On November 8, 2017, Senators Cornyn and Feinstein, along with seven other bipartisan cosponsors, introduced the Foreign Investment Risk Review Modernization Act of 2017 (the “Act”), a bill that would significantly change the jurisdiction and process of the Committee on Foreign Investment in the United States (CFIUS). A companion bill was introduced in the House of Representatives with similar bipartisan support. The Act would expand the scope of transactions subject to CFIUS review, make certain CFIUS filings mandatory for the first time, and extend the timing for many CFIUS reviews. The Act may be amended during the legislative process, and many important details are still to be determined by future implementing regulations. While some parts of the Act codify existing CFIUS practice, it would significantly alter the regulatory landscape for future inbound foreign investment. Among other themes, the Act expands CFIUS's purview beyond traditional defense-related considerations to focus more on protecting sensitive technology and information and increasing the scrutiny of countries such as China. We summarize key provisions of the Act below.
Expansion of the Scope of CFIUS Jurisdiction
The Act would add several types of transactions to the definition of “covered transactions” subject to CFIUS jurisdiction. CFIUS currently has jurisdiction only over transactions that would result in foreign control over a U.S. business. The Act would include several other transactions, even if control is not transferred, such as minority investments and arrangements that may give foreign persons access to sensitive U.S. technology. In particular, the definition of covered transaction would include:
- Any non-passive investment by a foreign person in any U.S. “critical technology company” or “critical infrastructure company.” While these terms would be defined in regulations, the Act would cover even small foreign investments in certain industries, and “passive investment” is narrowly defined to account for any decision-making role or access to information. Notably, the Act specifically adds the transportation industry to the list of critical infrastructure sectors.
- The contribution (other than as an ordinary customer) by a U.S. critical technology company of both intellectual property and associated support to a foreign person through any type of arrangement, including a joint venture. Here, Congress is attempting to prevent foreign access to U.S. technology through arrangements that would previously have been outside of CFIUS’s purview.
- The purchase or lease of real estate by a foreign person of private or public real estate that (1) is located in close proximity to a U.S. military installation or another sensitive U.S. government facility, or (2) meets other criteria later defined by CFIUS in regulations. While CFIUS already reviews certain real estate investments, the expansion to leases would be a substantive change.
- Any change in the rights that a foreign person has with respect to a U.S. business in which the foreign person is already invested if that change could result in (1) foreign control of the U.S. business, or (2) non-passive investment by a foreign person in any U.S. critical technology or critical infrastructure company. This test may change current CFIUS rules that exempt a foreign person’s increased investment in a business that CFIUS previously reviewed.
- Any other transaction, transfer, agreement, or arrangement designed or intended to evade or circumvent CFIUS jurisdiction.
Additionally, CFIUS would be able to create an exemption for transactions from certain low-risk countries.
Mandatory CFIUS Filings and “Light” Filings
The Act would require notification of certain covered transactions for the first time. A 5-page “declaration with basic information regarding the transaction” would be required for the acquisition of a voting interest of at least 25% of a U.S. business by a foreign person in which a foreign government owns, directly or indirectly, at least a 25% voting interest. This provision could capture many transactions by Chinese state-owned entities or sovereign wealth funds, and would require the consideration of CFIUS in transaction documents and deal timing in many cases where CFIUS is not currently considered. CFIUS would also be empowered to require a mandatory declaration for other covered transactions based on “appropriate factors,” including:
- The industry, sector, subsector, or technology in which the U.S. business trades or is a part of;
- The difficulty of remedying the harm to national security that may result from the completion of the transaction; and
- The difficulty of obtaining information on the type of covered transaction through other means.
Mandatory declarations would be required to be submitted at least 45 days before the closing of the transaction, and if the parties elected to submit a full voluntary notice instead of the declaration, that would be required at least 90 days before closing. A party that failed to file a mandatory declaration would be subject to penalties.
Importantly, other parties would be able to voluntarily submit a declaration instead of the comprehensive notice if they elect to do so. This would be useful for repeat filers that expect quick approval or parties that are on the fence about whether to file with CFIUS and are reluctant to engage in the costly and timeconsuming process of a voluntary notice.
Upon receiving a declaration, the Act specifies that CFIUS “shall endeavor to take action” within 30 days. The Act would give CFIUS four options: (1) request that the parties file a full written notice; (2) inform the parties that CFIUS is unable to conclude its national security review based on the declaration alone, and that the parties may file a joint voluntary notice if desired; (3) initiate a unilateral review of the transaction; or (4) notify the parties that CFIUS has concluded its national security review of the transaction. This new declaration process may potentially lessen the potential burden on both the filing parties and CFIUS. However, since CFIUS would not have a fixed deadline to respond to declarations, and the normal voluntary notice process may sometimes follow a declaration, there is also the potential for a longer process and increased uncertainly regarding timing.
CFIUS Process Timing
The Act would increase the current 30-day first-phase review period to a 45-day review period, extending the CFIUS full review and investigation period from 75 days to 90 days. CFIUS would also have the ability to extend the 45-day investigation period by 30 days once per submission under “extraordinary circumstances” (to be defined by CFIUS in regulations). This change could potentially alleviate some of the timing pressures on CFIUS that have resulted in transactions being forced to withdraw and refile due to the current statutory deadlines. However, these changes would significantly increase the potential full CFIUS process in the ordinary course to up to 120 days once a notice is accepted. Combined with the possibility that a full voluntary notice may be required after parties submit an abbreviated declaration, the Act has the potential to greatly increase the uncertainty and variance of the CFIUS timeline.
Filing Fees and Interim Measures
The Act provides for funding of CFIUS through filing fees, whereas there is currently no CFIUS filing fee. New filing fees would be assessed for each notice filed with CFIUS in the amount of the lesser of (1) 1% of the transaction amount, or (2) $300,000 (to be adjusted annually for inflation). The Act also provides for CFIUS to request additional funding and gives CFIUS special hiring authority. These provisions could potentially reduce the current resource constraints at CFIUS that have caused lengthened CFIUS processes in some cases. These resources would, however, come at a significant cost to parties to covered transactions, in what amounts to a new tax on inbound foreign investment.
The Act would also give CFIUS the authority to suspend a proposed or pending covered transaction that poses a risk to the national security of the United States if the covered transaction is under review or investigation by CFIUS. This would be the first time the power to halt a transaction, even temporarily, would be vested in CFIUS itself rather than the President. This provision would introduce yet another uncertainty into the CFIUS filing process.
Expansion of Factors Considered by CFIUS
The Act would increase the statutory national security risk factors to be considered by CFIUS. While CFIUS already has the discretion to consider these under a statutory “catch-all” national security risk factor, the listing of these concerns provides CFIUS and the public with important guidance as to Congress’s current concerns with expectations. Notably, the Act expands CFIUS’s focus beyond traditional defense and national security concerns, to cover issues such as sensitive technology, cybersecurity, and supply chain security. The revised and additional national security factors would include:
- Whether the covered transaction is likely to result in the increased reliance by the United States on foreign suppliers to meet national defense requirements;
- The potential effects of the covered transaction on U.S. international technological and industrial leadership in areas affecting U.S. national security, including whether the transaction is likely to reduce the technological and industrial advantage of the United States relative to any country of special concern;
- The degree to which the covered transaction is likely to increase the cost to the U.S. government of acquiring or maintaining the equipment and systems that are necessary for defense, intelligence, or other national security functions;
- The potential national security-related effects of the cumulative market share of any one type of infrastructure, energy asset, critical material, or critical technology by foreign persons;
- Whether any foreign acquirer has a history of complying with U.S. laws and adhering to U.S. government contracts;
- The extent to which the covered transaction is likely to expose personal identifier information, genetic information, or other sensitive data of U.S. 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 have the effect of creating any new cybersecurity vulnerabilities in the United States or exacerbating existing cybersecurity vulnerabilities;
- 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 activities designed to affect the outcome of any election for federal office;
- 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 U.S. business that is a party to the transaction possesses;
- Whether the covered transaction is likely to facilitate criminal or fraudulent activity affecting U.S. national security; and
- Whether the covered transaction is likely to expose any information regarding sensitive national security matters or sensitive procedures or operations of a federal law enforcement agency with national security responsibilities to an unauthorized foreign person.
The Act also formalizes the concept of a “country of special concern.” Though in practice CFIUS already scrutinizes transactions differently based on the country of the foreign acquirer, the Act would codify the concept, defining country of special concern to mean a country that poses a significant threat to U.S. national security. The Act does not list countries of special concern, though it is clear that the Act is primarily aimed at heightening scrutiny of Chinese investment. Senator Cornyn’s press release refers to China as a “potential adversary” that has exploited the U.S. economy, and Representative Pittenger’s press release is titled Taking Aim at China, and refers to the Act as a necessary tool to track and evaluate Chinese investment specifically.
The Act would mark the first significant changes to the CFIUS process in over ten years. It would significantly expand CFIUS’s jurisdiction, make the CFIUS process mandatory for certain filers, offer an abbreviated filing method for others, change the timing of the CFIUS filing process, and implement a firstever filing fee for parties to the CFIUS process. However, the Act has just been introduced in both the House and Senate, and has significant hurdles to clear before becoming law. Additionally, the specific requirements of the Act would need to be implemented by CFIUS through a future public review-andcomment rule-making process. Therefore, it is not yet clear what the final effects of this Act may be, and it is too soon for parties to change any short-term deal-making plans based on the Act. However, some things seem near certain: new transaction types may be covered by CFIUS, the CFIUS process will lengthen and become more uncertain in many cases, and the analysis of whether, when, and how to file with CFIUS will become more complicated. Accordingly, it is important to watch this space and to begin considering these factors for long-term strategic planning purposes.