The US House and Senate have passed, and will soon send to President Trump for his signature, a bill that includes a major reform of the Committee on Foreign Investment in the United States (“CFIUS”), and of the process by which foreign investment transactions are reviewed by the United States for national security risks, entitled the “Foreign Investment Risk Review Modernization Act of 2018” (“FIRRMA”).
The bill is the final iteration of CFIUS reforms that were initially proposed in late 2017. This language would expand CFIUS’ jurisdiction to review transactions involving foreign persons, though legislators have removed language from previous versions, which would have also expanded CFIUS jurisdiction to cover certain outbound investments or transfers of sensitive intellectual property. The bill, however, does make a number of reforms to the export control laws instead (although not the subject of this Legal Update).
The effective dates for provisions in the bill vary. Of the provisions which will take effect upon enactment, the most notable for investors is a timeline extension for the initial review period, which will go to 45 days (currently 30 days). If CFIUS cannot clear a transaction before the end of the review period, CFIUS can move to the investigation period, which is currently 45 days. However, upon the promulgation of regulations, CFIUS will eventually have the authority under extraordinary circumstances to extend the investigation period another 15 days.
Among the provisions with a delayed effective date, which is the earlier of 18 months following enactment or 30 days after the CFIUS chairperson determines CFIUS has sufficient resources, the most notable are the expansion of the types of transactions—called “covered transactions”—over which CFIUS has jurisdiction. Under current law, CFIUS jurisdiction extends only to a merger, acquisition or takeover by a foreign person that could result in foreign “control” of a US business—which, as CFIUS defines it, is a lower threshold than typical market definitions. FIRRMA principally expands CFIUS’ jurisdiction in two ways. First, it will cover real estate transactions located within important ports or near military installations or other sensitive US government facilities.
Second, the bill would also expand CFIUS’ jurisdiction to include any other investment by a foreign person in a US business that (1) owns, operates, manufactures, supplies or services critical infrastructure; (2) produces, designs, tests, manufactures, fabricates or develops critical technologies; or (3) maintains or collects the sensitive personal data of US citizens that may be exploited in a manner that threatens national security. These “other investments” will include investments in US businesses that would not otherwise be covered by CFIUS and which afford a foreign person (1) access to material nonpublic technical information; (2) membership or observer rights on the board of directors of a US business; or (3) involvement in decision-making regarding the sensitive personal data of US citizens, critical technologies or critical infrastructure. Such “other investments” will not include indirect investments in US businesses by a foreign person through an investment fund as a limited partner, assuming the fund is managed by a general partner who is not a foreign person and the foreign person does not have the ability to control the fund or its investment decisions.
The bill also provides for a new type of notification to CFIUS, known as a “declaration”—in effect, a shorter form than a formal notification. Parties to covered transactions may submit declarations to CFIUS, which will be acted upon by CFIUS within 30 days. In response to these declarations, CFIUS may request that the parties file a written notice, initiate a unilateral review of the transaction or notify the parties that CFIUS will not take any further action regarding the transaction.
In general, notifying CFIUS of a transaction will remain a voluntary process (although, as under current law, the only way to receive a safe harbor that CFIUS or the president will not block, unwind or alter the terms of a transaction is to notify CFIUS). However, parties will be required to notify CFIUS through a declaration or filing when a transaction will result in a substantial interest in certain sensitive US businesses (i.e., those involved in critical infrastructure, critical technologies or sensitive personal identifier information) by a foreign person in which a foreign government has a substantial interest. CFIUS will also have the authority, through the promulgation of regulations, to expand this mandatory declaration requirement to transactions involving other types of investors for companies involved in critical technologies and to prohibit parties from completing any mandatory declaration transactions for a waiting period that begins once the parties have notified CFIUS. Congress specified that this waiting period has a maximum length of 45 days. The term “substantial interest” will be defined through regulations, although Congress specified that less than 10 percent of voting interest will not be considered a “substantial interest.” CFIUS will also have the authority to waive this mandatory requirement for foreign persons if the committee determines that the foreign person demonstrates that their investments are not directed by a foreign government and has a history of cooperation with CFIUS.
The bill also provides for funding of CFIUS, both through the authorization of $20 million to be appropriated for CFIUS’ administration, and by providing for a fee structure to be implemented through regulation. If CFIUS decides to institute such a fee structure, the legislative language limits fees to the lesser of one percent of the value of a transaction, or $300,000.