Section 721 of the Defense Production Act of 1950 (the “DPA”) authorizes the President of the United States and the Committee on Foreign Investment in the United States (the “Committee” or “CFIUS”) to take such action to protect the national security with regard to any transaction in which a foreign person could obtain control of a U.S. business (a “Covered Transaction”). Practitioners generally believe that CFIUS has and wields broad and effective authority to protect the national security of the United States. However, Senator John Cornyn (R-Texas) and key figures within the Administration apparently do not share that view, as on November 8, 2017, Senator Cornyn and a bipartisan group of co-sponsors introduced the Foreign Investment Risk Review Modernization Act of 2017 to amend the DPA (the “Amendment”). If enacted, the Amendment will significantly expand the authority of CFIUS by broadening the types of transactions that CFIUS is able to review and lengthening the list of factors that CFIUS is to take into account when assessing the impact of a transaction on the national security of the United States.
In particular, the Amendment focuses attention on acquisitions of U.S. entities that are developing otherwise benign dual-use technologies that could be exploited for defense and/or intelligence purposes. Senator Cornyn’s rationale for reform, as expressed in a press release, is that “gaps in the current process have allowed foreign adversaries to weaponize their investment in U.S. companies and transfer sensitive dual-use U.S. technologies, many of which have potential military applications. These investment-driven technology transfers have jeopardized the United States’ ability to maintain our historical military advantage and have, in turn, weakened our defense industrial base.” The Amendment will also extend CFIUS’ authority to review emerging technologies.
The key changes contemplated by the Amendment are summarized below.
1. Expansion of Types of Transactions Subject to Review
Currently, the authority of the President and CFIUS is limited to transactions resulting in a foreign person obtaining “control” of a U.S. business. The Amendment expands the authority of the President and CFIUS by, among other things, expanding the CFIUS jurisdiction to joint ventures and technology support transactions. This would include, among other things:
- acquisitions or leases of real property in close proximity to a U.S. military instillation or to a sensitive U.S. Government facility;
- any investment in a critical technology or critical infrastructure company; and
- contributions of intellectual property and support to a foreign person by a U.S. critical technology company through “any type of arrangement, such as a joint venture.”
The addition of transactions covered in (1) above appears to reflect a concern that the U.S. military is not aware of holdings of foreign persons near military and sensitive instillations.
Transactions falling within (2) and (3) appear to reflect a need to monitor foreign investment in various technology-related transactions, including dual-use and emerging technologies.
2. Expansion of National Security Factors to Consider
The DPA does not define national security. Instead, it contains a list of national security factors CFIUS must consider when assessing the threat, vulnerability and consequences of any transaction. While the Amendment does not define national security, it adds ten factors. Key among them are:
- The potential effects on U.S. international technological and industry leadership, including the loss or reduction of any U.S. advantage to a “country of special concern”;
- “the extent to which the covered transaction is likely to expose, either directly or indirectly, personally identifiable information, genetic information, or other sensitive data of United States citizens to access by a foreign government or foreign person that may exploit that information in a manner that threatens national security;”
- “whether the covered transaction is likely to result in a foreign government gaining a significant new capability to engage in malicious cyber-enabled activities against the United States, including such activities designed to affect the outcome of any election for Federal office;” and
- "whether the covered transaction involves a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology that a United States business that is a party to the transaction possesses.”
The Amendment now requires CFIUS to consider a “country of special concern.” No such countries are specifically identified, but likely would include China and Russia. Indeed, in public statements, Senator Cornyn specifically identified issues relating to Chinese investment and catching up with U.S. technological leadership.
Notwithstanding these sweeping changes, the Amendment makes clear that it continues to be the policy of the United States that the nation “enthusiastically” welcomes and supports foreign investment in the United States, consistent with the protection of national security.