United States: Congress To Consider A Broad Overhaul Of CFIUS

Yesterday, bipartisan coalitions in both the House and the Senate announced new legislation that would substantially overhaul current law governing the Committee on Foreign Investment in the United States (CFIUS) and the standards by which foreign investments in U.S. businesses are reviewed. The law would dramatically expand CFIUS' authorities, and would affect a broad range of transactions — particularly in high-technology sectors. Companies could also be required to pay filing fees of up to $300,000 for each transaction.

The proposed legislation comes amid rising concerns by Administration officials and members of Congress about foreign investments in and acquisitions of high-technology industries, particularly by Chinese businesses. It was announced just as President Trump was arriving in China, where topics of discussion are sure to include trade and foreign investment policy.

The proposed Senate bill—which is 79 pages long and is titled "The Foreign Investment Risk Review Modernization Act" — is sponsored by Senators John Cornyn (R-TX) and Dianne Feinstein (D-CA), and has several other co-sponsors from both parties. The House bill was introduced by Rep. Robert Pittenger (R-NC) and also has a bipartisan lineup of co-sponsors. Although the text of the House bill was not available as of this writing, Rep. Pittenger's website describes it in the same terms as the Senate bill.

Expansion of CFIUS Jurisdiction

The proposed legislation would substantially broaden CFIUS's focus and strengthen its enforcement capabilities. As such, it could impose new obstacles for  foreign investors and U.S. businesses conducting transactions with them. At least some parts, however, codify existing practices. Most significantly, the legislation would devote more focus and enforcement authority to transactions in high-technology sectors. In this regard:

  • CFIUS would have authority to review certain transactions involving "critical technologies" — a term that would be updated to include "emerging technologies" that could be essential for the United States to maintain or gain a technical advantage against rival "countries of special concern." As a result, any foreign investment in a company that develops "critical technologies" would presumptively be covered by CFIUS, unless the investment is passive.
  • In a significant new development, CFIUS would further have the authority to review any contribution by a U.S. "critical technology company" of its intellectual property (along with associated support) to a foreign company, including through an arrangement such as a joint venture.
  • Similar rules would apply in "critical infrastructure" industries — a term defined to include various systems and assets that are vital to national security. The Department of Homeland Security has designated 16 different critical infrastructure sectors — ranging from manufacturing to electrical grids to the financial services sector. Accordingly, any foreign investment in a critical infrastructure company would presumptively be covered by CFIUS, unless the investment is passive.
  • For an investment to be considered "passive," it cannot give the foreign person any membership — or (notably) even observer rights on the target company's board or any involvement (other than through voting of shares) in substantive decision-making. The transaction also cannot afford the foreign person the ability to access certain types of non-public information possessed by the U.S. business.

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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.

© Morrison & Foerster LLP. All rights reserved

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