United States: CFIUS Reform Puts Spotlight On Tech Companies, Foreign Government-Controlled Investors

Last Updated: August 20 2018
Article by Amy Josselyn and Christopher Kimball

On August 13, 2018, President Trump signed the John S. McCain National Defense Authorization Act for fiscal year 2019. The NDAA includes the Foreign Investment Risk Review Modernization Act, which expands the power of the Committee on Foreign Investment in the United States to review certain investments in US businesses by non-US entities and persons.

Notably, unless otherwise indicated below, these changes will be implemented by new regulations and therefore may not become effective for up to 18 months. This delay will give companies some breathing room to consider how FIRRMA will impact their future investments and time to make necessary organizational and strategic decisions. Further, FIRRMA will not have a retroactive effect on transactions completed prior to its enactment or prior to the effective date of those FIRRMA provisions that do not take immediate effect.

Key changes

  • Expanded definition of "covered transaction:" CFIUS has jurisdiction to review "covered transactions," a term presently defined as a transaction that could result in "control" of a US business by a foreign person (i.e., a foreign national, foreign government, foreign entity or any entity controlled by a foreign person). FIRRMA revises the definition of "covered transaction" first by explicitly stating that "control" can manifest as the result of a "merger, acquisition or takeover carried out through a joint venture." More importantly, FIRRMA also expands the definition of a covered transaction to include other types of transactions, some of which may not result in foreign control of a US business. These new types of covered transactions include:

    • Acquisitions, including leases, by a foreign person of US private or public real estate that is either (1) associated with an airport or maritime port or (2) in close proximity to a military installation or otherwise sensitive US government facility.
    • "Other investments" by a foreign person in a US business that would provide a foreign person access to (1) critical infrastructure, (2) critical technologies or (3) sensitive personal data of US citizens, but only if such "other investments" also would provide a foreign person:

      1. access to "material nonpublic technical information" (i.e., information that provides key know-how not available in the public domain relating to critical infrastructure or critical technologies);
      2. membership or observer rights on the US business' board of directors (or equivalent body); or
      3. any involvement in substantive decision-making (other than through the voting of shares) of the US business regarding critical infrastructure, critical technologies or sensitive personal data.
    • Forthcoming CFIUS regulations pertaining to covered transactions: With respect to CFIUS' expanded jurisdiction to review "other investments," the terms "critical infrastructure" and "critical technologies" will be defined in forthcoming regulations prescribed by CFIUS. Significantly, the definition of "critical technologies" will include "emerging and foundational technologies," a list of which will be determined pursuant to a new interagency process involving (at a minimum) the Secretaries of the Departments of Commerce, Defense, Energy and State. Such emerging and foundational technologies almost certainly will include artificial intelligence, quantum computing, encryption technologies and nanoscale technologies, all of which have been the focus of recent attention by CFIUS.

      FIRRMA also permits CFIUS to focus the scope of its review of the real estate transactions and "other investments" described above on certain categories of foreign persons, including investors from certain countries of concern or foreign government-backed investors. If CFIUS decides to exercise this authority, investors from China and Russia will undoubtedly receive heightened scrutiny.
  • Carve-out for private equity and other investment funds: FIRRMA creates a limited jurisdictional carve-out for foreign persons who participate in an investment in a US business as limited partner (or the equivalent) in an investment fund. Specifically, the participation of a foreign limited partner in a transaction will not constitute an "other investment" as described above where all of the following conditions are met:

    1. the fund is managed exclusively by a general partner (or equivalent entity) that is not a foreign person;
    2. the advisory board (or equivalent committee) on which the limited partner sits does not have the power to control investment decisions of the fund or decisions made by the general partner;
    3. the foreign person is not able to control the fund; and
    4. the foreign person does not have access to "material nonpublic technical information."

    Because of the narrow scope of this carve-out, investment funds – and particularly those that anticipate making investments in US businesses involving critical infrastructure, critical technologies or sensitive personal data – must consider how CFIUS will regard the presence of non-US limited partners in a fund.
  • Mandatory declaration requirements: In contrast with the current voluntary CFIUS regime under which parties have no affirmative obligation to notify CFIUS of a covered transaction, FIRRMA contemplates mandatory filings in certain circumstances. FIRRMA also establishes a new process (also to be defined in the forthcoming CFIUS regulations) by which parties to a covered transaction may submit an abbreviated "declaration" to CFIUS, generally not exceeding five pages in length. Upon receiving a declaration, CFIUS will have the option to:

    1. notify the parties that CFIUS has completed all action with respect to the transaction (i.e., "cleared" the transaction);
    2. request that the parties submit a full notice of the transaction;
    3. inform the parties that CFIUS is not able to "clear" the transaction based on the declaration alone, in which case the parties can elect to submit a full CFIUS notice, or
    4. initiate a unilateral review of the transaction.

    While the specific circumstances that will trigger a mandatory declaration will be determined in regulations, FIRRMA provides that declarations will be required for transactions resulting in the acquisition of a "substantial interest" in a US business by a foreign person in which a foreign government has a "substantial interest" where such acquisition would provide the foreign person access to critical infrastructure, critical technologies and/or sensitive personal data of US citizens. The definition of a "substantial interest" will be determined in the forthcoming CFIUS regulations. CFIUS also will have authority to require declarations for any "other investments" described above in US businesses involving critical technologies.
  • Extension of the CFIUS review and investigation timelines: Effective immediately, the timeframe for the initial review of a transaction by CFIUS will extend from 30 days to 45 days. If CFIUS decides thereafter to initiate an investigation of a transaction, such investigation will run for 45 days, unless the CFIUS Chairperson elects to extend the investigation period for an additional 15 days due to "extraordinary circumstances."
  • Filing fees: Also effective immediately, CFIUS may require a filing fee for each full notice submitted in connection with a covered transaction. The process for determining the amount of the fee will be further defined in the CFIUS regulations, but it will not exceed the lesser of one percent of the value of the transaction or $300,000. In prescribing further regulations, FIRRMA instructs CFIUS to consider the effect of the filing fee on small business concerns and foreign investment more broadly. Notably, the filing fee will apply only to notices voluntarily submitted to CFIUS and not to reviews initiated by CFIUS or in connection with the new abbreviated declaration process established by FIRRMA.

The full impact of FIRRMA will be determined in the coming months, particularly with the promulgation of the new CFIUS regulations referenced throughout FIRRMA. However, it is clear that there will be significant implications for foreign investment in US technology companies, depending on how the term "critical technologies" is defined in CFIUS regulations and in the parallel process described in the Export Control Reform Act also included in the NDAA. Additionally, investors with ties to foreign governments will need to consider whether their investments will implicate the mandatory declaration requirement established in FIRRMA. Private equity and other investment funds also must consider how the jurisdictional carve-out provided in FIRRMA will impact the participation of foreign limited partners in funds and investments going forward.

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