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Proposed Legislation Would Expand CFIUS’ Jurisdiction to Review Foreign Investment in the United States

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On November 8, 2017, bipartisan bills were introduced in the House of Representatives and the Senate to amend Section 721 of the Defense Production Act of 1950 to revise the processes and authorities of the Committee on Foreign Investment in the United State (“CFIUS” or the “Committee”) to address perceived national security threats posed by certain types of foreign investment in the United States. The bills, entitled the Foreign Investment Risk Review Modernization Act of 2017 (“FIRRMA”), were introduced by a bipartisan group of lawmakers led by Representative Robert Pittenger (R-N.C.) and Senator John Cornyn (R-TX).

If passed, the proposed legislation will significantly expand the scope of transactions subject to CFIUS review, as well as the scope of factors that are deemed to present a national security threat or vulnerability. This update provides an overview of the bill, including some of the more notable provisions, which would, among other things, expand the scope of CFIUS’ review authority, require mandatory (i.e., non-voluntary) declarations of certain transactions, and lengthen the timeline for CFIUS reviews.

Expansion of “Covered Transaction” Definition

The proposed law would expand the scope of “covered transactions” subject to CFIUS’ jurisdiction to include:

  • any purchase or lease of real estate in “close proximity” to a U.S. military installation or other sensitive U.S. government property that “meets other such criteria as the Committee prescribes by regulation;”
  • any investment (other than passive investment1) by a foreign person in a U.S. “critical technology company”2 or “U.S. critical infrastructure company,”3 regardless of whether such investments result in foreign person “control” of the U.S. company;
  • any contribution by a U.S. critical technology company of intellectual property and support to a foreign person through “any type of arrangement,” such as a joint venture, other than through an “ordinary customer relationship;”
  • any other transaction or arrangement where the structure is designed or intended to evade or circumvent the application of this law.

Under FIRRMA, CFIUS would be permitted to further define certain categories of “covered transactions” by reference to the technology, sector or subsector, transaction type, or other characteristics of a transaction. CFIUS would also be able to exempt transactions from certain countries from review based on factors such as whether the country has a mutual defense treaty with the U.S. or an arrangement to safeguard national security with respect to foreign investment. Moreover, the proposed legislation mandates that CFIUS clarify that a “covered transaction” includes any transaction described in FIRRMA that arises from a bankruptcy proceeding or other form of default on debt.

Expansion of National Security Factors

FIRRMA would expand the national security factors to be considered by CFIUS in its review of foreign investment transactions. These changes are in direct response to concerns raised by recent trends in foreign investment that are seen to threaten U.S. economic and technological leadership. Specifically, U.S. policy makers and legislators have grown increasingly concerned about Chinese investment and the Chinese government’s alleged strategic goal to acquire certain U.S. critical technologies. In addition, they are concerned with U.S. cybersecurity vulnerabilities and foreign interference in U.S. elections. Reflecting these concerns, the list of national security factors would be expanded to include, among other things:

  • whether the covered transaction is likely to reduce the technological and industrial advantage of the U.S. relative to any “country of special concern”4;
  • whether the covered transaction is likely to contribute to the loss of or other adverse effects on technologies that provide a strategic national security advantage to the U.S.;
  • the degree to which the covered transaction is likely to increase the cost to the U.S. government of acquiring or maintaining equipment and systems that are necessary for defense, intelligence, or other national security functions;
  • the potential national security-related effects on the cumulative market share of any one type of infrastructure, energy asset, critical material, or critical technology by foreign persons;
    • In its definition of “critical technology,” the bills provide for CFIUS to consider whether a transaction would increase foreign market share in emerging technologies considered “essential for maintaining or increasing the technological advantage of the United States over ‘countries of special concern.’” Note, this would open the door for CFIUS to consider economic and market impacts of Chinese technology investments across the board.
  • whether any foreign person that would acquire an interest in a U.S. business or its assets as a result of the covered transaction has a history of—
    • complying with U.S. laws and regulations, including laws and regulations pertaining to exports, the protection of intellectual property, and immigration; and
    • adhering to contracts or other agreements with the U.S. government;
  • the extent to which the transaction is likely to expose, either directly or indirectly, personally identifiable information, genetic information, or other sensitive data of U.S. citizens to access by a foreign government or foreign person that may exploit that information in a manner that threatens national security;
  • whether the covered transaction is likely to have the effect of creating any new cybersecurity vulnerabilities in the U.S. or exacerbating existing cybersecurity vulnerabilities;
  • whether the transaction is likely to result in a foreign government gaining a significant new capability to engage in malicious cyber-enabled activities against the United States, including activities designed to affect the outcome of any election for federal office;
  • whether the transaction involves a “country of special concern” that has demonstrated or declared a strategic goal of acquiring a type of critical technology that a U.S. business possesses;
  • whether the transaction is likely to facilitate criminal or fraudulent activity affecting the national security of the U.S.;
  • whether the covered transaction is likely to expose any information regarding sensitive national security matters or sensitive procedures or operations of a federal law enforcement agency with national security responsibilities to an unauthorized foreign person.

Mandatory Declarations for Certain Covered Transactions with Foreign Government Interests

The bills would require mandatory declarations “with basic information regarding the transaction” in the case of certain covered transactions involving the acquisition of at least a 25 percent voting interest in a U.S. business by a foreign person that is 25 percent or more owned, directly or indirectly, by a foreign government. This declaration would be required to be submitted at least 45 days before closing of the transaction or a standard written joint voluntary notice to be submitted at least 90 days before closing. Failure to submit the declaration would subject the parties to a penalty.

The bills also provide that CFIUS may prescribe by regulation the submission of a declaration with respect to any other category of covered transaction at its discretion and based on “appropriate factors.” Furthermore, the legislation requires the Committee to establish a mechanism to identify covered transactions for which a notice or declaration is not submitted.

Modifying the Timing of Reviews, Imposing a Submission Fee, and Creating Judicial Review

FIRRMA would lengthen the timeline for CFIUS reviews and investigations by changing the initial review period from a maximum 30-day period to a maximum 45-day period. In circumstances to be defined by the Committee, CFIUS may extend the 45-day investigation period for one additional 30-day period. As such, the proposed legislation would increase the maximum CFIUS review and investigation period to 120 days, as opposed to the current 75-day period. This extended statutory timeline responds to a growing CFIUS caseload and the trend of extended CFIUS investigations. In recent practice, where CFIUS has not concluded its investigation within the allotted 75-day period, it has requested parties to withdraw and resubmit the Notice to restart the timeline.

Additionally, the proposed legislation would create a limited right of judicial review of a CFIUS action where a party alleges that the action violates a constitutional right, power, privilege or immunity. This right would be limited to parties that have initiated the review by filing a standard written joint voluntary notice or declaration.

Finally, FIRRMA would provide for the Committee to assess a fee for the submission of a written notice of a covered transaction, to a maximum of the lesser of 1 percent of the value of the transaction or $300,000, adjusted annually for inflation.

Potential Implications of the Proposed Law

Foreign Investment Involving “Critical Technologies” - If FIRRMA becomes law, parties to foreign investment transactions would likely see more technology deals fall under the purview of CFIUS, including joint venture arrangements involving the contribution of intellectual property by U.S. technology companies and transactions that do not necessarily result in “control” by a foreign person. Moreover, the provision addressing critical technology could be interpreted to extend to certain “greenfield” investments as the bills would expand the meaning of a covered transaction to include “any type of arrangement” involving the contribution of intellectual property. The bills’ new understanding of “critical technologies” might also pull smaller, low profile technology deals into CFIUS’ orbit as CFIUS will have a mandate to target emerging technologies.

Foreign Investment Involving “Big Data” - Under FIRRMA, foreign investment transactions involving “big data” would be scrutinized for national security concerns as the U.S. government increasingly sets its sights on protecting big data from nefarious foreign government uses. As more businesses accumulate and depend on such data, more transactions are likely to come under scrutiny based on this new national security ground.

Foreign Investment Involving Real Estate - Under FIRRMA, parties to a foreign investment transaction involving real property in the United States would have to engage in thorough due diligence at the outset of negotiations to determine whether there are any U.S. military or sensitive government facilities in proximity to the real property. Additionally, parties should determine whether any real property assets involved in the transaction include a U.S. government lease, particularly long-term leases with sensitive government agencies.

Longer and Costlier Reviews - Parties to a covered transaction will have to plan for longer and costlier CFIUS reviews if the proposed legislation becomes law. In this regard, parties will need to consider the impact that a lengthy and costly review will have on the anticipated deal timeline. Furthermore, parties may have to consider allocating more resources to manage an extended review period.

On November 8, 2017, the House bill was referred to the Committees on Financial Services, Energy and Commerce, Foreign Affairs, Intelligence, Armed Services, and the Budget for a period to be subsequently determined by the Speaker of the House. The House bill currently has 15 cosponsors, including 12 Republicans and 3 Democrats. The Senate bill has yet to be referred to the relevant committees for consideration. It currently has 9 cosponsors, including 5 Republicans and 4 Democrats.

1The proposed definition of “passive investment” has been narrowed to mean an investment that does not allow the foreign person (i) access to nonpublic technical information in the possession of a U.S. business; (ii) access to any nontechnical information in the possession of a U.S. business that is not available to all investors; (iii) membership or observer rights on the board of directors or the right to nominate an individual to such a position; (iv) any involvement, other than through voting of shares, in substantive decision-making related to any matter involving the U.S. business; and (v) where the foreign person and U.S. business do not have a parallel strategic partnership or other material financial relationship.
2A “critical technologies company” is defined as “a United States business that produces, trades in, designs, tests, manufactures, services, or develops one or more critical technologies, or a subset of such technologies,” including technologies controlled under U.S. export controls, nuclear-related technologies, controlled agents and toxins, and “other emerging technologies that could be essential for maintaining or increasing the technological advantage of the United States over ‘countries of special concern’ with respect to national defense, intelligence, or other areas of national security, or gaining such an advantage over such countries in areas where such an advantage may not currently exist.”
3A “critical infrastructure company” is broadly defined to refer to any company that provides services to, an entity or entities that operate within a “critical infrastructure sector or subsector,” as defined by regulations to be prescribed by the Committee.
4The bills define a “country of special concern” as a “country that poses a significant threat to the national security interest of the United States.” The bills clarify that CFIUS is not required to maintain a list of countries of special concern.


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