On November 8, Senator John Cornyn and Representative Robert Pittenger proposed, together with a bi-partisan group of co-sponsors, a bill entitled the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) that would reshape U.S. foreign investment review procedures in response to concerns over investment strategies directed by certain other governments. While FIRRMA’s recitals stress “the commitment of the United States to open and fair investment policy,” the bill could constrict U.S. openness.
It would tighten foreign investment screening by expanding the scope of vetting procedures and imposing mandatory filing requirements for the first time. The bill would convert the CFIUS procedure into a technology control regime governing joint ventures and other “arrangement[s],” at home and abroad, of U.S. “critical technology” companies, though there are reasons to doubt the effectiveness of this technology control regime.
The bill comes at a time of heightened focus on foreign investment in the United States and across advanced markets. The Grassley-Brown bill, which would create an additional screening mechanism focused on economic and trade policy considerations, reflects the growing concerns. The recent report by CFIUS to Congress tracks the rising number of cases, the increasing complexity of reviews, and the emergence of Chinese acquirers as the top investors before CFIUS.
Current foreign investment screening regime
The existing framework dates to the 1988 Exon-Florio Amendment to Section 721 of the Defense Production Act of 1950 (DPA). Signed by President Ronald Reagan, Exon-Florio was designed to protect national security while maintaining an open investment policy. The 2007 amendments to the DPA, the Foreign Investment and National Security Act (FINSA), codified CFIUS practices.
This legislation authorizes the President, assisted by CFIUS, to block or unwind any transaction that may result in control by a foreign person of a U.S. business that could threaten U.S. national security. The term “control” captures essentially any investments that could enable the foreign person to influence management and personnel decisions of the U.S. business. The term “national security” is open-ended, leaving the President with broad discretion. While there is generally no obligation for a particular investment to be notified to CFIUS, approval by the Committee provides a “safe harbor.” The President may force the unwinding of un-notified foreign takeovers at any time if he finds it necessary for national security.
Senator Cornyn and Representative Pittenger’s bill would expand the scope of review procedures, require mandatory declarations, extend timelines for notification procedures, and impose filing fees.
Scope. The bill would significantly expand CFIUS’s jurisdiction, particularly with regard to controlling potentially sensitive technologies. It would encompass:
- Critical technology and critical infrastructure companies – Any investment in a U.S. critical technology and critical infrastructure companies aside from “passive investments” that provide no influence over management or personnel and provide no access to non-public information. “Critical technology” is defined to include “technology, components, or technology items that are essential or could be essential to national security,” and including “emerging technologies that could be essential for maintaining or increasing the technological advantage of the United States over countries of special concern with respect to … national security, or gaining such an advantage over such countries in areas where such an advantage may not currently exist.” Presumably this category includes artificial intelligence, robotics, aerospace, etc., and could be far reaching. CFIUS would issue regulations providing detailed definitions. To be sure, CFIUS can already reach investments in this category where the foreign acquirer takes “control.” However, some investments that might not amount to “control” would also be captured where the buyer would have access to non-public information held by a critical technology company. In effect, CFIUS’s jurisdiction could be broader for any firm designated as a U.S. critical technology company.
- Contributions by U.S. critical technology companies of “intellectual property and associated support,” even abroad — Any “contribution” by a U.S. “critical technology” company of “intellectual property and associated support to a foreign person through any type of arrangement, such as a joint venture.” CFIUS would issue regulations defining this category, and could exempt certain transactions. While it is uncertain which enterprises would be designated as critical technology companies, this provision would represent a major expansion of CFIUS jurisdiction, capturing a broad range of “arrangement[s]” such as joint ventures and perhaps even licensing, both in the United States and abroad. This remarkable expansion of CFIUS jurisdiction appears to be a reaction to the technology transfer policies implemented across major emerging markets. This provision could effectively impose CFIUS regulatory supervision over the handling of intellectual property and related services at any firm classified as a U.S. critical technology company. Even if one accepts the need for a technology control regime, one can wonder about the effectiveness of this investment-based regime given that there are many ways to acquire technology without buying companies. Unlike export control laws, the Cornyn bill presumably would not reach the transfer of technology through hiring by foreign enterprises of employees of U.S. critical technology companies.
- Real estate – The purchase or lease by a foreign person of real estate located in the United States “in close proximity” to a U.S. military or other “sensitive” government facilities or properties, and meets such other criteria as defined by CFIUS. Proximity has become an increasingly frequent concern in CFIUS transactions, particularly when investments involve assets in regions such as Nevada with numerous military bases. Currently, the sale of land, without more, does not fall within CFIUS’s jurisdiction. This provision would fill that gap.
CFIUS would be authorized to exclude from CFIUS jurisdiction investments in these three new categories (U.S. critical technology company, contributions by a U.S. critical technology company, and sensitive real estate) where the investor is from an allied country.
Declarations. FIRRMA would impose a new declaration procedure in addition to the existing notification procedure. Declarations, whether mandatory or voluntary, would be short (five page) documents. After receiving a declaration, CFIUS would have the option of (1) requiring a notification, (2) initiating a review on its own, or (3) allowing the transaction to proceed and providing safe harbor protection from subsequent review.
- Declarations would be required at least 45 days before closing for certain foreign government-backed investments (acquisition of 25% of a U.S. business by a foreign person in which a foreign government has a 25% interest) and other technology investments designated by CFIUS. This provision would enable CFIUS to ensure it is informed of investments that are typically not notified to CFIUS – e.g., small transactions, sales of private companies with no government contracts. The preoccupation is, again, to control the transfer of technology, including that possessed by small ventures that might not yet have commercialized their products or services.
- In addition, parties could submit voluntary declarations in lieu of notifications. However, such voluntary declarations must be submitted 90 days before completion of the transaction to allow CFIUS time for analysis.
Notifications. The notification procedure, with its reviews (phase 1) and investigations (phase 2), would remain largely unchanged, except that the timelines would be extended. The 30 day review (phase 1) period would become 45 days, and CFIUS would be permitted to extend the 45 day (phase 2) investigation period by 30 days.
Centralization, funding and fees. FIRRMA would create new user fees to fund CFIUS operations. The bill would authorize CFIUS to collect filing fees for notifications (but not for declarations). Fees would be capped at the lesser of one percent of the value of the transaction or $300,000.
Coordination with other countries. Current legislation limits the ability of CFIUS agencies to share, including with allied governments, information provided by the parties. With a view to promoting coordination of policies with allies, FIRRMA would remove these constraints. FIRRMA would authorize the sharing of information with any “foreign governmental entity … to the extent necessary for national security purposes.” Moreover, the recitals call for the administration to lead “a more robust international outreach effort to urge and help allies and partners of the United States to establish processes that parallel [CFIUS] to screen foreign investments for national security risks.”
Rod Hunter is a trade and investment partner in the Washington, DC office and has substantial experience managing foreign investment reviews. He served as Senior Director for International Economics at the National Security Council, the White House office that supervises the national security reviews conducted by the Committee on Foreign Investment in the United States (CFIUS). In that White House role, he managed CFIUS cases, including negotiating resolution of the most sensitive cases, coordinating the administration’s legislative, communications and diplomatic outreach in particular cases, and developing the government’s procedures for incorporating intelligence agencies’ assessments. Earlier in his career, he served as Senior Counsel at the U.S. Trade Representative’s office where he litigated cases before the World Trade Organization.