Among key changes to the current system, FIRRMA will expand the scope of the transactions that may be reviewed by CFIUS (including new coverage for certain investment fund investments), provide for mandatory filings in certain circumstances, extend the review period, allow parties to file short-form declarations in many types of transactions, and provide for a filing fee. FIRRMA directs that the US Secretary of Commerce report every two years to Congress and CFIUS specifically on Chinese foreign direct investments.
Companies planning transactions or investments pursuant to which a foreign party would acquire an interest in a US business should carefully consider and take appropriate steps to address whether and how the deal would be treated by CFIUS, as amended by FIRRMA.
On August 1, 2018, the Senate approved a final version of the Foreign Investment Risk Review Modernization Act (FIRRMA) and the bill is now expected to be signed into law by the president in the coming days. The new legislation was passed by the US Congress as part of a broader national defense authorization bill (the National Defense Authorization Act, which also includes a section updating the US export controls laws).
FIRRMA could apply as soon as sometime in September 2018, within 30 days of its signing into law. Most of FIRRMA will not take effect for several months, however, and will become effective only once CFIUS writes and implements new regulations, which will require a comment and review process with stakeholders.
FIRRMA will apply in full to any transaction “proposed, pending, or completed” within 30 days after CFIUS indicates its new regulations and related resources are in place. Any transaction still pending (i.e., not closed) by that time that was not already filed under the current CFIUS rules and procedures will become subject to the new regulations.
FIRRMA will affect pending transactions that involve an acquisition of or an investment in a US business by a foreign company. We detail below some of the key changes to the current system:
- Expanded Scope of “Covered Transactions”
CFIUS will maintain its current right to review transactions that give foreign companies control over or access to a sensitive US asset, but FIRRMA will expand the scope of “covered transactions” beyond foreign parties’ acquisition of control over US businesses to include:
(1) Certain real estate transactions (such as purchases, leases and concessions) involving land close to sensitive US facilities (such as military or national security facilities);
(2) Certain investments in “critical infrastructure” businesses;
(3) Investments in businesses that maintain or collect personal data of US citizens;
(4) Investments in businesses that develop, make, or test “critical technologies.” “Critical technologies” are not precisely defined in the legislation, but could include technologies that are subject to US export controls and other security controls, including new export control provisions in the legislation designed to protect “emerging and foundational technologies.” Reports indicate that among the emerging technologies considered “critical” will be artificial intelligence, robotics, biotechnology, and similar areas;
(5) Changes in rights of a foreign company with respect to its investment in a US business; and
(6) Transactions that are structured in a manner to avoid CFIUS review (such as through a complex investment vehicle).
- Mandatory Filings
Filings (declarations) will be mandatory (not voluntary, as under current rules) for transactions involving an investment (1) by a foreign person in which a foreign government has a “substantial interest,” (2) resulting in the direct or indirect acquisition of a “substantial interest” in a US critical infrastructure business, critical technology business, or US business that maintains sensitive personal data of US citizens. The term “substantial interest,” used in both of the foregoing contexts, must still be defined by CFIUS in new regulations. Mandatory declarations will not be required for investments by US investment funds.
- Extension of Review Period
Today, the CFIUS review process consists of a 30-day initial review period, potentially followed by a 45-day investigation period. FIRRMA will extend the initial CFIUS review period from 30 days to 45 days, with an additional 15-day period extension for “extraordinary circumstances” (to be defined by CFIUS regulations). As a practical matter, CFIUS reviews have been extended beyond the 30-day period already, with CFIUS moving many reviews into the 45-day investigation stage to allow more time. In addition, in several cases, CFIUS has asked parties to withdraw their filings and refile multiple times with the same intent of extending the Committee's time to review a deal.
- Short-Form Declarations
FIRRMA will allow for parties in many types of transactions to file short-form declarations (up to only five pages) containing basic information regarding the transaction. Within this 30-day period, CFIUS will inform the parties whether a full review is needed, in which case the parties will need to file a written notice of their transaction.
- Filing Fee
Under current law, there is no CFIUS filing fee. FIRRMA will provide for a filing fee, up to the lesser of 1 percent of the value of the transaction or $300,000 (adjusted annually).
FIRRMA will impact a wide range of new foreign acquisitions and investments in the United States. The general intent and broadening scope of CFIUS under FIRRMA may also result in an immediate heightened level of scrutiny of any foreign investments and acquisitions of US businesses that are not notified to CFIUS.
Companies planning transactions or investments pursuant to which a foreign party would acquire an interest in a US business should carefully consider and take appropriate steps to address whether and how the deal would be treated by CFIUS, as amended by FIRRMA. Certain Chinese investments may particularly be scrutinized. Though FIRRMA does not expressly focus on China, except for the biennial reporting requirement noted above, Congressional and Trump Administration concern about Chinese access to sensitive US technology has influenced passage of FIRRMA.
Many details and key definitions will still need to be specified by CFIUS in new regulations. Companies will be able to engage with CFIUS during its rulemaking process. Companies should monitor these developments and take them into account when considering US investment and acquisition opportunities.