The Committee on Foreign Investment in the United States (CFIUS, pronounced SIFF-ee-yus) is a government interagency that assesses the national security risks surrounding foreign investment in U.S. businesses. Before the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), CFIUS regulations authorized CFIUS and the President to review any “covered transaction,” which ws defined as any transaction “by or with any foreign person, which could result in control of a U.S. business by a foreign person.” The specific nationality of the foreign person is irrelevant.
CFIUS has statutory authority to reviews foreign transactions, impose agreements or conditions that address the national security concerns, and recommend the President block a transaction or order the divestiture of a completed transaction. Regardless of whether the covered transaction is pending or completed, CFIUS has the authority to unwind the deal.
In order to reduce the risk of a CFIUS review or the divestiture of a completed transaction, companies could file a voluntary notice with CFIUS seeking safe harbor clearance for the transaction.
Until recent years, CFIUS has infrequently intervened and rarely halted covered transactions. Whether it is due to the increasing number of acquisitions of U.S. businesses by foreign entities or Trump’s “America First” economic and foreign policies, CFIUS has become a household name (if you’re involved in the foreign investment community, at least!). Even before President Trump signed FIRRMA into law, his mark on CFIUS cases has been unmistakable. In September 2017, CFIUS halted the acquisition of a U.S.-based chipmaker by a Chinese-backed equity firm. In January 2018, CFIUS blocked a Chinese electronic payment company’s acquisition of MoneyGram. And in March 2018, CFIUS prohibited Broadcom’s purchase of Qualcomm.
FIRRMA
In August 2018, for the first time in over a decade, President Trump signed into law amendments to CFIUS regulations; namely, FIRRMA. CFIUS regulations were amended due to concerns that critical technologies were being transferred to foreign countries (primarily China) as a result of foreign investment in U.S. businesses. FIRRMA expands CFIUS’ power in 3 critical ways:
1. As mentioned above, CFIUS previously had the authority to review covered transactions that would result in a foreign entity’s controlling interest in a U.S. business. Following the implementation of FIRRMA, CFIUS now has the ability to proactively review covered transactions that would result in a foreign entity’s non-controlling interest in a U.S. business that is related to or potentially affects “critical technologies.” The list of “pilot programs” below covers all critical technologies.
2. The new regulations provide for mandatory filings with CFIUS. Previously, companies involved in a foreign transaction could file a voluntary notice with CFIUS in order to qualify for a safe harbor. Now, “pilot program” businesses involved in a covered transaction are required to file a notice with CFIUS.
There are 27 Pilot Program Industries:
- Aircraft Manufacturing
- Aircraft Engine and Engine Parts Manufacturing
- Alumina Refining and Primary Aluminum Production
- Ball and Roller Bearing Manufacturing
- Computer Storage Device Manufacturing
- Electronic Computer Manufacturing
- Guided Missile and Space Vehicle Manufacturing
- Guided Missile and Space Vehicle Propulsion and Propulsion Unit Parts Manufacturing
- Military Armored Vehicle, Tank, and Tank Component Manufacturing
- Nuclear Electric Power Generation
- Optical Instrument and Lens Manufacturing
- Other Basic Inorganic Chemical Manufacturing
- Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing
- Petrochemical Manufacturing
- Powder Metallurgy Part Manufacturing
- Power, Distribution, and Specialty Transformer Manufacturing
- Primary Battery Manufacturing
- Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing
- Research and Development in Nanotechnology
- Research and Development in Biotechnology (except Nanobiotechnology)
- Secondary Smelting and Alloying of Aluminum
- Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing
- Semiconductor and Related Device Manufacturing
- Semiconductor Machinery Manufacturing
- Storage Battery Manufacturing
- Telephone Apparatus Manufacturing
- Turbine and Turbine Generator Set Units Manufacturing
It is important to note that what goods and services are included (or excluded) in a “pilot program” is a matter of interpretation, and thus subject to litigation.
3. Last, CFIUS now has additional jurisdiction over real estate transactions located near sensitive government locations, ports, or airports.
HOW TO COMPLY WITH FIRRMA & SURVIVE CFIUS REVIEW
CFIUS is committed to maintaining an open investment climate in the U.S., so most businesses will find complying with FIRRMA to be manageable. However, failure to comply with FIRRMA regulations could be disastrous for your pending or completed foreign transactions. There will likely be an attorney involved with the transaction already, but it is important to retain a CFIUS-competent attorney to guide you through the process and to avoid the unwinding of a deal.
The wisest and most conservative option for complying with FIRRMA is to pre-file with CFIUS so that you may ascertain whether the deal will receive CFIUS approval before the business expends tremendous negotiation/transaction costs.
Before engaging in a foreign transaction, a U.S. business should conduct its own review of the transaction, similar to the kind of review CFIUS would conduct. If the U.S. business flags any potential national security risks, the business should develop measures to mitigate those risks, specifically, how the U.S. business would limit foreign control or access to sensitive information or technology. The ability to develop and demonstrate effective mitigation measures could mean the difference between receiving CFIUS approval or having the deal blocked. The business should then develop a compliance plan that reflects the above mitigation measures – be sure to include and implement third party audits!
Finally, U.S. businesses are authorized to bring civil actions challenging a CFIUS action or finding in the U.S. Court of Appeals for the District of Columbia.
With the U.S. being the largest beneficiary of foreign direct investment (FDI), CFIUS is charged with the tough job of ensuring national security while promoting foreign investment. With increasing data breaches, the convergence of military and commercial technologies, and the policies of some foreign countries (particularly China) to displace U.S. technological leadership, the FIRRMA regulations seem like an appropriate, albeit pestering, response.
Sources:
Photo Sources:
https://www.dtsa.mil/SitePages/assessing-and-managing-risk/committee-on-foreign-investement-in-us.aspx
https://www.trevorloudon.com/2018/05/china-is-buying-america-with-and-without-cfius/
https://www.selectusa.gov/FDI-in-the-US
https://medium.com/@sashahodler/the-foreign-investment-risk-review-modernization-act-of-2018-firrma-5809081af194