United States: FIRRMA Broadens Scope Of Foreign Investments Subject To CFIUS Review

The Situation: The National Defense Authorization Act ("NDAA"), which contains the Foreign Investment Risk Review Modernization Act ("FIRRMA"), broadens the scope of foreign investments subject to scrutiny by the Committee on Foreign Investment in the United States ("CFIUS").

The Result: Certain noncontrolling foreign investments involving "critical infrastructure," "critical technologies," or sensitive data are subject to CFIUS review as well as certain foreign investments in real estate.

Looking Ahead: Some of FIRRMA's provisions will be effective immediately, while others will be further refined and implemented via regulation.

President Trump signed the NDAA today following a rare demonstration of strong bipartisan Congressional support. The NDAA contains the much anticipated FIRRMA. As we previously reported, FIRRMA modernizes and strengthens the CFIUS process by broadening the scope of transactions within the jurisdiction of CFIUS to include certain real estate transactions and certain transactions in U.S. "critical infrastructure" and "critical technology" companies and U.S. companies that maintain or collect sensitive personal data.

CFIUS remains an important consideration for foreign parties looking to invest in the United States. FIRRMA codifies the ways in which CFIUS has evolved in recent years. In addition to expanding CFIUS's jurisdiction, FIRRMA extends CFIUS's period of review and introduces a "declarations" process that mandates filings for certain transactions and establishes a process for parties to voluntarily file streamlined notices for expedited review. The NDAA also includes the Export Controls Act of 2018 that, among other things, introduces a process to identify and control the export, re-export, and transfer of "emerging and foundational technologies."

We see a number of key provisions that will impact foreign investment in the United States. Some are effective immediately; others will be further refined through regulation.

Expanded Jurisdiction

FIRRMA expands CFIUS's authority to review new types of transactions.

  • "Other Investments" Involving Critical Infrastructure, Critical Technologies, or Sensitive Data. CFIUS now enjoys broader authority to review noncontrolling investments in "critical infrastructure" and "critical technology" companies, as well as companies that maintain or collect sensitive data of U.S. citizens. By definition, investors that negotiate an observer board seat or receive access to any material nonpublic information will be subject to CFIUS jurisdiction when investing in these companies, regardless of the size of the investment.
  • Real Estate Transactions. CFIUS is now authorized to review the purchase, lease, or concession of private or public real estate that is: (i) a part of an air or maritime port or (ii) in close proximity to a U.S. military installation or other sensitive government location. While the acquisition of a single home and real estate in "urbanized areas" as defined by the Census Bureau are exempt from this provision, CFIUS traditionally raises proximity concerns when reviewing what would otherwise be a benign investment. We expect that this provision may further constrain investments in certain geographic areas.
  • Changes in the Rights of a Foreign Person. CFIUS is now tasked with more closely scrutinizing any change in the rights that a foreign person has with respect to their existing investments in U.S. businesses. This evaluation will take into consideration whether the change in rights (e.g., through additional investments or restructuring of initial investments) could result in an otherwise "covered transaction."
  • Evasion or Circumvention. CFIUS will also evaluate transactions carefully to assess whether they are designed to evade or circumvent CFIUS's jurisdiction.

Short Form and Mandatory Declarations

Recognizing that not all transactions necessarily demand a comprehensive review by CFIUS or all the information included in a traditional notice, FIRRMA establishes a streamlined process for certain parties to submit a short-form "declaration" in lieu of a traditional notice. While the mechanics will be delineated through regulations, FIRRMA provides that the information required will generally not exceed five pages in length. CFIUS will then have 30 days to respond to the declaration, after which CFIUS will either clear the transaction, invite or request the parties to file a traditional notice, or initiate a unilateral review of the transaction.

FIRRMA also requires mandatory declarations for foreign government-controlled investments in "critical infrastructure" and "critical technology" companies, as well as companies that maintain or collect sensitive data of U.S. citizens, when the investment would result in the foreign government acquiring a "substantial interest." CFIUS is also authorized to mandate declarations for transactions involving U.S. "critical technology" companies, regardless of the size of an investment. The circumstances under which these declarations will be required will be set forth in regulations.

Timing and Filing Fees

FIRRMA immediately extends the initial 30-day review period to 45 days, followed by the traditional 45-day investigation period. FIRRMA also authorizes CFIUS one 15-day extension for "extraordinary circumstances." While an extended review period may allow CFIUS to complete more evaluations during the first 45-day period, parties should not expect that the change will happen anytime soon. CFIUS continues to face significant resource constraints and the CFIUS review process is typically taking four to six months for most parties. Adding more time to the timeline will likely extend the process until resources match demand. CFIUS will be required to provide comments on drafts and formal notices within 10 business days of submission though this provision will not take effect immediately.

FIRRMA also authorizes CFIUS to require filing fees for CFIUS reviews. Fees will be determined by regulation, though they are capped at the lesser of one percent of the value of the transaction or $300,000 (adjusted annually for inflation).

Private Equity Investors

The recent trend of private equity investors interacting more frequently with CFIUS has resulted in guidance from Congress on how CFIUS should evaluate foreign limited partner investments. Under FIRRMA, foreign limited partners investing through a fund managed exclusively by a general partner, managing member, or equivalent, that is not a foreign person, may be exempt from CFIUS's jurisdiction when investing in "other investments," so long as the limited partners do not participate on any advisory boards granting them the ability to control investment decisions or gain access to nonpublic technical information, or otherwise have the ability to control the fund.

Emerging and Foundational Technologies

One of the most significant changes to the final legislation was the removal of the technology transfer provision (the so-called "joint venture" provision) that was one of the most hotly contested provisions of the proposed legislation. However, under the companion export control legislation, the U.S. Department of Commerce could evaluate the national security considerations with regard to technology transfer via joint ventures or development agreements under certain circumstances, such as in the context of reviewing export license applications. In addition, the President is tasked with establishing an interagency process to identify "emerging and foundational technologies" that are essential to the national security of the United States and not currently controlled under U.S. export control regimes. For example, recent experience suggests the U.S. government is concerned with investments in companies focused on artificial intelligence, robotics, and semiconductors, particularly when the technology may be used for defense applications. Companies should anticipate that controls will be placed on these and similar technologies (i.e., license requirements for exports), and that they may be off-limits to certain foreign investors. 

Three Key Takeaways

  1. FIRRMA expands CFIUS's authority to review new types of transactions, and CFIUS remains an important consideration for foreign parties looking to invest in the United States.
  2. Foreign parties looking to invest in the United States should: (i) be aware that it may take longer for CFIUS to clear transactions with traditional notices; (ii) evaluate whether an investment will require a mandatory "declaration" to CFIUS; and (iii) consider the option of filing a voluntary "declaration" to potentially expedite the CFIUS review process. 
  3. The U.S. government will establish a process for identifying and controlling "emerging and foundational technologies," which may become off-limits to certain foreign investors.

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.

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