Government Dramatically Expands Oversight of Foreign Investment in U.S. Business

The Committee on Foreign Investment in the United States (“CFIUS”) is a multi-agency committee comprised of members from executive agencies related to the economy, national security, and foreign intelligence. The agency was created during Gerald Ford’s presidency and its mandate is to review any transaction (called “covered transactions”) that might have an impact on U.S. national security (Keeler, Mayer Brown).A covered transaction is a merger, acquisition, or takeover in which a foreign national, entity, or government acquires an interest in a U.S. business that has an impact on U.S. national security (Jaramillo, Foley Hoag).This system of review was designed to be voluntary. Even so, CFIUS maintains the ability to block transactions when no notice of filing is submitted through the CFIUS system. The Foreign Investment Risk Review Modernization Act (“FIRRMA”) passed by Congress and signed into law by President Trump in August 2018 changes the jurisdictional mandate and the administrative processes undergirding CFIUS and its role in transactions involving foreign actors in the U.S. economy. See(Jaramillo, Foley Hoag;Treasury Department FIRRMA Summary)

FIRRMA is designed to “enhance U.S. security” by increasing oversight of covered transactions. FIRRMA changes CFIUS in two significant ways: it expands and increases the scope of its oversight and also makes a variety of changes to the administration of CFIUS. (Davis Polk.) 

Prior to the passage of FIRRMA, CFIUS’s scope included transactions which could result in foreign control of any U.S. business. FIRRMA expands CFIUS’s oversight to permit its review of transactions (including real estate transactions) that involve:

· non-controlling interests, particularly related to critical technologies, critical infrastructure, or the sensitive personal information of any U.S. citizen, unless the investment can be shown to be truly “passive” (Davis Polk);

· the acquisition of property within U.S. air or maritime bases or near a military base or similar location (Jaramillo, Foley Hoag); and,

· the ability of the purchaser to collect intelligence or otherwise expose national security activities at this type of location, even if there is no underlying U.S. business interest involved (Jaramillo, Foley Hoag). 

 Now, under FIRRMA, CFIUS has jurisdiction to review transactions which provide foreign individuals, companies, or governments with access to material non-public technical information, membership or observer rights on a board of directors (or the equivalent), or any involvement in substantive decision making. SeeU.S. Treasury Department: FIRRMA FAQs.This jurisdictional extension does not apply when the only involvement by the foreign owner involves the voting of shares. (Davis Polk.)FIRRMA also expands oversight jurisdiction into consumer-related sectors like insurance and e-commerce because of the private individual data component, which has not previously fallen under the purview of CFIUS review. (Keeler, Mayer Brown.)

 Moreover, FIRRMA clarifies that when there is any change in percentage of ownership by any non-U.S. citizen or entity, the transaction is covered under the umbrella of CFIUS jurisdiction. SeeU.S. Treasury Department: FIRRMA FAQs.This mandate permits CFIUS to review transactions where the only change is a foreign shareholder’s ownership percentage. (Davis Polk.)The jurisdictional expansion permits CFIUS to review any transaction involving a foreign purchaser of an interest in a U.S. business. (Davis Polk.)Exclusions only apply when a foreign purchaser acquires a purely passive interest and the business has no relation to anything deemed ‘critical’ or involving any sensitive data about individual U.S. citizens. (Keeler, Mayer Brown.)

 FIRRMA adds filing fees and lengthens the CFIUS review process timeline. (Davis Polk.)Prior to the passage of FIRRMA, the compliance process with CFIUS was entirely voluntary, although CFIUS could block transactions where the parties involved had not filed notices. (Davis Polk.)The FIRRMA passage also introduces a new, abbreviated filing option called a declaration. CFIUS will review the declaration within 30 days of filing and either approve it or request the filers to complete the more extensive voluntary joint notice. (Keeler, Mayer Brown.) The shorter version appears to be designed to streamline the process when the interest being acquired, and the parties involved, are not of any particular concern to U.S. national security interests. (Keeler, Mayer Brown.)

 The new guidelines articulated in FIRRMA regarding the timing of CFIUS transactions, including investigation periods, provide added transparency for domestic and foreign investors. SeeU.S. Treasury Department: FIRRMA FAQs.These guidelines provide investors with a better understanding of the length of time and detail the information required by CFIUS in order to review and respond to transaction applications.

 The expansion of the CFIUS review mandate will likely slow down the approval process due to the additional requirements imposed by FIRRMA. Even so, the new, shorter declaration form coupled with realistic timelines may ultimately provide the M&A industry with a more streamlined method for doing deals that involve foreign acquisitions of U.S. business interests.