US President Donald Trump signed into law on 6 August the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), marking the most significant changes to the law governing the Committee on Foreign Investment in the US (CFIUS or committee) since the creation of the US foreign investment regime in 1988. Although prompted primarily by national security concerns with Chinese investments, the legislation will affect investments by all foreign investors. The changes reflect a trend across advanced markets for greater scrutiny of inbound investments.
While Congress has declared that the US continues to welcome investments from abroad, the FIRRMA grants the administration new tools to regulate foreign direct investments raising national security concerns. The FIRRMA expands the jurisdiction of CFIUS to scrutinize inbound investments and creates mandatory declaration requirements for foreign government-affiliated investors and for other investments designated by CFIUS. The law makes a series of other changes that strengthen CFIUS’s authority, delegates broad rule-making authority to the committee, and authorizes the sharing of information on transactions with allied governments for the first time.
The FIRRMA enactment will launch a major rule-making process at the same time that CFIUS agencies must expand staff numbers significantly. While extended timelines for the CFIUS review process will go into force immediately, most FIRRMA provisions will phase in only after the issuance of regulations and expansion of staff, processes that will likely take over a year. Meanwhile, the administration will initiate a related regulatory process of classifying and imposing licensing requirements for exports of “emerging” and “foundational” technologies. This effort could affect cross-border transactions more broadly, including outbound investments from the US.
While CFIUS previously had broad authority to review investments through which a foreign person could assume control of a US business, the new law grants CFIUS the authority to review the following:
Non-passive foreign investments. A non-passive foreign investment in a company that (1) owns, operates, manufactures, supplies or services critical infrastructure; (2) produces, designs, tests, manufactures, fabricates, or develops critical technologies; or (3) maintains or collects sensitive personal data of US citizens. “Non-passive” investments are those that provide any position on the board of directors, including observer rights, a role in substantive decision-making, or access to “material non-public technical information,” with certain exemptions for investment funds.
Real estate. The purchase, lease, or concession by or to foreign persons of real estate located within a port, or is proximate to a “sensitive” US government property. Previously, CFIUS did not have jurisdiction to review acquisitions of real estate not associated with commercial activities.
The FIRRMA imposes a new declaration procedure in addition to the existing notification approach. Declarations, whether voluntary or mandatory, will be short (about five pages). After receiving a declaration, CFIUS will have 30 days either to approve the transaction or to require a full CFIUS review.
Declarations will be mandatory for investments by foreign persons in which a foreign government has a “substantial interest”. There will be a possibility of waiving the required declaration where the foreign investor has a record of compliance and cooperation with the US government. In addition, CFIUS will issue regulations imposing mandatory declarations on investments in other businesses, likely including those involved in critical infrastructure, critical technology, and handling of sensitive personal data of US citizens.
Parties will also have the option of submitting voluntary declarations where they desire the legal certainty of an approval through the expedited procedure.
The FIRRMA amends the CFIUS process in several other ways. In terms of timing, it extends the initial review period from 30 days to 45 days, and adds a possible 15-day extension to the investigations phase (i.e., an investigation phase may take up to 60 days). The FIRRMA also clarifies CFIUS’s authority to block transactions or impose conditions during a review process or when parties withdraw.
For the first time, the CFIUS will be authorized to collect a filing fee. The fee will be determined by regulation and will be based on the value of the transaction – it will be capped at the lesser of 1 per cent of the value of the transaction, or US$300,000.
Of broader importance, the FIRRMA authorizes CFIUS to disclose to a US ally or partner information arising from a CFIUS process in order to advance the common national security interests of the US and that other government. This new authority will facilitate greater cooperation between regulators in the US and partner countries.
As part of the compromise to secure the FIRRMA’s passage, Congress reauthorized and expanded the US export control law. The export control legislation requires the administration to identify “emerging” and “foundational” technologies, and to impose licences on exports to China and certain other countries. This classification process is expected to occur over the coming months, a process that President Trump foreshadowed when he directed his administration in June to assess US export controls of “critical technologies” and to work with allies to support “efforts to combat harmful technology transfer and intellectual property theft”. This new regulatory mandate could have, like the FIRRMA, with its focus on the transfer of national security-relevant technologies, significant impact on cross-border transactions.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at firstname.lastname@example.org