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President Trump Signs Law to Enact Major Reform of Foreign Investment National Security (CFIUS) Reviews

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On August 13, 2018, President Donald Trump signed into law the Foreign Risk Review Modernization Act (“FIRRMA”) of 2018 as part of the 2019 defense authorization act. FIRRMA, which has undergone substantial debate and redrafting in Congress since its introduction in November 2017, represents the most extensive reform in more than a decade to the procedures and authorities by which the Committee on Foreign Investment in the United States (“CFIUS” or “Committee”) reviews foreign investment in the U.S. for national security concerns.

FIRRMA, in relevant part, expands the Committee’s scope of review to transactions that were previously not within its mandate, including non-controlling investments in certain categories of U.S. businesses and certain real estate transactions. FIRRMA also amends the Committee’s review process to provide some parties with the opportunity to have their proposed transactions reviewed and approved in a more expeditious manner, while at the same time requiring mandatory filings for other parties and transactions. Additionally, FIRRMA imposes a number of administrative changes to the CFIUS process, including extending the time frame for the Committee's review of a transaction and authorizing the Committee to assess a filing fee for the review process.

I. FIRRMA’s Expansion of CFIUS’s Jurisdiction to Review Foreign Investment

FIRRMA amends the definition of a “covered transaction” (as defined in existing regulations) to significantly broaden the Committee’s authority to review transactions previously not within its jurisdiction. Specifically, FIRRMA makes the following additional categories of transactions subject to CFIUS’s jurisdiction:

  • Non-controlling investments in certain categories of U.S. businesses: Previously, CFIUS’s mandate was limited to transactions that result in the control of a U.S. business by a foreign person. FIRRMA breaks from this mandate by authorizing the Committee to review “other investments” in an “unaffiliated United States business” that:
    • “owns, operates, manufactures, supplies, or services” critical infrastructure;1
    • “produces, designs, tests, manufactures, fabricates, or develops” critical technologies; or
    • maintains or collects the personal identifying information (“PII”) of U.S. citizens that could be used in a manner that threatens national security.

    FIRRMA defines “other investments” as any investments by a foreign person in any of these three categories of U.S. businesses that provides the foreign person with (1) access to material nonpublic technical information in the possession of such U.S. businesses; (2) membership or observer rights on the board of directors; (3) or involvement in substantive decisionmaking regarding the sensitive PII of U.S. citizens, critical technologies, and critical infrastructure. An “investment” under FIRRMA is defined as an “acquisition of equity interest, including contingency equity interest,” but will be further defined by CFIUS in forthcoming regulations. 

    • Exception for certain investment funds: FIRRMA exempts from “other investments” a foreign person’s indirect investment through an investment fund, where the foreign person is a limited partner or a member of an advisory board or a committee of the fund, provided that (1) the fund is exclusively managed by a U.S. general partner (or equivalent); (2) the advisory board or committee does not have the ability to control investment decisions of the fund or decisions made by the general partner; (3) the foreign person does not otherwise have the ability to control the fund; and (4) the foreign person does not have the ability to access material nonpublic information2 as a result of its participation on the advisory board or committee.
  • Certain real estate transactions: FIRRMA expands the Committee’s jurisdiction to review the purchase or lease by, or concession to, a foreign person of private or public real estate that is located in the United States and is in close proximity to a U.S. military installation or other sensitive U.S. Government facility or property or that “is, is located within, or will function as part of, an air or maritime port.” FIRRMA clarifies that a single “housing unit” and real estate located in “urbanized areas,” as defined by the U.S. Census Bureau, are exempt from the Committee’s jurisdiction.

Notably, this expanded authority may erode the “greenfield” exception under current regulations by authorizing the Committee to review transactions relating to only the purchase or lease by, or concession to, a foreign person of real estate that falls within the criteria described above.

  • Change in rights: FIRRMA expands the definition of a covered transaction to include any change in a foreign person’s rights in a U.S. business that would result in (1) control of a U.S. business; or (2) any “other investment,” as described above. Importantly, given the construction of this language, it is possible that CFIUS would have jurisdiction over such transactions regardless of whether it had previously reviewed and cleared a related transaction.

II. Changes to the CFIUS Review Process and Procedures

FIRRMA makes several notable changes to the CFIUS process, including the following:

  • Timeframe for Reviews: Under current regulations, the authorizing legislation provides that the CFIUS review process may take as long as 75 days, with the initial 30-day review period and the possibility for the Committee to undertake an optional 45-day investigation. Under FIRRMA, the Committee’s initial 30-day review period will be extended to 45 days, while retaining the current additional 45-day investigation period. FIRRMA will also provide CFIUS with the option to extend the 45-day investigation period for a one-time 15-day period, but only under “exceptional circumstances” (to be defined by the Committee through regulations). Accordingly, under FIRRMA the CFIUS review process will be extended to a minimum of 45 days under the initial review period or a maximum of 105 days.

On its face, this may appear as a burden for parties who already struggle with factoring in the CFIUS timeframe to their deals. However, based on CFIUS’s current practice, which often sees even some innocuous deals take the full 75-day review and investigation period, the extended timeframe may actually shorten the review process by giving the Committee additional time to review more complex transactions and more efficiently manage its caseload.

  • Statutory timeframe for CFIUS’s acceptance of draft or formal notices: Under the prior statutory authority, there was no required maximum timeframe for CFIUS to provide comments on a draft notice or accept a formal notice. FIRRMA imposes a statutory 10-day timeframe for the Committee to either provide comments on the draft filing or accept the formal filing, which starts the clock for the initial review period and brings considerable predictability to the timing of the overall review process.

Currently, many parties struggle to plan for the closing of their deals because, while CFIUS requires the parties to a voluntary notice to submit the notice in draft and await formal CFIUS acceptance, the timeframe of this preliminary CFIUS process is variable. This amendment in particular is intended to provide parties with more certainty in planning deal timelines.

  • Voluntary declarations: FIRRMA amends the CFIUS process to allow any party to a covered transaction to submit a declaration with “basic information” about the transaction to the Committee in leu of a full written notice. FIRRMA authorizes the Committee to prescribe regulations establishing the requirements for a voluntary declaration but notes that they should generally not exceed five pages.

Upon receiving the declaration, CFIUS is required to respond to the parties within 30 days and either (1) request that the parties submit a full written notice; (2) inform the parties that it cannot conclude action on the basis of the declaration and that the parties may submit a full written notice seeking written confirmation from the Committee that is has concluded action with respect to the transaction; (3) initiate a unilateral review of the transaction; or (4) inform the parties that it has concluded all action with respect to the transaction.

This approach to the CFIUS review process may benefit certain parties that have “low risk” transactions. In particular, the voluntary declaration may provide such parties with the opportunity to expedite the review of their transaction and would significantly reduce the amount of resources required to obtain CFIUS’s approval. Such transactions would likely involve acquisitions in industries that have a lower national security risk profile or that involve buyers from certain “low risk” countries (e.g., countries that have historically been U.S. allies).

  • Mandatory filings: Prior to FIRRMA’s passage, the CFIUS process was entirely a voluntary one that parties could pursue in order to obtain “safe harbor” for a transaction. Under FIRRMA, however, filings will be mandatory in certain transactions.

In this regard, FIRRMA requires parties involved in the acquisition of a “substantial interest” in a U.S. business involved in critical technology, critical infrastructure, or the collection and maintenance of sensitive PII of U.S. citizens by a foreign person in which a foreign government has a “substantial interest”3 to submit a mandatory declaration to CFIUS. Importantly, FIRRMA exempts such acquisitions involving investment funds with foreign limited partners from mandatory declarations if the fund is managed exclusively by a U.S. general partner and the foreign limited partner does not have control of the fund.

  • Filing fee: As noted above, FIRRMA authorizes the Committee to impose a discretionary filing fee on parties that submit their transaction for review. The fee will be based on the value of the transaction and may not exceed the lesser of 1 percent of the transaction or $300,000. Importantly, FIRRMA notes that in assessing the amount of the fee, CFIUS should consider the effect that such a fee could have on small businesses.
  • Provision of Additional Resources: FIRRMA allocates additional resources aimed at alleviating certain timing and administrative-related burdens. In particular, FIRRMA allows for the creation of the position of Assistant Secretary for Investment Security in the U.S. Department of the Treasury’s Office of International Affairs, whose duties are to be principally related to the Committee. In addition, FIRRMA provides for the establishment of a CFIUS Fund, with $20 million allocated to such fund for fiscal years 2019 through 2023.

III. FIRRMA’s Effective Date

Many of the provisions in FIRRMA, including the amended timeframe for reviews, are effective immediately. However, a number of the substantive changes to CFIUS’s jurisdiction, including several of the new categories of “covered transactions,” will not go into effect until the earlier of (i) 18 months after FIRRMA’s enactment; or (ii) 30 days after the Secretary of the Treasury certifies that the regulations, organizational structure, personnel, and other resources that are necessary to administer such provisions are in place. The new regulations will apply to transactions that are “proposed, pending, or completed” within 30 days after CFIUS issues new regulations. Any transaction by that time that was not already filed under the current CFIUS rules and procedures will be subject to the new regulations.

Please contact one of the authors below or your Baker Botts relationship attorney with any questions.

1In practice, CFIUS has typically understood the term critical infrastructure broadly. For the purposes of “other investments” in critical infrastructure however, FIRRMA requires the Committee to implement regulations that will specify the critical infrastructure. Such regulations are to be based on criteria “intended to limit application” of “other investments” to the “subset” of critical infrastructure that is “likely to be of importance to the national security of the United States.” Moreover, FIRRMA requires the Committee to “enumerate specific types and examples of such critical infrastructure” in the regulations.
2FIRRMA defines “material nonpublic information as information that (i) “provides knowledge, know-how, or understanding, not available in the public domain, of the design, location, or operation of critical infrastructure” or (ii) “is not available in the public domain, and is necessary to design, fabricate, develop, test, produce, or manufacture critical technologies, including processes, techniques, or methods.” Such information explicitly excludes “financial information regarding the performance of a United States business.”
3FIRRMA leaves the definition of this term to the Committee, but provides factors for it to consider, including the means by which a foreign government could influence the actions of a foreign person (e.g., through board membership, ownership interest, or shareholder rights). Moreover, FIRRMA explicitly excludes from the definition of the term investments of less than a ten percent voting interest and investments that do not fall within the criteria for “other investments.”

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