• Congress continues to put pressure on the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”), increasingly informing the context in which the Committee conducts its work.
• Last week, for example, the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party (the “Select Committee”) published a report containing 150 policy recommendations, many of which call for substantial changes to the CFIUS review process.
• The Congressional wish list for CFIUS has grown over the course of the year: lawmakers have not-so-subtly encouraged CFIUS to review deals and have considered legislation to expand the Committee’s jurisdiction to address perceived threats to U.S. national security resulting from non-U.S. investments in U.S. businesses and real estate (in particular, rural and agricultural land).
• Based on data released by the Committee, it is busier than ever and is ramping up its staffing to manage a growing docket. In this OnPoint, we highlight the recommendations for CFIUS from the Select Committee as well as what is known about the Committee’s priorities for the year ahead.
• In light of these and other developments, dealmakers would be wise to evaluate CFIUS risks at the start of the transaction process and develop a sophisticated strategy to navigate the current headwinds. We can help.

CFIUS

CFIUS is an interagency committee, chaired by the U.S. Department of the Treasury, that has broad powers to review foreign investments in and acquisitions of U.S. businesses to determine the potential impact on U.S. national security. The Committee has a heightened focus on specific investments in certain U.S. businesses that involve critical technology, critical infrastructure, and sensitive personal data. We wrote about CFIUS’ latest Annual Report here.

The Select Committee

The Select Committee is a bipartisan committee of members of the U.S. House of Representatives established to evaluate the “threat” posed by the Chinese Communist Party (the “CCP”) to the United States and develop recommendations to counter such threat. In recent months, the Select Committee has made repeated headlines with its “name and shame” tactics aimed at U.S. businesses, investment firms, and academics regarding their connections to, and investments in, the People’s Republic of China (“China”).

The Select Committee’s recent report, titled “Reset, Prevent, Build: A Strategy to Win America’s Economic Competition with the Chinese Communist Party” (the “Report”) contains 150 recommendations across three strategic pillars, in what the Select Committee characterizes as an outline of “a strategy to win America’s economic competition with the Chinese Communist Party.”

Shots Fired

In relevant part, the Report outlines what it views as potential weaknesses in the current CFIUS process, including that CFIUS’ current regulatory approach to U.S. inbound investment review is “not sufficient to combat [China’s] Military-Civil Fusion.” The Select Committee asserts that the current CFIUS regulations are “country-agnostic” and fail to distinguish between “foreign adversaries” and allies. The Report also highlights with concern that CFIUS lacks jurisdiction to review certain types of inbound foreign investments, such as greenfield investments, certain cross-border joint ventures, and certain foreign acquisitions of land in the United States.

Help You, Help Me

Recognizing that the limitations that they have identified stem from the statutory authority provided by Congress to CFIUS, the Select Committee recommends that Congress expand and enhance the jurisdiction and authority of CFIUS with new legislation.

Massive Jurisdictional Expansion. While the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) expanded CFIUS jurisdiction, it included limitations as well. From the Report it appears the Select Committee views those safeguards as unnecessary and unhelpful. The Select Committee seeks to expand existing, expansive jurisdictional bases for CFIUS to review foreign investments involving critical technology and covered real estate. If passed, the recommended new legislation would:

• Grant CFIUS jurisdiction over all joint ventures involving foreign adversary parties (including minority stakes) and require mandatory filings, imposing a presumption of unresolvability for transactions involving critical technologies.
• Streamline CFIUS reviews involving companies from allied countries that do not pose substantial national security risks, and provide clear guidance on regulations concerning “Excepted Foreign Investors” to ensure that the category does not become a scheme for evading CFIUS review. This would include adding Japan to the “whitelist” of Excepted Foreign States and directing CFIUS to begin formal negotiations to add other close allies.
• Address mitigation agreements by requiring CFIUS to block any transaction for which the national security concerns cannot be resolved through a mitigation agreement within three years, and provide additional funding for continued monitoring and assessment of all such agreements.
• Enhance CFIUS’ ability to enforce the law and its own orders by:
  • Providing CFIUS subpoena power for transactions that are not subject to mandatory filing requirements.
  • Creating carve-out exceptions to existing confidentiality provisions in order to encourage whistleblowers.
  • In cases where the national security risk has significantly increased since the transaction was first reviewed, allowing CFIUS to reopen or alter previously mitigated transactions.
  • Requiring CFIUS to refer to the U.S. Department of Justice any cases in which CFIUS believes transaction parties may have submitted false information.

More Critical Technology. The current definition of critical technology in the CFIUS regulations already incorporates a broad list of technologies subject to export controls and allows for the U.S. Commerce Department to identify additional so-called “emerging and foundational” technologies that are not yet enumerated. The Report’s recommendations would expand the definition to include: (i) technologies that directly or indirectly enable the technologies identified as “Critical and Emerging Technologies” by the White House Office of Science and Technology Policy; and (ii) technologies that are deemed “critical technologies” by either a majority of CFIUS member agencies or a single member agency of CFIUS with concurrence by the CFIUS Chair (the U.S. Department of the Treasury).

More Covered Real Estate. The CFIUS real estate regulations apply only to U.S. real estate within a certain distance of specifically identified military installations listed in the regulations. CFIUS added eight military installations to the list in June 2023 in what appeared to be a response to certain well-publicized instances of non-U.S. investors’ acquisitions near military installations (such as Grand Forks AFB in North Dakota) that were not subject to CFIUS review but drew scrutiny from the military, Congress, and the public alike. The Report recommends that CFIUS expand the list of covered installations to include all military facilities as well as acknowledged intelligence sites, national laboratories, defense-funded and university-affiliated research centers, and critical infrastructure sites. In addition, the Report recommends that CFIUS’ jurisdiction be updated to cover standalone non-urban, non-single housing unit real estate transactions by “foreign adversary” parties where such transactions could reasonably provide such parties the ability to collect intelligence on sensitive national security sites, without requiring disclosure or mandatory review and while preventing CFIUS from limiting such jurisdiction through regulation.

The Report’s recommendations also echo calls from Congress to protect U.S. agricultural land and consider U.S. agricultural needs when analyzing a proposed covered transaction’s impact on U.S. national security. Specifically, the Report calls for new legislation to add the U.S. Secretary of Agriculture as a voting member of CFIUS for cases that involve farmland or agriculture technology and to allow the Secretary of Agriculture to flag potentially problematic land purchases for CFIUS review. Similar proposals were contained in the Promoting Agriculture Safeguard and Security Act (the “PASS Act”) earlier in 2023 which would add the U.S. Secretary of Agriculture as a standing member of CFIUS, prohibit the acquisition of U.S. agricultural land and agricultural businesses by investors from China, Russia, Iran, and North Korea (i.e., “foreign adversaries”) and require a report to Congress from the U.S. Department of Agriculture on “risks posed by foreign takeovers of U.S. businesses engaged in agriculture.”

New Jurisdiction Over Greenfield Investments. Currently, CFIUS does not have jurisdiction over greenfield investments¹, although the scope of this exception to CFIUS’ jurisdiction is not as broad as one may think. This exception has come under recent Congressional scrutiny, especially with respect to greenfield investments by Chinese investors. The Exposing China’s Belt and Road Investment in America Act of 2023 would require CFIUS to review U.S. greenfield investments by businesses controlled by the CCP. The Report does not recommend eliminating the greenfield exception for Chinese investors but would grant CFIUS jurisdiction over greenfield investments involving foreign adversary parties as well as critical technologies, critical infrastructure, or sensitive personal data (each a broad category) and would require mandatory filings for such transactions. This recommendation aligns with the Protecting Sensitive Personal Data Act, which seeks to expand CFIUS jurisdiction to require the mandatory review of non-U.S. transactions that involve U.S. businesses that collect sensitive personal data of U.S. citizens (such as health data, genetic data, financial data, or geolocation data).

CFIUS’ Agenda for 2024

What does this mean for CFIUS in the new year?

It remains to be seen whether the Report will result in new legislation, galvanize pending legislative proposals, or both. It would appear, however, that the concerns voiced in both chambers of Congress this year will remain on the agenda in the year to come, as the forward-leaning, public nature of the Report will keep these issues in focus.

As we covered in our recent OnPoint regarding takeaways from CFIUS’ 2^nd Annual Conference (which can be accessed here), CFIUS has its own full agenda for FY2024. Recent reporting has highlighted that the Committee has been busy building out its ranks, adding five new deputies, operating with two Deputy Assistant Secretaries in place for the first time ever, and hiring an array of subject matter experts and compliance personnel.

CFIUS officials also have alerted the market that CFIUS is planning to release “clarifying” amendments in 2024. We can also expect CFIUS to play a role in the development of a new outbound investment regime (which we wrote about here). CFIUS will increase its outreach to Congressional staff and conduct more site visits to U.S. businesses subject to mitigation measures. It will also bolster its office of non-notified transactions to identify more covered transactions that may pose a risk to U.S. national security.

CFIUS enforcement is on the rise, as are penalties for violations of the CFIUS regulations and implemented mitigation measures (such as National Security Agreements). Further, CFIUS will increase its focus on clean energy and biotechnology and its scrutiny of private equity fund structures.

Finally, the market should still expect to see continued Chinese investments in U.S. businesses. Based on available data points in CFIUS’ 2021 Annual Report (which we covered here) and 2022 Annual Report (which we covered here), Chinese investors continue to be at or near the top of the list with respect to number of notices filed and reviewed. However, such investments will likely continue to receive heightened scrutiny in the current U.S. national security environment and as U.S.-China relations remain fraught.

Conclusion

Although the Report only contains recommendations for CFIUS, it appears that all roads may be leading to increased authority and jurisdiction for the Committee. Transaction parties should keep their eyes open for upcoming changes to the CFIUS regulations and increased activity from the Committee in FY2024. Transaction parties contemplating investments by non-U.S. investors in U.S. businesses should continue to evaluate CFIUS considerations early in the transaction process to avoid surprises and delays on their preferred path to closing.

1. A greenfield investment is an investment in which there is not an acquisition of, or investment in, an existing U.S. business but rather assistance in the development of a U.S. business at its inception (i.e., building it from the ground up).