Expected Legislation Amending CFIUS Will Affect a Broad Range of Foreign Investments in US Businesses

A bipartisan group from the US Senate and the House of Representatives introduced legislation in 2017 to update and expand the role of the Committee on Foreign Investment in the United States (CFIUS) in reviewing possible US national security implications of acquisitions and investments in US businesses by foreign parties. Congress has continued to debate and refine the legislation, known as the Foreign Investment Risk Review Modernization Act (FIRRMA). Riding a wave of increased scrutiny surrounding foreign investment and access to sensitive technology in US businesses, particularly by Chinese investors, a version of FIRRMA passed the Senate on June 18, 2018. A slightly different FIRRMA bill passed the House of Representatives on June 26, 2018, with significant bipartisan support. House and Senate conferees will now meet to form a single bill, which is expected to pass into law with firm support from the Trump administration. FIRRMA will impact a wide range of new foreign acquisitions and investments in the United States.

Parties to transactions involving foreign investment in US business are well advised to consider the impact of FIRRMA’s amendments to the CFIUS process.

Both versions of FIRRMA would broaden the scope of CFIUS’s jurisdiction to include review of any investment (other than passive investment) by a foreign person in any US critical technology business, including:

• Emerging or breakthrough technologies;
• Real estate transactions with access to air, land (i.e. border crossings), or sea ports or with proximity to sensitive US government facilities;
• Bankruptcy and other default transactions;
• Existing investments under which a foreign stakeholder has gained rights of control or influence over the US entity; and
• Any other investments which CFIUS deems designed to evade CFIUS review.

The House bill would additionally require CFIUS to review transactions allowing a foreign investor to influence or gain access to sensitive personal information of US citizens.

While the new versions of FIRRMA would significantly expand CFIUS’s authority, certain limitations would be introduced as well. Under the Senate’s version, CFIUS could exempt from review transactions in which all foreign investors involved are from “friendly countries” (i.e., countries that have shared security interests with the US and effective review processes to safeguard them, NATO member countries and major non-NATO allies, and countries that adhere to nonproliferation control means). The Senate bill would also expand the definition of “passive” investments (which are exempt from CFIUS oversight) to include transactions involving investment funds with non-controlling foreign investors.

Both current versions of FIRRMA removed language included in the original draft of the FIRRMA bill that would have allowed CFIUS to review licensing and joint venture transactions with foreign parties for the transfer of US intellectual property.

For FIRRMA to become law, the two houses of Congress must agree on an identical version of the bill, and President Trump must sign it. The president has stated that he expects Congress to pass “strong FIRRMA legislation that better protects the crown jewels of American technology and intellectual property from transfers and acquisitions that threaten our national security—and future economic prosperity.” However, if Congress does not pass a bill, or if it passes a bill that does not contain language sufficiently strong in the eyes of the administration, then President Trump may seek to impose additional foreign investment restrictions.

Specifically, the president has raised the possibility of imposing restrictions under Section 301 of the Trade Act of 1974 (Section 301) on China’s laws, policies, and practices relating to technology transfer, intellectual property, and innovation. Section 301 grants authority to “investigate foreign trade practices and take action to compel another country to eliminate unfair, unreasonable or discriminatory practices that burden US commerce.” On March 22, 2018, President Trump issued a Memorandum directing the Secretary of Treasury to report within 60 days regarding measures “to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States,” including “options for new investment restrictions using ‘any available statutory authority.’” The investment restrictions were expected to target China’s key sectors, including information technology, aerospace, marine engineer, pharmaceuticals, advanced energy vehicles, robotics and other technologies.

On June 27, 2018, President Trump announced that he would not enforce new investment restrictions against China under Section 301, provided that Congress passes FIRRMA. It remains to be seen whether any final version of FIRRMA will impose restrictions stringent enough to satisfy the president and forestall additional China-specific restrictions pursuant to Section 301.

Companies planning transactions or investments pursuant to which a foreign (non-US) party would acquire an interest in a US business should carefully consider and take appropriate steps to address whether/how the deal would be treated by CFIUS, as amended by FIRRMA. Such consideration would be particularly important in the case of a Chinese investment.