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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 often referred to as the Exon–Florio or CFIUS review process after the relevant authorising statute and administrative body, respectively. 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 United States had an entirely voluntary national security reviews process applicable to transactions that could result in a foreign person acquiring control of a US business (a 'covered 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) 'other investments' by foreign persons (i.e., non-passive investments not amounting to control) in US businesses involving certain key areas of concern, specifically critical infrastructure, critical technologies or sensitive personal data. 'Other investment' is defined by reference to access and governance rights rather than a specific investment threshold.

FIRRMA also institutes for the first time a mandatory filing regime with respect to certain transactions, while all other transactions subject to CFIUS's jurisdiction may still be notified voluntarily. FIRRMA requires that investments made by foreign government-controlled persons in a US business involved in critical infrastructure, critical technology or sensitive personal data must be notified to CFIUS, and also permits CFIUS to implement certain other mandatory notice requirements. CFIUS took advantage of the authorisation to launch in November 2018 a mandatory regime applicable to certain foreign investment in 'Pilot Program US Businesses'. Under this Pilot Program, parties must submit a filing to CFIUS if their transaction involves a controlling or otherwise non-passive investment (i.e., an investment that provides the investor with certain rights, such as board representation or certain governance or access rights) by a foreign person in a US business when the US business is involved with critical technology (defined with reference to export control laws) and is active in, or designs products for, specified industries. Parties can be fined up to the transaction value for failure to file when required.

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 requires CFIUS to consider the following factors in a 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. 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;
  5. the potential effects of the proposed or pending transaction on US international technological leadership in areas affecting national security; and
  6. 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 such licensees. 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 such 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.