CFIUS Review of Corporate Transactions Will Likely Be Significantly Expanded
According to press reports, the President has decided to rely on a bill pending in Congress to resolve the issues regarding investment from China in technology and other businesses in the US. The bill is the Foreign Investment Risk Review Modernization Act,” known as FIRRMA. Most observers believe that Congress will enact FIRRMA this year. As proposed, FIRRMA will govern a very broad swath of transactions between domestic and foreign businesses from all sources, not only inbound investment from China.
FIRRMA grants significant additional authority to the Committee on Foreign Investment in the United States (CFIUS), the existing interagency body that regulates inbound foreign investment based on nexus with U.S. national security. The existing regime relies on the filing with CFIUS of voluntary notices by the parties to an inbound investment transaction that may affect U.S. national security. CFIUS reviews the notices to determine whether further investigation is required and whether to recommend that the President block the transaction. If the parties have failed to file and receive clearance, CFIUS has the legal authority to cancel their transaction.
FIRMMA would significantly broaden the range of transactions that are subject to CFIUS review beyond M&A and direct investment to five new types of transactions:
- Transactions that may give control over a US critical technology company or critical infrastructure company to a foreign person, under statutory standards that determine which investments are passive and which are non-passive. “Critical technologies” is expanded to include technologies that are essential for maintaining or increasing the technological advantage of the United States with respect to national security or defense or for gaining such an advantage;
- Joint ventures or other arrangements that involve technology transfers from a U.S. critical technology company to a foreign entity;
- Any change in a foreign investor’s rights that would result in control of a U.S. business or critical infrastructure or critical technology company;
- Acquisition of real estate in close proximity to a military base or sensitive national security facility; and
- Other arrangements designed to avoid CFIUS review.
Complementing the additional authority, FIRRMA proposes to establish a simplified filing method by which the parties could file a short declaration for expedited review in place of the full notice. This procedure is much welcomes as it will allow the parties to determine whether the transaction will be subject to full review before taking on the full expense of preparing a notice.
Significantly, FIRRMA also would authorize CFIUS to exempt transactions with investors from countries to be designated by CFIUS, expand the President’s authority to address risks to national security, further limit judicial review of CFIUS decisions and impose a fee on the filing of notices, the proceeds of which would be used to fund CFIUS operations.
Although many of the provisions appear to be aimed at forestalling increased Chinese investment in U.S. start-ups and other technology companies, Congress will be taking the opportunity to insert CFIUS review in hundreds of ordinary transactions where no governmental clearance is now required. As a result, to avoid subjecting transactions to the risk of cancellation by CFIUS, legal review of transactions with foreign counterparties by experienced counsel may well become essential with the passage of FIRRMA. Should you have questions on this or other related matters, please contact William A. Newman.