President Trump signed into law the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) on August 13, 2018, which was included as part of the annual National Defense Authorization Act (NDAA). FIRRMA significantly reforms the Committee on Foreign Investment in the United States (CFIUS or the Committee), and makes related changes to the country’s export control regime.
Congress considered myriad proposals over the past year as it attempted to balance national security interests against the policy of encouraging foreign investment in the United States. The new law settled on an approach focused on areas lawmakers believe are most under threat from certain countries. FIRRMA makes several substantial changes to the CFIUS process, including by:
- Expanding the scope of CFIUS jurisdiction to permit review of a wider range of transactions;
- Adopting a new declaration process to notify the Committee about potentially covered transactions;
- Extending the time period for CFIUS to conduct its review;
- Strengthening the Committee’s authority to restrict transactions that threaten U.S. national security; and
- Making other changes that impact non-U.S. investors and their U.S. targets.
Some of these changes took effect immediately, while others will not take effect until the earlier of 18 months after enactment or after the CFIUS chairperson formally determines that CFIUS has the necessary resources to administer the updated program. The U.S. Treasury Department recently released a list of FIRRMA FAQs (FAQs), which provides some information about the status of FIRRMA’s implementation and enforcement, including limited details about which provisions it is currently enforcing. CFIUS might also choose to conduct pilot programs to test certain program elements prior to full implementation of all changes.
Expanded CFIUS Jurisdiction
CFIUS has jurisdiction over all “covered transactions,” which, under the previous law, included mergers, acquisitions and takeovers that could result in a non-U.S entity’s control over a U.S. business. FIRRMA adds four additional categories of cross-border deals to its definition of covered transactions, including: investments in certain real estate; investments in entities involved in critical infrastructure, critical technology or sensitive information; certain changes in a non-U.S. entity’s rights with respect to a U.S. business; and transactions that are intended to evade CFIUS review.
Real Estate Investments: 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 (so-called “persistent co-location” concerns). FIRRMA broadens CFIUS’ jurisdiction further by allowing the Committee to review a purchase or lease by, or a concession offered to, a non-U.S. person (including foreign governments) of a public or private piece of U.S. real estate that: (i) is located within, or will function as part of, an air or maritime installation; (ii) is in close proximity to a U.S. military installation or other national security facility; (iii) could offer a non-U.S. person the ability to collect information about the facility; or (iv) could otherwise put national security activities at risk of foreign surveillance. FIRRMA provides an exception to these reviews for the lease or purchase of a single housing unit or certain real estate located in urbanized areas.
Critical Infrastructure, Critical Technology and Sensitive Personal Data Investments: FIRRMA places particular focus on U.S. technologies and industries where the competitive advantage of the United States is perceived to be under threat from other countries. To that end, FIRRMA authorizes the Committee to review investments that relate to “critical infrastructure,” “critical technology” or sensitive personal information about U.S. persons, even when such an investment does not result in control by a non-U.S. person. If a non-U.S. investor will acquire certain rights – such as access to material non-public technical information (other than financial information), membership or observer rights on a board, or certain other decision making authority – investments in these types of entities are subject to review. The Committee’s interpretation of what constitutes “critical infrastructure” and “critical technology” will be significant as FIRRMA provides fairly broad definitions in this regard:
- Critical infrastructure: “Systems and assets whether physical or virtual, so vital to the U.S. that the incapacity or destruction of [them] would have a debilitating impact on national security.”
- Critical technology: Defense items on the U.S. Munitions List, certain items on the Commerce Control List, specified items related to the nuclear energy industry, select agents and toxins, and “emerging and foundational technologies” (discussed below).
Private equity exemption: FIRRMA also narrows CFIUS’ jurisdiction in this category by exempting certain investments by funds. An indirect investment through an investment fund that affords a non-U.S. investor membership as a limited partner is not a covered transaction as long as certain requirements are met, including that: (i) the fund is managed by a U.S. general partner (or equivalent), (ii) the fund board or committee on which the non-U.S. limited partner sits does not have control over the U.S. fund’s management or investment decisions, and (iii) the non-U.S. limited partner does not have access to material non-public technical information of the target company, and other potential requirements.