President Signs Sweeping Expansion of CFIUS Review of Foreign Direct Investment
On August 13, 2018, President Trump signed into law sweeping changes to the process by which the United States conducts national security reviews of foreign investment through the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”). The first legislative overhaul of CFIUS in more than a decade, the new law — the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), enacted as part of the National Defense Authorization Act of 2019 (“NDAA”) — expands the scope and extent of CFIUS’s review power.1
Certain key aspects of FIRRMA have delayed effective dates and will take shape only through the promulgation of implementing regulations over the next 12-18 months. However, the statute itself portends significant changes. Among other things, it: (i) dramatically expands the jurisdiction of CFIUS, a Treasury-led inter-agency committee tasked with reviewing foreign transactions potentially implicating U.S. national security; (ii) modifies the timing provisions of CFIUS national security review and, for the first time, requires CFIUS filings for certain transactions; (iii) allows for streamlined review of investments from certain countries or entities, and exempts from CFIUS review investments through certain qualifying funds; and (iv) grants CFIUS expanded power to remediate potential threats to U.S. national security.2
The legislation has immediate consequences for foreign investors and their U.S. counterparties contemplating transactions in the United States, not only for direct acquisitions, but also for participation in funds or other investment vehicles. Investors should carefully consider the new law — and additional changes likely to occur over the next 18 months — to assess the substantive and timing risks to transactions that may trigger the Committee’s review.
A more detailed discussion of certain of the key aspects of FIRRMA follows below.
Expansion of CFIUS Jurisdiction
One of the law’s most significant reforms is to expand the kinds of transactions that can trigger CFIUS review. FIRRMA maintains the existing definition of a “covered transaction,” which gives CFIUS authority to review any transaction by or with a foreign person that could result in foreign control over a U.S. business.3 However, FIRRMA also expands CFIUS’s jurisdiction to include the following new kinds of transactions:4
Real Estate Transactions, Including “Greenfield” Investments. Subject to certain limitations, FIRRMA expands CFIUS’s jurisdiction to include transactions in which a foreign person purchases, leases, or obtains a concession for private or public U.S. real estate, if:
- the real estate is located within, or will function as part of, an air or maritime port; or
- the real estate is (a) in close proximity5 to a U.S. military installation or another facility or property of the U.S. government that is sensitive for reasons relating to national security, (b) could reasonably provide a foreign person with the ability to collect intelligence on activities being conducted at such a location, or (c) could otherwise expose national security activities at such a location to the risk of foreign surveillance.
FIRRMA’s real estate provisions could well apply to the acquisition of leasehold interests in exploration and production assets or upstream oil and gas businesses, although the details may be clarified through the rulemaking process. The oil and gas industry will have the opportunity to comment on any draft rules published to implement FIRRMA.
Importantly, the bill does not anticipate that CFIUS would review every qualifying real estate transaction nationwide. Rather, and unless regulations provide otherwise, real estate transactions involving a “single housing unit” or real estate in “urbanized areas” will not trigger CFIUS jurisdiction. Furthermore, FIRRMA directs the Committee to define by regulation the term “foreign person” for purposes of real estate transactions, evidently with the intention of shielding from CFIUS review investments by certain categories of foreign persons, such as those from allied countries or entities that are well known to, and have a demonstrated track record of compliance with, CFIUS.
FIRRMA provisions relating to real estate transactions do not take effect immediately, but rather are subject to the delayed effective dates described below.
Other Investments and Non-Controlling Transactions Involving Critical Infrastructure, Critical Technologies, and Sensitive Personal Data. For many years, the definition of a “covered transaction” has meant that CFIUS could only review a transaction if the foreign person could obtain control. FIRRMA, however, memorializes Congress’s concern that even non-controlling and other investments could pose a threat to U.S. national security. Accordingly, FIRRMA gives CFIUS jurisdiction to review certain “other investments,” where a foreign person obtains a non-controlling interest in an unaffiliated U.S. business engaged in certain enumerated business activities. Those activities include:
- owning, operating, manufacturing, supplying, or servicing critical infrastructure;6
- producing, designing, testing, manufacturing, fabricating, or developing critical technologies;7 and
- maintaining or collecting sensitive personal data of U.S. citizens that may be exploited in a manner that threatens U.S. national security.
Under FIRRMA, not every investment in these sectors will trigger CFIUS jurisdiction.8 Rather, the statute gives CFIUS jurisdiction if a transaction may give a foreign person:
- access to material non-public technical information9 in the possession of the U.S. business;
- membership or observer rights on the board of directors or equivalent governing body of the U.S. business, or the right to nominate an individual to a position on the board of directors or equivalent governing body; or
- an involvement, other than through the voting of shares, in substantive decision making regarding (a) the use, development, acquisition, safekeeping, or release of sensitive personal data of U.S. citizens, (b) the use, development, acquisition, or release of critical technologies, or (c) the management, operation, manufacture, or supply of critical infrastructure.10
Safe Harbor For U.S.-Managed Funds With Foreign Limited Partners
To avoid chilling legitimate investment through funds or other related vehicles, FIRRMA contains a safe harbor, under which foreign investors may in certain circumstances participate in funds without triggering CFIUS review. In particular, a foreign person can make an indirect investment in a U.S. business through an investment fund, including obtaining membership as a limited partner or equivalent on an advisory board or fund committee, without triggering CFIUS review if:
- the fund is managed exclusively by a general partner, a managing member, or some equivalent that is not a foreign person;
- the advisory board or committee does not have the ability to approve, disapprove, or otherwise control (a) investment decisions of the fund, or (b) decisions made by the general partner, managing member, or equivalent relating to entities in which the fund is invested;
- the foreign person does not otherwise have the ability to control the fund, including the authority (a) to approve, disapprove, or otherwise control investment decisions of the fund, (b) to approve, disapprove, or otherwise control decisions made by the general partner, managing member, or equivalent relating to entities in which the fund is invested, or (c) to unilaterally dismiss, prevent the dismissal of, select, or determine the compensation of the general partner, managing member, or equivalent; and
- the foreign person does not have access to material non-public technical information as a result of its participation on the advisory board or committee.
Existing funds with foreign limited partners contemplating U.S. investments should carefully consider whether the role and rights of their foreign limited partners fall within the statutory safe harbor. Given the fact-intensive nature of CFIUS’s definition of “control,” the third prong of the safe harbor (regarding foreign control) will require careful attention. Nonetheless, the statutory safe harbor should provide much-needed predictability in how CFIUS review applies to funds with foreign limited partners, and when filings are appropriate. FIRRMA also establishes that the mere ability of a majority of limited partners to remove a general partner will not trigger CFIUS jurisdiction, without more.
Finally, FIRRMA directs the Committee to promulgate regulations defining the term “foreign person” for purposes of these “other transactions,” with the apparent intention that CFIUS will exclude from its jurisdiction investments of certain categories of foreign persons, presumably those that originate in allied countries or implicate entities that are well known to, and have a demonstrated track record with, CFIUS.
FIRRMA provisions relating to these types of investments are subject to the delayed effective dates described below.
Circumvention or Evasion. Under FIRRMA (and effective immediately), any transaction, transfer, or arrangement designed or intended to evade or circumvent CFIUS jurisdiction will be treated as a covered transaction.
Comment / Acceptance Period. Given its current heavy workload and resource constraints, CFIUS recently has taken as long as four weeks to provide responsive comments on draft notices, injecting a degree of uncertainty and unpredictability about the overall timing of the CFIUS review process. FIRRMA, however, dictates that CFIUS provide comments on a draft (or accept a formal notice for review) within 10 business days of the date of submission, so long as the parties stipulate that transaction is a “covered transaction.” This provision is subject to delayed implementation as described below.
Declarations. Under prior law, the only way to obtain CFIUS clearance of a transaction was to submit a full “Joint Voluntary Notice,” frequently entailing the compilation of voluminous information regarding the parties and the contemplated transaction. FIRRMA, however, establishes a short-form filing mechanism, allowing a five-page “declaration” to be submitted in lieu of a formal notice. For certain parties and more benign transactions, the availability of the short-form filing could substantially alleviate the burden and cost of preparing a formal notice.
Submitting a declaration does not guarantee, however, that a formal notice will not be required. Rather, after reviewing the short-form declaration, CFIUS may: (i) request a formal notice; (ii) inform the parties that it is not able to complete action on the basis of the declaration and inform the parties that they may submit a formal notice to seek written notification from the Committee that it has completed all action; (iii) initiate a unilateral review; or (iv) notify the transaction parties in writing that it has completed all action. In any event, the Committee must take action within 30 days of the date of receipt of a declaration.
The declaration process will not be available immediately; it is subject to delayed implementation as described below.
Mandatory Declarations. Historically, filing a transaction with CFIUS has been a voluntary decision, in which parties weigh the benefits of filing (i.e., CFIUS approval and a statutory safe harbor against future review), against the delay and costs of filing and the risks that CFIUS might later initiate a review of a non-filed transaction. FIRRMA now requires that parties submit either a short-form declaration or a formal notice, for certain transactions involving a foreign person substantially owned by a foreign government. In particular, FIRRMA requires a filing if an investment (i) would result in a substantial interest in a U.S. business relating to critical infrastructure, critical technologies, or sensitive personal data (ii) by a foreign person in which a foreign government holds a substantial interest.11 The term “substantial interest” will be defined by regulation. But FIRRMA specifies that voting interests of less than 10 percent are not “substantial.” FIRRMA also specifies the investments falling into the safe harbor for funds described above are also exempt from the mandatory filing requirement. FIRRMA authorizes the imposition of penalties for a failure to make a mandatory filing.
The mandatory declaration process is also subject to delayed implementation — i.e., in the near term, CFIUS filing will continue to be voluntary until the FIRRMA provisions take effect.
Extended Period for CFIUS Review. Immediately upon enactment, FIRRMA extends the initial CFIUS review period from 30 to 45 days, and authorizes CFIUS to extend the existing 45-day second-stage investigation period by 15 days in extraordinary circumstances. The net effect of these changes potentially results in a 105-day process (even before the 15-day presidential review period).12 FIRRMA does not appear to foreclose the practice — common under existing law — of CFIUS requesting that the parties withdraw and refile a notice, essentially resetting the clock and resulting in a second review period. That said, the need for frequent “withdrawal and refiling” may be reduced given the extended timelines authorized by FIRRMA. The timing provisions take effect immediately.
Non-Notified and Non-Declared Transactions. FIRRMA directs CFIUS to establish a process to monitor and identify transactions that the parties have chosen not to file with CFIUS. Although CFIUS has already undertaken such efforts for years, the statutory mandate may increase the risk that CFIUS chooses to intervene in a non-filed transaction, where CFIUS has learned about a transaction based on public (or other) information.
Judicial Review. FIRRMA gives the United States Court of Appeals for the District of Columbia Circuit exclusive authority to hear challenges to an action taken by CFIUS. Presidential actions — including the decision to block a transaction — remain formally outside the scope of judicial review, but generally can be challenged on constitutional grounds.
Expanded Authority to Impose Mitigation. FIRRMA confirms CFIUS’s longstanding view that it has power to suspend a proposed or pending covered transaction for national security reasons even during the pendency of an ongoing review or investigation. FIRRMA also authorizes CFIUS to enter into an interim mitigation arrangement in connection with transactions that closed before CFIUS review occurred, and to impose mitigation agreements in connection with abandoned transactions. FIRRMA also requires the Committee or the responsible lead agency to develop a plan for monitoring compliance with mitigation agreements.
Other Miscellaneous Changes
Report on Chinese Investment. FIRRMA does not explicitly target investments from any particular country, but does express Congress’s expectation that the Committee may consider, among other things, whether a covered transaction involves “a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership in areas related to national security.” Although FIRRMA does not say so explicitly, the language is clearly intended to include China. Consistent with this concern, FIRRMA directs the Secretary of Commerce to prepare and submit to Congress and CFIUS a report on Chinese investment in the United States within two years of the date of enactment of FIRRMA and every two years thereafter through 2026.
CFIUS Funding and Filing Fees. Historically, CFIUS has suffered from funding and personnel shortfalls, contributing to delays in processing notices during times with large numbers of filings. To offset this problem — which seems likely to be exacerbated by FIRRMA’s expansion of CFIUS jurisdiction — the new law establishes a fund for which $20 million will be appropriated annually through 2023. In addition, FIRRMA authorizes for the first time a filing fee for formal notices, defined as 1 percent of the value of the transaction or $300,000, whichever is less, and adjusted annually for inflation. These provisions are effective immediately, but the filing fee requirement is contingent on CFIUS promulgating implementing regulations.
Effective Dates. As noted above, certain provisions of FIRRMA are effective immediately, while others only take effect upon the earlier of: (i) 18 months after enactment; or (ii) 30 days after CFIUS publicly certifies that the regulations, organizational structure, personnel, and other resources necessary to administer FIRRMA are in place.13 Notably, the FIRRMA provisions that most dramatically expand CFIUS’s jurisdiction (and thus are likely to lead to a large increase in the number of filings) are subject to delayed implementation. However, parties are well advised to evaluate current transactions in light of CFIUS’s impending expanded focus and jurisdiction, once FIRRMA and its regulations are fully implemented.
Please do not hesitate to contact any member of V&E’s CFIUS team for assistance in understanding how these important statutory reforms affect particular transactions or circumstances.
1 The enactment of FIRRMA is the culmination of reform efforts initiated in November 2017, which we detailed at https://www.velaw.com/Insights/Proposed-Bipartisan-Legislation-Expands-CFIUS-Jurisdiction-and-Creates-a-Focus-on-Dual-Use-and-Emerging-Technologies/.
2 The NDAA also includes the Export Controls Act of 2018 (“ECA”) and Anti-Boycott Act of 2018.
3 FIRRMA defines a “United States Business” without limitation as a “person engaged in interstate commerce in the United States,” thereby raising the question of whether entities organized and located outside the United States, but which engage in, for example, sales transactions in the United States might be treated as U.S. businesses.
4 With limited exceptions, and as explained below, filing a transaction with CFIUS remains voluntary.
5 The term “close proximity” will be defined by regulation, but FIRRMA directs that the definition refer only “to a distance or distances within which the purchase, lease, or concession of real estate could pose a national security risk in connection with a United States military installation, or another facility or property of the United States Government.”
6 Although the term is likely to be further expanded and refined through implementing regulations, FIRRMA defines “critical infrastructure” to mean “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.”
7 FIRRMA defines “critical technologies” to include defense articles or services included on the U.S. Munitions List, certain items controlled for export, reexport, or in-country transfer pursuant to the U.S. Export Administration Regulations, certain nuclear equipment and facilities, and certain agents and toxins. FIRRMA also directs that “critical technologies” include emerging and foundational technologies subject to controls imposed as a consequence of the ECA. We expect that the ECA control process will apply to technologies such as artificial intelligence, robotics, and augmented or virtual reality — and thus that those technologies will trigger the expanded CFIUS review for non-controlling and other transactions.
8 FIRRMA directs CFIUS to promulgate regulations that provide guidance on the types of transactions considered to be covered investments, including regulations that will narrow the term “critical infrastructure” to assets “likely to be of importance to the national security of the United States.
9 FIRRMA defines “material non-public technical information” to be 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. However, under FIRRMA, mere access to financial information regarding the performance of a U.S. business would not, without more, trigger CFIUS’s jurisdiction.
10 Through these criteria, FIRRMA effectively circumscribes the scope of the passive investment exemption to CFIUS jurisdiction that existed under prior law, and creates a separate class of non-controlling, non-passive investments.
11 FIRRMA also authorizes the Committee to require the submission of a declaration in connection with transactions involving critical technology companies, although the relevant provision of the legislation will be delayed in its implementation.
12 Pursuant to FIRRMA, the 15-day presidential review period is triggered by the earlier of the date on which an investigation of a transaction is completed or the date on which the Committee otherwise refers a transaction to the president.
13 FIRRMA directs CFIUS to develop an implementation plan within 180 days and report to Congress on issues such as timing, staffing, and resource requirements.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.