CFIUS – Impacts of the Foreign Investment Risk Review Modernization Act of 2018
The Committee on Foreign Investment in the United States ("CFIUS") is charged with the responsibility of reviewing potential risks to national security that may result from the consummation of foreign investments in the United States. CFIUS was originally established by an Executive Order in 1975. The basic CFIUS mandate is to determine whether foreign entities exert a level of control over domestic investments in a manner that has the potential to create a national security risk.
In 1988, Congress expanded CFIUS by enacting Section 721 of the Defense Production Act of 1950 (the "Exon-Florio Amendment"). The Exon-Florio Amendment authorized the President to suspend or prohibit any proposed or consummated foreign acquisition, merger or takeover of a U.S. corporation that was determined to threaten the national security of the United States. In 2007, the Foreign Investment and National Security Act again expanded CFIUS by increasing the scrutiny of foreign government related investments and asking potentially covered transactions to submit more robust notice filings. Recently, on August 13, the President again expanded the CFIUS mandate by signing the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA") into law as part of the National Defense Authorization Act of 2018. This memorandum will evaluate the broadened authority granted to CFIUS under FIRRMA to review potential national security concerns, as well as the impact such changes will have on the CFIUS mandate and review process.
Changes to the CFIUS Landscape
Only "covered transactions" that may have an impact on national security are subject to CFIUS review. Historically, a covered transaction was defined to include any merger, acquisition or takeover which could result in the foreign control of any United States entity. Under FIRRMA, the definition was expanded to include two new categories of covered transactions. First, any investment, including smaller, non-controlling investments, by a foreign person in a United States business that is connected to critical infrastructure, critical technology or the collection of sensitive personal data and that affords such foreign person access to material nonpublic technical information or involvement in the substantive decision-making of such business, including through a seat on the board of directors, will now be subject to CFIUS review.
A second expansion of the definition of covered transactions under FIRRMA is in the inclusion of certain real estate transactions. Real estate transactions will now be subject to CFIUS oversight if they relate to the purchase or lease by a foreign person of public or private real estate that is located in the United States and is either located within, or will function as part of, an air or maritime port, is in close proximity to a government or military installation or will give such foreign person the ability to collect intelligence or expose national security concerns at such an installation. The new law also includes an exception to the foregoing rule, whereby a real estate transaction will not be deemed to be a covered transaction if it relates to (i) a single "housing unit" or (ii) real estate in "urbanized areas", in each case as defined by the U.S. Census Bureau.
Private Fund Exemption
While FIRRMA expanded the definition of covered transactions, it also established an exemption for certain passive private fund investors. In order for a passive investor in a private fund to be exempt from CFIUS oversight, (i) the fund must be managed by a U.S. person and (ii) the foreign investor must not have the ability to control the fund’s investment decisions or dismiss the fund's management, or access material nonpublic technical information held by the fund, including as a member of a fund advisory board or otherwise.
The current CFIUS process is based on a voluntary notice system, whereby any party may file a voluntary notice of the transaction and request CFIUS review. CFIUS also has the power to independently initiate a review (either before or after the transaction is consummated). While the voluntary notice system will remain in place following the passage of FIRRMA, mandatory declarations on an accelerated review timeline will now also be required for any covered transaction that results in the acquisition, directly or indirectly, of a "substantial interest" in a United States business related to critical technology, critical infrastructure or sensitive personal information by a foreign person in which a foreign government holds a "substantial interest". While the analysis of what will constitute a substantial interest for the purposes of filing a mandatory declaration will be a factual determination, no interest that is less than a 10% voting interest will be deemed to be a substantial interest. This is the first time that mandatory filings will be a required element of CFIUS oversight.
While declarations will be required to be filed in the specific circumstances described above, any party to a covered transaction may also elect to submit an accelerated declaration in place of a traditional notice filing. Once a declaration is submitted, CFIUS will have 30 days to either complete its review of the subject transaction, request a formal notice filing or commence a unilateral full review of the transaction.
Process and Fees
Under the prior CFIUS regime, if a notice was filed there was a 30-day review period in which the CFIUS staff had to analyze the covered transaction. FIRRMA expanded this initial review period for traditional notice filings from 30 days to 45 days. At the end of this 45-day period, CFIUS must determine whether the transaction can be cleared or if an additional 45-day investigation is warranted. FIRRMA also added an additional 15-day extension to the investigatory process, if necessary.
Under FIRRMA, filing fees will also be required when submitting a notice to CFIUS for review. Filing fees were never required under the prior CFIUS regime. Each filing fee cannot exceed the lesser of (i) 1% of the transaction value and (ii) $300,000. Over time, CFIUS will also assess whether it will be feasible to add a prioritization fee with respect to expedited CFIUS reviews.
The CFIUS landscape will continue to develop following the passage of FIRRMA, as the new law authorizes CFIUS to promulgate regulations that will further clarify the covered transactions that will be subject to CFIUS review. For more information on FIRRMA or the CFIUS regime, please visit the U.S. Congress website at congress.gov.