The US Treasury Department has issued proposed regulations that would “comprehensively” implement FIRRMA, to broaden the jurisdiction of CFIUS.

On 17 September 2019, the US Treasury Department issued proposed regulations to implement the Foreign Investment Risk Review Modernization Actof 2018 (FIRRMA). FIRRMA broadened the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to include certain foreign noncontrolling investments and real estate transactions. CFIUS reviews foreign investments in the United States to determine their impact on US national security, and a CFIUS review of any transaction may result in the transaction being cleared to proceed without revision, cleared to proceed with mitigating measures, or blocked on account of unresolved national security issues.

The new rules, which would provide important clarity and predictability for the business community concerning how CFIUS will treat foreign investment transactions, can be accessed here; CFIUS guidance on the proposed rules can be accessed here and here

RULES FOR “COVERED INVESTMENTS” AND “COVERED TRANSACTIONS”

Prior to FIRRMA, CFIUS had authority to review controlling investments (primarily acquisitions) in US businesses by foreign persons (known as “covered transactions”). FIRRMA expanded CFIUS’s jurisdiction to authorise reviews of certain noncontrolling investments by foreign persons in a US business if the investment affords the foreign person

• Access to material, nonpublic technical information

• Membership, observer, or nomination rights for the board of directors or equivalent, or

• Involvement in substantive decision-making regarding

• Use, development, acquisition, safekeeping, or release of “sensitive personal data” of US citizens

• Use, development, acquisition, or release of “critical technologies”, or

• Management, operation, manufacture, or supply of “critical infrastructure”; and if the US business is one that

• Produces, designs, tests, manufactures, fabricates or develops one or more “critical technologies”

• Owns, operates, manufactures, supplies or services “critical infrastructure”, or

• Maintains or collects “sensitive personal data” of US citizens that may be exploited in a manner that threatens US national security

• Use, development, acquisition, or release of “critical technologies”, or

• Management, operation, manufacture, or supply of “critical infrastructure”; and if the US business is one that

• Produces, designs, tests, manufactures, fabricates or develops one or more “critical technologies”

• Owns, operates, manufactures, supplies or services “critical infrastructure”, or

• Maintains or collects “sensitive personal data” of US citizens that may be exploited in a manner that threatens US national security

The first of two sets of proposed new rules would provide a clearer definition of these “critical” and “sensitive” terms. The rules would name a noncontrolling investment subject to CFIUS jurisdiction a “covered investment,” rename a foreign controlling investment in a US business a “covered control transaction”, and retain the old term “covered transaction” to cover both, plus any transaction intended to evade the law.

CFIUS reviews of most covered investments would continue to be triggered by parties voluntarily notifying CFIUS of the transaction through either a full notice or a short-form “declaration”. The rules would make declarations mandatory for certain covered transactions where a foreign government has a “substantial interest”, or where the US business involves critical technologies. Treasury has already established a pilot programme mandating declarations or notices for this second category of covered investments.

The rules would create an exception from “covered investments” (but not from “covered control transactions”) for foreign persons that qualify as “excepted investors”, i.e., investors tied to a country that CFIUS determines to be an “excepted foreign state” based on that country’s maintenance and compliance with certain laws and practices in furtherance of national security protection.

RULES FOR CERTAIN REAL ESTATE TRANSACTIONS

A second set of proposed rules would subject to CFIUS jurisdiction the lease by, or concession to, a foreign person, of private or public real estate that

• Is located within, or will function as, part of an air or maritime port

• Is in “close proximity” to, i.e., within one mile of, a US military installation or other sensitive US government property

• Could provide the foreign person with the ability to collect intelligence on activities at such US government property, or

• Could expose national security activities at such US government property to foreign surveillance risk.

The rules would create exceptions from coverage for foreign “excepted real estate investors” who have requisite ties to certain countries that CFIUS identifies as “excepted real estate foreign states,” and are found to comply with certain national security-related laws of those countries. Real estate transactions for single housing units, real estate in an “urbanized area”, and office space in multi-unit commercial office buildings, are excepted from the scope of coverage.

The new rules… would provide important clarity and predictability

CONSIDERATIONS FOR PARTIES TO COVERED TRANSACTIONS AND COVERED REAL ESTATE TRANSACTIONS

FIRRMA leaves a wide range of discretion for CFIUS. Those contemplating transactions involving foreign investment in the United States should carefully consider the scope of the new CFIUS rules, in conjunction with the political and practical dimensions of US national security concerns, to determine if and/or how the new rules may apply. For now, CFIUS will continue its pilot programme mandating notification and CFIUS reviews for certain covered transactions involving US businesses with critical technologies in one of 27 specified industries.