The U.S. Senate on June 18, 2018 passed legislation to significantly reform the oversight and authority of the Committee on Foreign Investment in the United States (CFIUS or the Committee), the interagency committee responsible for assessing threats to U.S. national security posed by significant investments in U.S. businesses by non-U.S. investors. The Foreign Investment Risk Review Modernization Act (FIRRMA), passed as part of the annual National Defense Authorization Act (NDAA), brings new transactions under CFIUS’s review authority by enabling the Committee to review deals beyond those involving the transfer of control of U.S. businesses to non-U.S. persons. In particular, the Senate bill would allow CFIUS to review transfers of minority interests in companies dealing in critical infrastructure or critical technology, in addition to a host of other transactions that implicate national security.

While the rules regarding CFIUS review have remained largely unchanged over the past decade, CFIUS has operated under a new paradigm in recent years. After the U.S. government blocked just two transactions from its inception in 1975 through 2015, Presidents Barack Obama and Donald Trump have blocked three transactions since 2016 and a growing number of additional transactions have been abandoned following heavy scrutiny by CFIUS. Citing concerns about the U.S. government’s ability to address threats posed by Chinese investment in particular, lawmakers have been focused on passing CFIUS reform, an effort Sen. John Cornyn (R-TX) said would “modernize and strengthen [CFIUS] to more effectively guard against the risk to the national security of the United States posed by certain types of foreign investment.”

In addition to reforming CFIUS, the Senate NDAA would re-impose the sanctions on Chinese telecommunications company ZTE that were rolled back earlier this month by the Trump Administration. The House of Representatives passed a version of the NDAA on May 24, 2018 that did not include CFIUS reform or the ZTE provisions. While the fate of the sanctions against ZTE remains uncertain as the House and Senate reconcile their two NDAA bills, CFIUS reform is expected to be included in the final legislation sent to the President.

FIRRMA’s Key Provisions

In seeking to address perceived gaps in the existing CFIUS review process, FIRRMA expands the Committee’s jurisdiction from solely focusing on acquisitions of control in U.S. companies by non-U.S. persons to also include certain substantial (but non-controlling) investment in U.S. critical infrastructure or critical technology companies and real estate transactions. Most significantly, the Senate’s CFIUS reform legislation:

  • Adds mandatory declarations for certain investments.

The CFIUS notification process currently is voluntary, though CFIUS can initiate its own review if parties to a transaction do not voluntarily submit a notification to the Committee. The new legislation requires parties to file mandatory “declarations” – an abbreviated notification that should not exceed five pages in length – for transactions that directly or indirectly result in a foreign government (including state-owned enterprises) acquiring a “substantial interest” in U.S. critical infrastructure or critical technology companies. CFIUS may therefore review investments in these industries absent foreign control. While prior versions of FIRRMA required declarations for the acquisition of companies in any industry, this version narrows the required declaration filings to investments in critical infrastructure or critical technology, though more mandatory declarations may be required by regulation. It also provides for mandatory filings only when a foreign government acquires a substantial interest. An investment by a foreign person that does not result in any foreign governmental interest will not require a mandatory declaration. Declarations also can be submitted in lieu of a full notification for other transactions that might fall under CFIUS jurisdiction. After receiving a declaration, CFIUS can request the parties to file a full notification, initiate its own unilateral review, or inform the parties that it does not intend to take any further action.

Unlike past versions of the bill, the Senate’s final bill leaves the “substantial interest” determination to CFIUS by specifying only that passive investments, and investments of less than a 10-percent voting interest, would not be considered a substantial interest triggering a mandatory filing.

  • Leaves passive investments and certain limited partner investments in critical infrastructure and technology companies untouched.

The Senate bill clarifies what constitutes a “passive investment,” ensuring that CFIUS will generally not have jurisdiction over transactions where the foreign investor does not control the business or investment fund decisions or have access to non-public technical information.

An investment in a U.S. critical infrastructure or critical technology company by a U.S. private equity investment fund with one or more foreign limited partners will be considered a passive investment excluded from CFIUS jurisdiction if the U.S. fund meets specified requirements showing that the foreign limited partner does not have significant decision-making authorities and that the fund’s general partner or equivalent is not a foreign person.

  • Expands “covered transactions” subject to CFIUS’s review to include all purchases and leases of real estate in proximity to sensitive U.S. government land and facilities (excluding “single housing units” and real estate in “urbanized areas”).

CFIUS has reviewed, and in some cases, rejected, transactions involving the acquisition by foreign persons of real estate located in close proximity to U.S. military facilities and sensitive government facilities. The Senate bill broadens CFIUS’s jurisdiction further by allowing the Committee to review real estate transactions that allow foreign persons (including (but not limited to) foreign governments) to access sensitive information about, or conduct surveillance of, national security sites, even if the relevant real estate transaction is not in close proximity to sites of importance to U.S. national security. These transactions can include purchases, leases, and “concessions” offered to a foreign person. While these real estate transactions may be reviewed by CFIUS as covered transactions, they do not require mandatory declarations.

  • Allows disparate treatment based on the investor’s country.

Under the Senate’s legislation, countries that pose a significant threat to U.S. national security may be designated “countries of special concern” and subject to greater scrutiny. Conversely, countries that pose a low risk to national security may be exempt from certain CFIUS review requirements. CFIUS would use a number of factors to assess whether a country may be exempted, including whether the country is a member of NATO, adheres to nonproliferation control regimes, and other elements, including whether the country makes use of a foreign investment review mechanism similar to the CFIUS review process.

  • Establishes the Department of Commerce’s authority to oversee outbound transfers of intellectual property involving the acquisition of a U.S. business.

While prior drafts of FIRRMA would have expanded CFIUS’s jurisdiction to include certain joint ventures and other arrangements that could result in the transfer of intellectual property, the final version reins in this authority. Instead, it establishes an export control process that covers “emerging” and “foundational” technologies (as separate from “critical technologies”).

The legislation additionally contemplates the creation of an interagency process through which the Secretaries of Commerce, Defense, Energy, and State and the heads of other federal agencies work to identify emerging and foundational technologies “that are essential to the national security of the United States.” This provision seems to draw upon the Trump Administration’s National Security Strategy (NSS), which was published in December 2017 and emphasizes the Administration’s intention to “Promote and Protect the U.S. National Security Innovation Base.” While the NSS envisioned a role for CFIUS in protecting emerging technologies, the Senate’s final version of FIRRMA shifts this responsibility to an interagency group to be formed by the President and to the country's export controls regime.

The Senate version of FIRRMA tasks the Secretary of Commerce with establishing appropriate export controls and licensing requirements under the Export Administration Regulations for emerging and foundational technologies identified through this new interagency process. FIRRMA further requires the Secretary of Commerce, in collaboration with other federal agency heads, to submit reports to both CFIUS and Congress regarding these new export controls at least every 180 days. 

Complementing this interagency process is a new directive to the Commerce Department’s Emerging Technology and Research Advisory Committee (the Advisory Committee) to similarly target the identification of emerging and foundational technologies. The bill calls for the Advisory Committee to meet at least every 120 days and to include its findings in the Commerce Secretary’s annual report to Congress.

  • Adjusts CFIUS’s review procedure in certain cases.

As passed by the Senate, entities that are otherwise required to file mandatory declarations may choose instead to submit full written notifications, like the ones submitted under current law. In such instances, CFIUS would be required to comment on the submission within 30 days of the submission. While the bill maintains a general bar on judicial review of CFIUS decisions, it would enable parties to challenge CFIUS’s actions or findings via civil suit in the U.S. Court of Appeals for the District of Columbia Circuit. While the legislation does not specify which aspects of an action or finding may be challenged, final CFIUS determinations are unlikely to be subject to judicial review.

  • Enables CFIUS to assess filing fees to cover administrative expenses.

The new fees will support the Committee’s expanded staffing as its jurisdiction expands. The bill also allows CFIUS to create a prioritization fee that would enable parties to pay for expedited Committee’s review.

While there have been significant changes to FIRRMA since it was first introduced in 2017, Congress’s goal remains strengthening the power and jurisdiction of CFIUS. The House of Representatives and the Senate are expected to negotiate a final CFIUS reform package in the near future. Many leading figures in the Trump Administration indicated support for a prior version of FIRRMA. (The President’s support for measures re-imposing sanctions on ZTE, discussed below, is less clear.)

Provisions Regarding ZTE and Other Chinese Telecommunications Companies

The Senate-passed NDAA contains sections restraining the President’s powers regarding U.S. sanctions and export controls. Most notably, the bill addresses the Trump Administration’s recent handling of Chinese telecommunications company ZTE. The U.S. government initially announced sanctions against ZTE in March 2016 and imposed a ban on U.S. exports to the company in April 2018 after the company failed to uphold certain commitments made to the government, but the company agreed to a new arrangement in June 2018 that would lift the sales ban in exchange for a fine of approximately $1.4 billion. President Trump publicly suggested that this accommodation was necessary to preserve Chinese jobs, and it has been reported that it related as well to other issues currently under discussion by the U.S. and Chinese governments.

With several members of Congress criticizing the Trump Administration’s lifting of sanctions against ZTE, the Senate-passed NDAA restores the penalties imposed by the U.S. government against ZTE under the April 2018 order, including the ban of exports or reexports of all U.S.-origin items to ZTE. The NDAA also adds a general prohibition on all U.S. government agencies from purchasing or leasing telecommunications equipment or services from either ZTE or Huawei or any of their subsidiaries or affiliates. It also bans the U.S. government from using grants or loans to subsidize any of those companies. Moreover, the NDAA includes a requirement that any future penalties imposed on a Chinese telecommunications entity for violating export control or sanctions laws of the U.S. not be modified unless and until the President certifies to Congress that the company has not violated U.S. laws for at least one year and is fully cooperating with any U.S. government investigations in the activities of the company.