During a November 8 press conference announcing the introduction of the Foreign Investment Risk Review Modernization Act (“FIRRMA”) while President Trump met with President Xi Jinping in China, co-sponsor and Senate Majority Whip John Cornyn (R-TX) summed up the impetus for the bipartisan, bicameral bill in five words:
“China is eating our lunch.”
In the decade since Congress last passed reforms governing the Committee on Foreign Investment in the United States (“CFIUS”) and its procedures for conducting national security reviews of inbound foreign investment, Chinese investment in the United States – especially in the technology sector – has exploded. Although FIRMMA doesn’t mention China by name, many of its provisions appear designed to address aspects of Chinese investment deals that cause heartburn for national security hawks. For example, when referring to Chinese investment in US sensitive technologies, House co-sponsor Rep. Robert Pittenger (R-NC) alleged,
“They either steal it or they buy it.”
Still, not all members of Congress were so quick to praise the bill. Powerful Senate Banking Committee Chairman Mike Crapo (R-ID) – whose committee has jurisdiction over the bill and who will set the timing of hearings and markups – noted, “There are concerns from all sides. This involves allowing a government entity or a set of agencies to interfere with the private sector transactions. It’s appropriate, but we’ve just got to get the right balance.”
Moreover, if the bill becomes law, it will affect foreign investors located in many countries beyond China, as well as a broader cross-section of US target companies. Key provisions are as follows:
- Covered Transactions: The bill would broaden the definition of a “covered transaction” over which CFIUS can exercise jurisdiction to include any non-passive foreign investment in any US critical technology or critical infrastructure technology; contribution by a US critical technology company of IP and associated support through a joint venture or other arrangement with a foreign person, follow-on transactions or side agreements to increase foreign investor ownership or rights, and foreign purchases or leases of strategically-located real estate.
- Factors Triggering National Security Concern: The CFIUS regulations currently list 10 specific factors and one catch-all provision that CFIUS may consider when analyzing a transaction’s impact on US national security. FIRRMA would update four of those factors and add nine new factors, including the extent to which US personal identifier information or sensitive data would be exposed to foreign persons, whether the sale would increase the US government’s cost in maintaining the US defense industrial base, and whether the transaction would result in a foreign government gaining significant new capability to engage in “malicious cyber-enabled activities” against the United States. Importantly, trade reciprocity was not included as a new factor, although President Trump has floated it several times.
- Voluntary and Mandatory Declarations: Recognizing that the preparation and review of full CFIUS filings can be a costly and burdensome process, FIRMMA would allow parties to choose to file 5-page declarations for certain covered transactions but would not automatically trigger CFIUS review; this could streamline the process for trusted foreign buyers that repeatedly appear before the committee. However, what FIRRMA giveth, FIRRMA taketh away. While filing with CFIUS has always been a recommended but nominally voluntary process, for the first time FIRMMA would require parties to file declarations – thus notifying CFIUS of the deals’ existence – regarding certain transactions, such as those involving the US technology sector or critical infrastructure companies. This could be viewed as a shot across the bow to Silicon Valley, whose technology start-ups have increasingly sought foreign investment but not viewed their operations as implicating US national security concerns.
- Countries of Special Concern: While no country is mentioned by name, and the bill would not require CFIUS to create or publish a list, FIRRMA would create the concept of a “country of special concern” that poses a significantly heightened threat to US national security interests, and therefore whose proposed investments would require greater scrutiny. Although CFIUS already gives closer scrutiny to investments from China, Russia, and the Middle East, this provision could formalize that concept, which could be viewed as whittling away at the long-standing US open investment policy.
- Mitigation: FIRRMA would authorize CFIUS to impose interim mitigation measures or even suspend a transaction during the pendency of its review. FIRRMA also would beef up CFIUS monitoring of mitigation agreements and authorize penalties for non-compliance.
- Presidential Action: FIRMMA would clarify that the president not only has the authority to block or unwind deals, but can place restrictions on future sales of the US assets in question. FIRMMA would also restrict judicial review of presidential actions related to national security reviews of foreign investments.
FIRRMA contains a number of other procedural provisions, including increasing CFIUS staffing, creating a mechanism for parties to pay filing fees to fund the CFIUS review process, modifying the contents of required CFIUS submissions to Congress, and encouraging information sharing with US allies. While Congress may view these provisions as helpful clarifying or codifying actions, CFIUS may not need this authority or appreciate Congress dictating how the committee runs itself.