Proposed Bill Expands, Strengthens CFIUS Review, Makes Some Filings Mandatory and Adds a New Regulatory Hurdle in Domestic Transactions Involving Foreign Investors
Sen. Cornyn (R-TX), along with co-sponsors Sen. Feinstein (D-CA), Sen. Burr (R-NC), Sen. Peters (D-MI), Sen. Rubio (R-FL), and Sen. Klobuchar (D-MN), introduced the “Foreign Investment Risk Review Modernization Act of 2017” (FIRRMA) November 8, 2017. This proposed bill, and a companion bill of the same name introduced in the House of Representatives by Rep. Pittenger (R-NC), seeks to expand the scope and authority of the Committee on Foreign Investment in the United States (CFIUS or the Committee), an inter-agency committee which reviews and approves certain transactions that may affect the national security interests of the United States.
The number of CFIUS reviews has drastically increased over the past two administrations; CFIUS conducted a total of 14 investigations in fiscal years 2005, 2006 and 2007, but conducted 79 investigations in 2016 alone. Given the Trump administration’s “America First” agenda and public comments by high-ranking administration officials expressing skepticism of international influence in the United States economy, the number of CFIUS investigations is likely to increase.
FIRRMA aims to direct the expansion of the committee’s role in national defense as an adaptive and forward-thinking review process. In so doing, FIRRMA seeks to redefine the role CFIUS will play. From an afterthought to a chief hurdle in consummating transactions with foreign investors, CFIUS investigations have strayed from their traditional scope and have entered previously unexplored fields. CFIUS historically investigated transactions that appeared likely to affect national security on their face, such as a foreign company purchasing real estate abutting a military base. However, CFIUS has recently launched investigations into transactions for reasons that appear indirect to national security, such as the committee’s recent investigation of a Chinese company acquiring a long-term care provider in the United States, presumably due to the risk of improper disclosure of American patients’ personal and private information to the Chinese buyer.
No New Members or Targeted Countries
Introduced with bi-partisan support, FIRRMA seeks to expand the scope of CFIUS’s ability to review transactions beyond traditional notions of national defense. Despite early speculation, the bill does not expand the number of members of the Committee, nor does the bill specifically name or target any particular country. Thus, while transactions involving Chinese and Russian buyers may receive particular attention from CFIUS regulators as a matter of practice, the bill does not require heightened scrutiny of these transactions as a matter of law.
Expansion of Authority; Mandatory Filings, Filing Fees
FIRRMA principally seeks to expand the Committee’s authority to review certain types of transactions. Specifically, FIRRMA expands the Committee’s authority to review a wider variety of transactions involving a “critical technology company” or “critical infrastructure company,” terms which are defined very broadly. For example, a “critical technology company” includes any company that “produces, trades in, or designs, tests, manufactures, or develops one or more critical technologies,” which are “[t]echnology components, or technology items that are essential or could be essential to national security, identified for purposes of this section pursuant to regulations prescribed by the Committee.” Thus, barring future limitations in the regulations, any technology that could, even hypothetically, be “essential to national security” would fall under the scope of CFIUS review.
Currently, CFIUS may only review transactions which result in “foreign control.” However, FIRRMA would permit review of any investment in any “critical technology company” that is not a “passive investment.” Thus, the FIRRMA would permit CFIUS review of any non-passive technology license agreement or joint venture agreement involving a critical technology company, including agreements in which the foreign investor does not gain majority interest. Under FIRRMA, a non-passive, non-majority investment by a foreign national in a small technology startup company specializing in monetizing map technology could fall under the scope of CFIUS review because the map technology might be considered “technology…[that] could be essential to national security.” However, unlike a larger competitor with the financial capability to easily internalize the costs involved with the CFIUS review process, the prospect of CFIUS review may derail such a deal, due to the time and legal expense required to undergo a CFIUS review.
Currently, the CFIUS review process relies upon a voluntary-filing scheme; however, FIRRMA would create a hybrid system in which declarations for certain transactions must be filed with the Committee. Under FIRRMA, a declaration must be filed with the committee for any transaction which involves the acquisition of at least 25 percent of the voting interest in a U.S. business by a person in which a foreign government owns, directly or indirectly, at least a 25 percent voting interest, as well as any covered transaction identified under regulations because of the economic or business sector, the difficulty of remedying the potential harm to be caused by the transaction, and the difficulty of obtaining information on the type of covered transaction through other means.
These filings may delay certain types of transactions. While the parties to such a transaction generally may choose to file a declaration or a formal written notice, a formal written notice of the transaction must be filed at least 90 days before the completion of the transaction. Declarations must be filed at least 45 days before the completion of the transaction.
FIRRMA may also complicate or inhibit certain real estate transactions involving foreign investors. FIRRMA’s expanded definition of a “covered transaction” includes any purchase or lease by a foreign person of real estate near a military installation or U.S. government property sensitive for reasons of national security. Importantly, the types of U.S. government property to which this applies, as well as the term “sensitive for reasons of national security” are not defined, which may result in extremely broad review authority.
In addition to expanding the kinds of transactions CFIUS may review, FIRRMA provides additional factors that the Committee may use when reviewing the transactions. These additional factors include the likelihood of whether the transaction will: (1) expose personally identifiable, genetic information, or other sensitive data of U.S. citizens that could be exploited in a manner that threatens national security; (2) create new or exacerbate existing cybersecurity vulnerabilities; (3) increase foreign ability to affect U.S. elections; (4) facilitate a declared strategic concern of a country of special concern; (5) facilitate criminal or fraudulent activity affecting the national security of the U.S.; or (6) expose any information regarding sensitive national security matters or operations of law enforcement agencies.
FIRRMA does, however, exclude certain types of transactions. For example, and as mentioned above, FIRRMA explicitly excludes any qualified “passive investment” from the definition of “covered transaction.” A passive investment is an investment in which the foreign investor does not receive any of the following: (1) non-public technical information of the U.S. business; (2) non-technical information not available to all investors; (3) board or observer rights; (4) involvement in substantive decision-making of the U.S. business; and (5) parallel strategic partnership or other material financial relationship with the U.S. business.
Finally, it is important to note FIRRMA contemplates an increase in the cost of the CFIUS review process. As proposed, FIRRMA includes a filing fee for CFIUS filings of not more than 1 percent of the total value of the transaction, or $300,000.
Having sophisticated CFIUS counsel determine whether CFIUS review may be applicable, and to handle CFIUS filings and navigate CFIUS investigations, is more critical than ever. For companies large and small, Dinsmore’s team of experienced attorneys has a proven track record of achieving excellent results for clients under the specter of a CFIUS review.