Foreigners seeking to invest in semiconductors, telecommunications, computers, batteries, and other high technology industries will face heightened scrutiny by a strengthened Committee on Foreign Investment in the U.S. ("CFIUS"), following the August passage of the Foreign Investment Risk Review Modernization Act ("FIRRMA") and Export Control Reform Act (ECRA), as well as the Pilot Program introduced by the Trump Administration on October 10. A list of industries affected by the Pilot Program is available here (p. 12-13).

National security objectives have now been expanded to incorporate protection of critical technology from foreign influence and control, preserve U.S. leadership in advanced technology and impose taxes and barriers on foreign nations (like China) that the U.S. believes is undermining these objectives.

While ostensibly aimed at all foreign investment and technology transfers, China is clearly the focus of these new laws and regulations. The continued use of Section 301 Trade Act "emergency" tariffs and expanded export control regulations will increase the need to manage U.S.-China company cross-border dealings. Moreover, this increased scrutiny is in the context of recent reports that China exploited vulnerabilities in the U.S. technology supply chain to infiltrate the computer networks of almost 30 U.S. companies.

Below we highlight these recent changes to CFIUS and export control:

1. Expanded Scope of CFIUS

FIRRMA marks a significant broadening of review of foreign investments in the U.S. as it empowers CFIUS to review foreign "non-passive" investments in U.S. businesses that: (1) own, operate, manufacture, supply or service "critical infrastructure"; (2) produce or develop "critical technologies" -- U.S. export-controlled technologies including "emerging and foundational" technologies; or (3) maintain or collect sensitive personal data of U.S. citizens.

It will likely be several months before the relevant agencies finalize regulations, but the administration has authority to adopt a pilot program to implement some or all of the law before the regulations are issued. The Pilot Program identifies 27 "industries for which certain strategically motivated foreign investment could pose a threat to U.S. technological superiority and national security." Foreign investment, including non-controlling ones, will now be subject to a stricter review process beginning November 10 until no later than March 2020. Infrastructure and U.S. citizen personal information are not separate considerations under this Pilot Program. However, a wide range of other industries have been mentioned previously by the government in other contexts as also constituting critical technologies for national security/competitiveness including alternative renewables energy generation such as wind and solar, which might be added in the future as the new program evolves.

The enactment of FIRRMA and the Pilot Program confirms that the Trump administration has changed the focus of foreign investment scrutiny from areas of core national security risk to foundational technologies in which the U.S. competes with China.

2. Minority Investments in Sensitive Areas

CFIUS has historically retained jurisdiction where a foreign investor would have a "controlling" interest in a US business. Over the past few years, this has resulted in some foreign investors structuring investments to technically not be controlling, such as minority investments without management authority.

To address this issue, CFIUS will now retain jurisdiction over non-controlling investments in U.S. companies involving critical technologies, infrastructure and sensitive personal data of U.S. persons if such investments provide a "foreign person" access to nonpublic technical information possessed by the U.S. business, board membership/observer rights, or involvement in substantive decision-making. Similarly, the Pilot Program applies if the investment would result in a board seat, decision-making power, or the disclosure of non-public information about a company.

CFIUS has an explicit carve-out for minority "passive" investments by a foreign person through investment funds or limited partnerships notwithstanding the foreign person's membership on the fund's advisory board or a committee fund when the fund is managed by a U.S. person and foreign limited partners have no control over the fund.

3. Real Estate Investments

CFIUS will have expanded jurisdiction to review certain real estate transactions (including short-term leases or new development / "Greenfields") that involve property located near sensitive U.S. government, military facilities or key infrastructure such as airports and ports. Proximity to government contractors would also be covered.

There is an exception for personal housing or real estate located in an "urbanized area."

4. Changes to the CFIUS Review Process

A CFIUS review has previously been mostly on a voluntary process in which the parties would: (a) submit a draft notification form to be reviewed by CFIUS, (b) followed by an informal preliminary review period for CFIUS upon completion of which CFIUS will advise parties to file their formal notice, (c) followed by an initial 30-day review period, (d) with the option for CFIUS to open a subsequent 45-day investigation period. This often resulted in delays and CFIUS' requests to "pull and refile" that pushed back reviews by many months.

There will now be a short-form filing of five pages or less at least 45 days before the completion of a transaction. CFIUS will be required to respond within 30 days by either: (a) clearing the transaction; (b) requesting that the parties file a formal notice; (c) informing the parties that CFIUS is unable to complete action based on the information provided and the parties may file a written notice; or (d) initiating a unilateral review of the transaction. Once filed, FIRRMA will also lengthen the initial review period from 30 to 45 days, followed by, if necessary, one 15-day extension for "extraordinary circumstances." The change from 30 to 45 days for the initial review period has already taken effect.

FIRRMA makes CFIUS "declarations" mandatory where a foreign person, in which a foreign government has a "substantial interest," acquires a "substantial interest" in a U.S. critical infrastructure/technology company or a U.S. company that handles large amounts of U.S. persons' sensitive personal data. Additionally, FIRRMA provides CFIUS discretion to require notification of transactions in which foreign persons acquire certain U.S. critical technology companies, which it recently did through the October 10 Pilot Program.

Currently, there is no fee to notify a transaction to CFIUS. FIRRMA authorizes CFIUS to charge a fee not to exceed the lesser of 1 percent of the value of the transaction or $300,000.

5. Export Control

FIRRMA originally covered outbound transfers of intellectual property. This aspect was removed from the final bill due to significant opposition by the U.S. technology industry. However, Congress simultaneously passed the ECRA to complement FIRRMA in addressing U.S. national security concerns regarding expansion of Chinese technology investment. ECRA requires the Department of Commerce to identify and control the export of emerging and foundational technologies. By contrast, the export control process previously only focused on military and dual use technologies.

The term "emerging and foundational" technology is not defined in ECRA. However, ECRA clearly targets China's effort to enhance its standing in critical technology (including Made in China 2025) and focus on making investments in and entering into joint ventures with U.S. companies as a means to access important technologies.

ECRA will give the U.S. more insight and control over the export, re-export or in-country transfer of such emerging and foundational technology. The law defines its mandate as ensuring the U.S. can "maintain its leadership in the science, technology, engineering and manufacturing sectors, including foundational technology that is essential to innovation."

ECRA will authorize the Department of Commerce to compel various disclosures by certain applicants for licenses to transfer emerging and foundational technologies, including ultimate ownership of the party requesting the license.

Through regulations that will ultimately be promulgated, "emerging and foundational" technologies will be defined and the import/ export licensure process will provide the U.S. with significant insight into the global supply chain as well as the ability to better limit access of key technologies to foreign countries such as China.

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