United States: Proposed Bill Seeks To Expand Scope Of CFIUS Reviews Of Foreign Investments

Key Points
  • The House and Senate proposed companion bills that would expand the scope of CFIUS review by broadening the definition of covered transactions to include certain minority investments and joint ventures, among other specified transactions.
  • The proposed legislation also creates a new short-form filing ("declaration") that is mandatory in certain transactions, extends the CFIUS review timeline, introduces filing fee requirements and expands CFIUS's and the President's authority to address national security concerns.
  • Despite receiving bipartisan sponsorship and notional support from key Trump administration officials, the legislation faces an uncertain future in the current political climate.

On November 8, 2017, Sens. John Cornyn (R-TX), Dianne Feinstein (D-CA) and Richard Burr (R-NC) introduced legislation, titled the "Foreign Investment Risk Review Modernization Act," (FIRRMA), in the U.S. Senate that would dramatically expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS or the "Committee"). Rep. Robert Pittenger (R-NC) introduced a companion bill by the same name in the U.S. House of Representatives that also has bipartisan sponsorship. In addition to expanding CFIUS jurisdiction, the proposed bills would impose mandatory reporting requirements for certain types of transactions and introduce filing fees to the notification process. While the legislation has received bipartisan sponsorship, it remains to be seen whether the supporters of FIRRMA can garner the necessary votes for it to become law.

Background: The Current CFIUS Regime 

CFIUS is an interagency panel, chaired by the U.S. Department of the Treasury, with authority to review certain investments that could result in foreign control of U.S. businesses—referred to as "covered transactions"—for potential national security concerns. Under the current CFIUS regime, parties to a proposed transaction do not have an affirmative obligation to file a notice with CFIUS. However, the Committee has the authority to initiate a review and direct the submission of a notice if it becomes aware of a covered transaction that it believes implicates U.S. national security concerns. Parties often seek CFIUS approval in cases that present such potential issues to avoid the otherwise unextinguished liability that could arise following completion of a transaction.

The CFIUS review process involves a 30-day review, followed by a 45-day investigation if the Committee has unresolved national security concerns associated with the transaction. The potential outcomes of this process include CFIUS clearing the transaction, requiring a mitigation agreement before clearance or recommending that the President block the transaction.

The Committee has received increased attention in 2017, due to a recent surge of Chinese investment into the United States. President Trump's decision to block the acquisition of Oregon-based Lattice Semiconductors by Canyon Bridge, a Chinese-backed private equity fund, drew headlines as only the fourth such presidential blocking action in CFIUS history. The past year has also seen a rising number of transactions with Chinese buyers stalled or abandoned as a result of CFIUS scrutiny. On top of this, the Committee is reportedly on pace to review a record number of deals this year despite being understaffed. These factors have resulted in a backlog of pending cases and an increase in parties' having to withdraw their notices and refile them with CFIUS to restart the review clock.

Amidst growing concern for the national security implications of increased Chinese investment, legislators and Trump administration officials have voiced interest in expanding CFIUS's authority to scrutinize such deals. While discussing CFIUS reform in June, Sen. Cornyn referenced a February 2017 report from the Defense Innovation Unit Experimental (DIUx), a part of the Department of Defense, which expressed concern regarding Chinese investment in advanced technologies. Later, in mid-September, the Senate Committee on Banking, Housing and Urban Affairs, which oversees CFIUS, held a hearing on potential CFIUS reform. Within the Trump administration, Treasury Secretary Steven Mnuchin, Defense Secretary James Mattis, Commerce Secretary Wilbur Ross and Attorney General Jeff Sessions have all expressed support for strengthening the Committee's review process, which has been criticized by lawmakers from both parties.

Key Provisions of the Reform Bill

Sen. Cornyn and Rep. Pittenger introduced their proposed legislation following many months of consideration of how best to strengthen the CFIUS process without discouraging foreign direct investment in the United States. In its current form, FIRRMA would bring a variety of adjustments to the CFIUS review process. Notably, its proposed amendments to the CFIUS regime remain focused on national security issues and do not encompass "economic security" or other seemingly protectionist issues that have also been the subject of debate among lawmakers. We describe some of FIRRMA's key modifications to the CFIUS process below.

1. Expanded Definition of "Covered Transaction"

The proposed bill would substantially expand the definition of a "covered transaction." Currently, CFIUS has jurisdiction to review only transactions in which a non-U.S. person could gain the ability to control a U.S. business. FIRRMA would expand the scope of CFIUS review to cover the following transactions, which are not currently within the specific definitional scope of CFIUS jurisdiction:

  • the purchase or lease by a non-U.S. person of private or public real estate that is located in close proximity to a U.S. military installation, other U.S. government facility or property that is sensitive for national security reasons;

  • investments (other than "passive investment") by a non-U.S. person in any U.S. critical technology company, which means a U.S. business that produces, trades in, designs, tests, manufactures, services, or develops one or more critical technologies

    • Notably, FIRRMA expands the current definition of "critical technologies" beyond export-controlled items to include "[o]ther emerging technologies that could be essential for maintaining or increasing the technological advantage of the United States over countries of special concern with respect to national defense, intelligence, or other areas of national security, or gaining such an advantage over such countries in areas where such an advantage may not currently exist." While it may be further clarified through regulations, this expanded category could create a shadow export control regime through the CFIUS process and may also be difficult for companies to interpret.

  • investments (other than "passive investment") by a non-U.S. person in any U.S. critical infrastructure company, which means a U.S. business that is, owns, operates or primarily provides services to an entity that operates within a critical infrastructure sector or subsector;

  • any change in a non-U.S. person's rights with respect to a U.S. business in which the non-U.S. person has an investment, if that change could result in (i) foreign control of the U.S. business or (ii) an investment in a U.S. critical technology or critical infrastructure company;

  • joint ventures or any other types of arrangements (other than an ordinary customer relationship) in which a U.S. critical technology company contributes both intellectual property and associated support to a non-U.S. person, which could potentially cover joint ventures established outside of the United States; and

  • any other transaction, transfer, agreement, or arrangement designed or intended to evade or circumvent the CFIUS review process.

As noted above, FIRRMA builds in an exclusion for "passive investments" from CFIUS's jurisdiction in relation to certain investments and adds a more detailed definition of this concept. This new definition is narrow, capturing investments that do not provide (i) control; (ii) access to certain non-public information about the U.S. business; (iii) membership, observer, or nomination rights on the board of directors or equivalent body; (iv) involvement in any decision-making (beyond rights through voting shares); and (v) a parallel strategic partnership or other material financial relationship to the non-U.S. person and U.S. business. Moreover, as with other defined terms, CFIUS will have the discretion to develop other criteria for "passive investments" by regulation.

2. Exemptions for Particular Countries

To avoid capturing benign investments, the proposed legislation would allow the Committee to create a list of exempt countries (a so-called "white list") from which inbound investment would not be captured in the expanded definition of "covered transaction." Importantly, the aforementioned transactions would not be exempt from the existing scope of CFIUS jurisdiction. In identifying the white-listed countries, the bill directs the Committee to consider the following factors: (i) whether the U.S. has a mutual defense treaty in effect with the country; (ii) whether the U.S. has a mutual arrangement with the country to safeguard national security as it pertains to foreign investment; (iii) the national security review process for foreign investment of that country; and (iv) any other criteria the Committee deems appropriate.

3. Voluntary and Mandatory Declarations

FIRRMA also creates a new process for submitting short-form notices, called "declarations," that would apparently contain high-level information regarding the transaction. Under FIRRMA, these declarations can be submitted on a voluntary basis, in lieu of a full written notice, but they would also be mandatory in certain circumstances. Specifically, the mandatory declaration will apply to covered transactions involving the acquisition of a 25 percent or greater voting interest by a non-U.S. person in which a foreign government owns at least a 25 percent voting interest. CFIUS may also require the submission of a declaration for covered transactions based on the following factors or circumstances: (i) the technology, industry or economic sector in which the U.S. business trades; (ii) the difficulty of remedying the national security harm that may result if the transaction is completed; and (iii) the difficulty of obtaining information on the type of covered transaction through other means.

Parties must submit mandatory declarations no later than 45 days before the completion of the transaction. If the parties elect to submit a full notice in lieu of a mandatory declaration, the notice must be filed 90 days in advance of closing. The proposed legislation provides CFIUS with the authority to issue penalties if the parties fail to file a mandatory declaration or notice.

In response to a declaration, CFIUS will take one of the following steps: (i) clear the transaction; (ii) request that the parties file a full notice; or (iii) initiate a unilateral review of the transaction to further review the national security implications of the transaction. FIRRMA provides that CFIUS shall "endeavor" to take such action within 30 days of receiving the declaration.

4. Extended Timeline

As stated above, the timeline for the CFIUS review process is generally triggered upon the parties' submission of a voluntary notification to CFIUS. FIRRMA proposes extending the initial 30-day review period to a 45-day review period. Moreover, in extraordinary circumstances, the proposed bill authorizes the Treasury Secretary to extend the subsequent 45-day investigation by 30 days. Given the record backlog of CFIUS cases currently pending, these extended review and investigation periods could reduce the need for parties to withdraw and refile notices with CFIUS by allowing more time for review and negotiation of mitigation terms. The bill also provides for tolling of the review period during a government shutdown, which is in response to delays that occurred in the last government shutdown of September-October 2013.

5. Monitoring of Non-Notified Transactions

The proposed bill establishes a requirement for CFIUS to monitor transactions for which no declaration or notice is submitted. As a practical matter, CFIUS staff and its member agencies already perform this function, but this change makes such monitoring an affirmative legal requirement. Specifically, FIRRMA requires CFIUS to establish a mechanism to identify non-notified and non-declared covered transactions for which "information is reasonably available."

The proposed legislation would also allow the CFIUS chairperson, in consultation with the Committee, to centralize this process and other appropriate functions within the Department of the Treasury.

6. Expanded Authority for CFIUS and the President to Address National Security Concerns

Under the proposed bill, the Committee may also "suspend a proposed or pending covered transaction that may pose a risk to the national security of the United States" while it is under review or investigation. It also provides the Committee with the authority to refer the transaction to the President at any time during the review or investigation. These authorities are not explicit under the current law.

In addition, the proposed bill states that CFIUS may negotiate, impose, and enforce any agreement or condition with any party to a completed transaction to mitigate any interim risks to U.S. national security that may arise as a result of the transaction until the Committee has completed its review or the President has taken appropriate action. The bill also expands the President's authority so that he may "take any additional authority [he] considers appropriate to address the risk to the national security of the United States identified during the review and investigation of the transaction."

7. Filing Fees and Funding

With respect to a covered transaction for which a written notice is submitted to the Committee, the proposed bill introduces a filing fee that may not exceed an amount equal to the lesser of 1 percent of the value of the transaction, or $300,000, adjusted annually for inflation. This new fee will generate revenue for CFIUS for the first time, but it could discourage the voluntary submission of notices.

In addition, FIRRMA establishes a dedicated CFIUS fund to hold the filing fees and appropriations from Congress, which will fund the operation of the Committee. The proposed bill allows the CFIUS chairperson to transfer amounts from the new fund to other departments or agencies represented on the Committee for CFIUS-related activities. This dedicated funding will be critical for CFIUS to execute the new mandates of FIRRMA, particularly in light of the current backlog of cases at the Committee.

Outlook and Potential Impact of FIRRMA

The proposed legislation faces an uncertain fate. At this juncture, it is unclear whether it will be able to gain enough momentum to pass in both the House and the Senate. While the legislation has bipartisan sponsorship, the breadth and focus of this support have not yet crystallized. The level of commitment to CFIUS reform will be a critical factor in the passage of any legislation, given Congress's packed legislative agenda and other priorities.

If the bill does become law, it would heighten scrutiny of deals involving non-U.S. buyers, especially those from China. Regardless of the size of their investment, non-U.S. investors dealing in sensitive industries and those from countries of interest would need to consider the CFIUS implications of transactions. The proposed bill could also substantially extend the time that parties to a transaction must build in for CFIUS review.

While formally heightening scrutiny on non-U.S. investors, the proposed legislation could also help clarify the scope and parameters of CFIUS review, aiding potential investors in structuring deals to minimize national security concerns. Given the current backlog and reports of stalled deals from China, the legislation may be seen as formalization of certain aspects of a CFIUS review process that has increased its level of scrutiny on inbound investments. Still, the proposed bill grants broad discretion to CFIUS, and therefore, it may raise as many questions as it answers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions