasonably ignore the increased authority of CFIUS.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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