New CFIUS Regulations Target More Foreign Investments for Review

As part of the 2019 National Defense Authorization Act ("2019 NDAA"), Congress recently enacted significant changes to the process by which the Committee on Foreign Investment in the United States ("CFIUS") operates as well as to the scope of its authority. The Foreign Investment Risk Review Modernization Act ("FIRRMA"), included within the 2019 NDAA, expands the authority of CFIUS, creates mandatory filing obligations, extends the period of review, and imposes fees that have the potential to be quite significant. These changes should also be considered along with the newly enacted Export Controls Act of 2018 ("ECA") discussed in a separate alert here. The two pieces of legislation were passed to deliberately complement each other.

This newly enacted legislation, FIRRMA and ECA, target technology drains to China and will affect how deals involving foreign investments are structured and reviewed. In the short term, CFIUS initial review will expand to 45 days instead of 30. Additionally, FIRRMA formalized the request to review all agreements related to a transaction.

In the long term, we have to wait and see what the expanded "covered transaction" will be after Treasury certifies the regulations, and resources and systems are in place. We will likely see new filing requirements, as well as more frequent filings and fees. Additionally, there will be mandatory "declarations" or short notices under CFIUS, changing the voluntary nature of CFIUS.

Foreign investors will need to focus more keenly on CFIUS and ECA and understand that these transactions will have longer time lines and may need structural modifications to clear review.

Below is a summary of the changes to the CFIUS review process that will have the greatest impact on foreign businesses and individuals seeking to invest in the U.S.

Brief History

 CFIUS was established more than forty years ago with the objective of maintaining oversight of foreign investments in U.S. businesses and ensuring that such transactions did not jeopardize U.S. national security interests. The primary role of CFIUS is to review covered transactions, i.e., transactions by which a foreign individual or business could attain control of a U.S. business. Historically, these reviews generally commenced through a voluntary joint filing by the foreign entity and U.S. business. If, based upon its review, CFIUS determines that the transaction threatens to impair the national security of the United States, CFIUS could impose mitigation requirements or, through a recommendation to the President, block the transaction.

Although the 2019 NDAA expressly recognizes that foreign investment in U.S. businesses brings "economic growth, productivity, competitiveness, and job creation" to the United States, Congress also determined that U.S. national security needs have changed significantly in recent years and that these changes demand modernization of the process and authority of CFIUS. This brings us to FIRRMA, which implements Congress's changes to CFIUS, some of which are effective immediately and some of which will require the adoption of implementing regulations.

Key Changes in CFIUS's Authority and Review Process

1. Scope of CFIUS Review Expanded – Historically, CFIUS review was focused on transactions that "could result in control of a U.S. business by a foreign person." (emphasis added). With the passage of FIRRMA, Congress has expanded the definition of "covered transaction" to include:

a. Investments in critical technology companies or critical infrastructure companies, i.e., companies that (i) produce, design, test, manufacture, fabricate, or develop a critical technology or that (ii) own, operate, manufacture, supply, or service critical infrastructure;
b. Investments in companies that maintain or collect personally identifiable information ("PII"), which could be exploited to threaten U.S. national security;
c. Real Estate transactions that are within "close proximity" to a U.S. port, military installation, or a Government-owned facility that present a national security concern, with the exception of single-family residences; and
d. Changes in existing ownership rights that a foreign person has with respect to a U.S. business if that change could result in control of the U.S. business or one of the three aforementioned covered transactions: an investment in critical technology or critical infrastructure, investment in a company that maintains PII, or a covered real estate transaction.

FIRRMA defines "investment" as a direct or indirect investment that affords a foreign individual any of the following: (i) access to any material nonpublic technical information; (ii) membership or observation rights on a board of directors, or its equivalent, or the right to nominate an individual to such a position; or (iii) involvement–other than through voting shares—in substantive decision making of the business concerning PII, critical technologies, or critical infrastructure.

This expansion of CFIUS's authority is not yet in effect, but will become effective within the next 18 months. With its expanded authority, we can expect CFIUS to receive a substantial influx of notices to review. Anticipating this change, Congress is mulling the implementation of "prioritization fees" (discussed in more detail below).

2. Mandatory Filings — Historically, CFIUS reviews were initiated through voluntary filings. While submission of notices to CFIUS will remain voluntary for most transactions, FIRRMA requires the submission of notices in certain instances. Where the subject transaction will involve a "substantial" (a term to be defined at a later date) interest in a business that involves critical infrastructure, critical technology, or PII, the parties to the transaction must submit a written declaration no later than 45 days prior to the closing of the transaction.

The written declaration, which itself is also a new process introduced under FIRRMA, must be a brief, no more than 5 pages, description of the transaction. Upon receipt of the declaration, CFIUS will take one of the following actions: (i) request a formal written notice; (ii) inform the parties that the declaration is inadequate for CFIUS's review and that a formal notice is needed; (iii) initiate a unilateral review; or (iv) notify the parties that CFIUS's review of the transaction is complete.

While the submission of a declaration is mandatory for certain transactions, any party may utilize the "declaration" process as an alternative to filing a formal notice. This may be a viable means for parties to facilitate a faster, and more economical, review by CFIUS. How effective this review process will be, and whether it ultimately becomes a viable alternative to the formal notices historically used in a CFIUS review, remains to be seen.

The use of declarations and the requirement that parties submit such declarations for certain covered transactions is not immediately effective. We anticipate that these changes will go into effect within the next 18 months.

3. Extended Period of Review – FIRRMA extends the period of time in which CFIUS may review formal and informal notices. Where the parties stipulate that the transaction is covered, i.e., it will result in foreign control of a U.S. business or in the acquisition of certain real estate or an interest in certain U.S. businesses, as described above, CFIUS must issue comments on a draft or formal written notice within 10 days of its submission. In all other instances, CFIUS will now have 45 days (rather than the previous 30) to conduct its initial review. Additionally, CFIUS may extend its investigation for a single 15 day period in the event that there are "extraordinary circumstances" (again, a term yet to be defined). This change is effective immediately.

4. Expanded Powers – Not only did FIRRMA expand CFIUS's scope of authority, but it expanded the Committee's powers as well. With the passage of FIRRMA, CFIUS may now: (i) suspend a transaction for the duration of a review or investigation if the Committee determines that the transaction may pose a risk to national security; (ii) impose interim mitigation agreements or conditions on completed transactions; and (iii) with respect to abandoned transactions, negotiate, enforce, enter into, or impose mitigation agreements or conditions on any party to effectuate the abandonment of the review and mitigate any risk. The expansion of the Committee's powers is effective immediately.

5. Filing and Prioritization Fees – Prior to FIRRMA, parties were not required to submit a fee in connection with their voluntary submission of a notice to CFIUS. With the passage of FIRRMA, however, parties will now be required to pay a fee. While the amount to be charged has not yet been established and will be determined by CFIUS, the fee will vary by transaction and be based on the value of the transaction, while accounting for small business concerns, the expenses of CFIUS, the effect of the fee on foreign investment, and other matters that CFIUS deems relevant. While we do not know for certain what the fees will be, we anticipate that they will be significant as FIRRMA provides that they may not exceed the lesser of 1 percent of the transaction value or $300,000—a sum far in excess of the amount of a filing fee associated with litigation or typical administrative review proceedings.

In addition to the filing fee, FIRRMA contemplates a potential prioritization fee that could be applied to fast track a CFIUS review. As passed, FIRRMA does not impose such a fee, but instead requires CFIUS to conduct a study on the feasibility and merits of such a fee. The potential need for a fee that would prioritize the timing of a CFIUS response is borne, as Congress concedes in the 2019 NDAA, from the potential for CFIUS to not be able to meet the revised deadline for issuing its comments in the event that there is an influx of notices. Given the expanded scope of CFIUS, it is reasonable to assume that there will be an influx that will impact the Committee's ability to respond timely to the voluntary notices and mandatory declarations submitted for its review.

FIRRMA's changes to the CFIUS review process are significant, yet we will not realize their full impact until we have seen how the Committee operates under its expanded scope of authority, whether it is able to conduct the reviews in a timely manner, what the impact of the filing fee and potential prioritization fee has on moving through the review process, and when and how the Committee uses its expanded authority, such as, for example, to suspend transactions during the review process.