An extract from The Foreign Investment Regulation Review, 8th Edition

Foreign investment regime

The United States has both national security and sector-specific review regimes applicable to foreign investment.

i National security review process

The US national security review process is authorised by Section 721 of the Defense Production Act and is generally referred to simply as the CFIUS review process after the administrative body that administers the process, the Committee on Foreign Investment in the United States. The process was significantly reformed by the enactment in August 2018 of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). Prior to the enactment of FIRRMA, the CFIUS process was based on a voluntary filing system applicable to transactions that could result in a foreign person acquiring control of a US business (now referred to as a 'covered control transaction'). The statute and its accompanying regulations did not require that any particular foreign investment be subject to the voluntary national security review process, but did give CFIUS (or the President of the United States (the President), or both, as applicable) the authority to block or impose remedial measures with respect to any covered transaction that was not notified and cleared.

Post-FIRRMA, CFIUS still has the authority to review acquisitions of control of US businesses. However, FIRRMA expanded CFIUS's jurisdiction in a number of material ways also to include:

  1. stand-alone acquisitions, leases or concessions of real estate in certain instances; and
  2. 'covered investments' by foreign persons, which are investments that both:
    • fall short of giving the foreign investor control but provide the investor with certain rights, such as board representation or certain governance or access rights (i.e., non-passive investments not amounting to control); and
    • are in US businesses involving certain key areas of concern, specifically critical infrastructure, critical technologies or sensitive personal data.

The term 'covered investment' is defined by reference to the access and governance rights noted rather than a specific investment percentage threshold.

FIRRMA also instituted for the first time a mandatory filing regime with respect to certain transactions, although all other transactions subject to CFIUS's jurisdiction may still be notified voluntarily. A filing is mandatory if, subject to certain exceptions, a foreign person in which a foreign government holds a 49 per cent or greater interest, acquires a 25 per cent or greater interest in a US business involved with 'critical technology' or 'critical infrastructure', or that holds 'sensitive personal data', terms defined by the regulations. CFIUS has also exercised its discretion to require that foreign persons, subject to certain exceptions, submit a filing to CFIUS if their transaction involves a covered control transaction or a covered investment in a US business that (1) is involved with a critical technology, and (2) the critical technology cannot be exported to the foreign investor (or anyone holding a 25 per cent or greater interest, direct or indirect, in the foreign acquirer) without US government export authorisation. Since Congress passed FIRRMA, CFIUS has issued a series of implementing regulations bringing these changes into effect. Additionally, funding authorised by FIRRMA is enabling CFIUS to devote more resources to identifying transactions that are not notified by the parties, leading to an increase in the number of cases subject to CFIUS's review and investigation.

The US national security review process originally focused, at least in practice, on the acquisition by foreign companies of US businesses directly or indirectly supplying the US Department of Defense (DOD); however, and especially after the 9/11 terrorist attacks, the concept of national security – and therefore the types of transactions subject to review under the regime – was broadened by statute and practice. National security is an ever-evolving concept, and its expansion in recent years has been fuelled by rapid advancements in technology, increasing digitalisation, increasingly globalised supply chains, and the appearance of China as a significant investor and technological competitor. These considerations led to the passage of FIRRMA to better position CFIUS to address concerns related to them.

The statute does not define national security but identifies the following as factors that CFIUS may take into consideration in its review:

  1. domestic production needed for projected national defence requirements;
  2. the capability and capacity of domestic industries to meet national defence requirements, including the availability of human resources, products, technology, materials and other supplies and services;
  3. the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security;
  4. whether the transaction is a foreign government-controlled transaction;
  5. whether the transaction involves a country that does not adhere to non-proliferation regimes or cooperate on counterterrorism efforts, or presents a risk for transshipment or diversion of technologies;
  6. the potential effects of the proposed or pending transaction on sales of military goods, equipment or technology to any country:
    • that is identified by the Secretary of State as a country that supports terrorism, is a country 'of concern' regarding missile proliferation or the proliferation of chemical and biological weapons, or is listed on the Nuclear Non-Proliferation Special Country List; or
    • that poses a potential regional military threat to the interests of the United States;
  7. the potential effects of the proposed or pending transaction on US international technological leadership in areas affecting national security; and
  8. the potential for national security-related effects from the acquisition of US critical technologies and infrastructure, including energy.
ii Sector-specific requirements for foreign investment

As discussed in Section IV, the United States imposes some restrictions on foreign investment in select regulated industries. Typically, companies in these sectors are required to obtain a licence from the government to operate in the sector, and federal law limits foreign ownership of licensees of this kind. For example, the Communications Act of 1934, as amended by the Telecommunications Act of 1996, restricts foreign governments, individuals and corporations from holding more than 20 per cent of the interests of a broadcast licensee. Proposed foreign investment in these sectors to the extent typically permitted is subject to review and approval by sector-specific regulators. Regulations issued by the sector-specific agency outline the process and standards applicable to the review of foreign investment in the sector.