With the recent passage of the U.S. Foreign Investment Risk Review Modernization Act (“FIRRMA”), businesses and investors have been watching closely to see exactly how the law will expand the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”). On November 10, a pilot program to address CFIUS’ expanded jurisdiction over transactions involving critical technologies went into effect, providing some clarity around some of the questions of FIRRMA’s implementation and CFIUS’ expanded jurisdiction.
The pilot program expands CFIUS’ jurisdiction to cover a range of additional transactions involving the acquisition of equity interests in U.S. businesses (“pilot program U.S. businesses”) that (1) produce, design, test, manufacture, fabricate or develop “critical technologies” that are then (2) used or designed for use in certain sensitive industries identified in the rule. Importantly, the pilot program also makes it mandatory for parties to file with CFIUS when their investment in a pilot program U.S. business is either a “pilot program covered investment” (i.e., one that is sufficient to trigger the expansion of CFIUS’ expanded jurisdiction, explained below) or any transaction that could result in a foreign control of a pilot program U.S. business (i.e., the traditional CFIUS jurisdictional test). The mandatory nature of these filings is a marked change for CFIUS. Previously, CFIUS was entirely a voluntary process; though the only way to receive a legal guarantee that the U.S. president would not unwind a transaction post-closing, or that CFIUS would not change the material terms of the transaction, was to file with CFIUS and receive approval or confirmation that the transaction was not subject to CFIUS jurisdiction.
The rule defines “critical technologies” as:
(a) Defense articles or defense services included on the United States Munitions List set forth in the International Traffic in Arms Regulations (ITAR) (22 CFR parts 120-130).
(b) Items included on the Commerce Control List set forth in Supplement No. 1 to part 774 of the Export Administration Regulations (EAR) (15 CFR parts 730-774) and controlled:
- Pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology; or
- For reasons relating to regional stability or surreptitious listening.
(c) Specially designed and prepared nuclear equipment, parts and components, materials, software, and technology covered by 10 CFR part 810 (relating to assistance to foreign atomic energy activities).
(d) Nuclear facilities, equipment, and material covered by 10 CFR part 110 (relating to export and import of nuclear equipment and material).
(e) Select agents and toxins covered by 7 CFR part 331, 9 CFR part 121, or 42 CFR part 73.
(f) Emerging and foundational technologies controlled pursuant to section 1758 of the Export Control Reform Act of 2018.
The 27 selected industries are critical to U.S. technological superiority and national security and were selected because they could be targeted by strategic foreign investment. As noted, a pilot program U.S. business is one that produces, designs, tests, manufactures, fabricates, or develops a critical technology that is:
(a) Utilized in connection with the U.S. business’s activity in one or more pilot program industries; or
(b) Designed by the U.S. business specifically for use in one or more pilot program industries.
The selected industries include, among others:
- Aircraft, Aircraft Engine, or Engine Parts Manufacturing
- Alumina Refining and Primary Aluminum Production and Secondary Smelting and Alloying of Aluminum
- Computer Storage Device Manufacturing
- Electronic Computer Manufacturing
- Guided Missile and Space Vehicle Manufacturing
- Military Armored Vehicle, Tank, and Tank Component Manufacturing
- Nuclear Electric Power Generation
- Optical Instrument and Lens Manufacturing
- Petrochemical Manufacturing
- Power, Distribution, and Specialty Transformer Manufacturing
- Primary Battery Manufacturing
- Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing
- Research and Development in Nanotechnology or Biotechnology
- Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing
- Semiconductor and Related Device Manufacturing
- Storage Battery Manufacturing
- Telephone Apparatus Manufacturing
- Turbine and Turbine Generator Set Units Manufacturing
CFIUS already had the jurisdiction to review transactions in which a foreign person gained “control” of a U.S. business, and CFIUS’ threshold for such control was already considerably lower than market perceptions of control. But FIRRMA, and the pilot program’s implementation of the law, expand CFIUS’ jurisdiction to cover “pilot program covered investments.” These are non-controlling investments, whether direct or indirect, by foreign persons in U.S. businesses in which the foreign person gains:
- Access to any material nonpublic technical information about the U.S. business;
- Membership or observer rights on the board of directors or equivalent governing body of the U.S. business; or
- Any involvement, other than through the voting of shares, in the substantive decision-making of the U.S. business regarding the use, development, acquisition, or release of critical technology.
CFIUS has provided answers to Frequently Asked Questions to address the new pilot program. These responses clarify that “substantive decision-making” can include decisions about licensing, pricing, or supplying a critical technology, as well as decisions about corporate strategy and business development, research and development, manufacturing locations, access, storage and protection, strategic partnerships, and oversight of a critical technology.
The pilot program will also implement a key part of FIRRMA: CFIUS is using its discretionary authority to require parties to these pilot program covered transactions to file mandatory declarations with CFIUS (or, in lieu of that, full notifications). These declarations are abbreviated notices that provide basic information about the transaction. Under the pilot program, mandatory declarations must be filed at least 45 days prior to a transaction’s expected completion date. Within 30 days of accepting a declaration, CFIUS may either: (1) request a written notice from the parties (the acceptance of which would begin CFIUS’ 45-day review process, (2) unilaterally take action to review the transaction, or (3) conclude its action with respect to the transaction. CFIUS has provided a template, five-page mandatory declaration form on its website for parties to use when filing a mandatory declaration.
The pilot program is an important step in the implementation of the FIRRMA. As CFIUS develops its new procedures and requirements, businesses and investors would be well-served to keep a close eye on these developments.