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International Law Bulletin

November 13, 2017

New Legislation Would Subject Foreign Investment in the United States to Enhanced National Security Reviews with a Focus on Chinese Investors

By Edward L. Rubinoff, Christopher T. Cushing

Bipartisan legislation was introduced in both Houses of Congress last week by lawmakers seeking to strengthen the power of the Committee on Foreign Investment in the United States (CFIUS) to review foreign direct investment in the United States, reflecting growing concern about Chinese investment in sensitive U.S. technology and infrastructure companies.  The bills would expand CFIUS jurisdiction to review deals that do not result in foreign control of a U.S. business, add new criteria for CFIUS to consider in assessing whether foreign investments threaten U.S. national security, and revise CFIUS procedures to facilitate reviews.  If enacted, the bills would significantly increase the number of foreign investment transactions that CFIUS could review, provide CFIUS greater powers to collect more information, and create tougher standards for obtaining CFIUS clearance, especially for Chinese investment in American technology companies.  Given the bipartisan sponsorship of the legislation, coupled with the apparent Trump administration support for their objectives, there is a good likelihood that the bills will be enacted and signed into law in substantially the form in which they were introduced. 

Background

Senators John Cornyn (R-TX), Dianne Feinstein (D-CA) and Richard Burr (R-NC) introduced the Foreign Investment Risk Review Modernization Act (FIRRMA) in the Senate on November 8, 2017, while a companion bill was introduced in the House of Representatives by Representative Robert Pittenger (R-NC).  The bills would broaden CFIUS’s authority to scrutinize foreign investment in the United States and establish additional criteria to weigh in assessing the national security threats of such transactions.  Each bill is backed by several legislators from both parties. 

In a statement announcing the legislation, Sen. Cornyn said that the changes are needed to address gaps in the CFIUS review process that foreign investors are exploiting in a bid to target sensitive technologies.  Rep. Pittenger also emphasized the perceived threat from inceasing investment from China as a factor driving the need for CFIUS to be updated for the first time since 2007.  Several Chinese-driven deals have either been blocked or delayed this year after encountering objections from CFIUS.  For example, in September, President Trump, at the recommendation of CFIUS, blocked the sale of chip-maker Lattice Semiconductor Corporation to a Chinese-funded investment firm, citing the Chinese government’s role in supporting the acquisition as one of the reasons for the action.  Pending deals facing challenges include Ant Financial’s takeover of MoneyGram, Genworth Financial Inc.’s sale to China Oceanwide Holdings Group, and HNA Group Co.’s investment in SkyBridge Capital LLC.  These actions suggest that the Trump administration is already taking a more restrictive approach to Chinese investment in the United States under the current law.      

Expanded CFIUS Jurisdiction to Review a Broader Range of Foreign Investment

Under current law, CFIUS reviews foreign investment transactions that would result in foreign control of a U.S. business.  FIRRMA would expand the definition of such “covered transactions” to include investments that do not involve foreign control, but present other concerns, including the following:

  • Any investment by a foreign person in any U.S. “critical technology” or “critical infrastructure” company;
  • The purchase or lease by a foreign person of real estate that is located in “close proximity” to a U.S. military installation or other sensitive facility;
  • Joint ventures or other arrangements with foreign persons whereby a U.S. “critical technology” company contributes both intellectual property and associated support;
  • So-called “passive” investments in critical technology and infrastructure companies, regardless of the level of foreign ownership, that would result in a foreign person gaining (1) access to non-public technical information or non-technical information that is not available to all investors, (2) membership or observer rights to the board of directors or equivalent governing body, or (3) involvement in substantial decision-making on any matter; and
  • Any covered transaction that arises in bankruptcy proceedings or default of debt.

The term “critical technology” would be amended to include “emerging technologies” that could be essential for maintaining, gaining or increasing the technological advantage of the United States over “countries of special concern” (a term that will be defined by regulation, but which clearly targets China) with respect to national defense, intelligence, or other areas of national security.  In this regard, the Department of Defense has expressed concerns about Chinese investment in U.S startups that are developing leading edge technology with military applications, such as artificial intelligence, augmented reality and robotics. 

The bills create an exemption for certain of the new types of covered transactions where all foreign investors are from designated countries that meet certain criteria, i.e., they either have a mutual defense treaty with the United States, a mutual arrangement to safeguard national security with respect to foreign investment, or a national security review process for foreign investment.  Both the EU and the UK are considering new foreign investment frameworks or laws. 

Additional Criteria for Evaluating National Security Threats

FIRRMA identifies several new and expanded factors that CFIUS should consider in determining whether a covered transaction poses a U.S. national security risk, including whether the transaction would:

  • Involve a “country of special concern” that has a demonstrated or declared strategic goal of acquiring a type of critical technology that a targeted U.S. business possesses;
  • Expose personally identifiable information, genetic information or other sensitive data of U.S. citizens to a foreign government or person that may exploit that information;
  • Create or exacerbate cybersecurity vulnerabilities in the United States;
  • Provide a foreign government a significant new capability to engage in “malicious cyber-enabled activities” against the United States;
  • Expose information regarding a sensitive matter of a federal law enforcement agency;
  • Increase the U.S. Government’s cost of acquiring or maintaining equipment and systems necessary for defense, intelligence or other national security functions;
  • Affect a foreign person’s market share of any type of infrastructure, energy asset, critical material or critical technology; and
  • Reduce the technological or industrial advantage of the United States relative to any country of concern.

Procedural Reform

  1. Notifying CFIUS of a Covered Transaction

CFIUS reviews are generally initiated by the voluntary submission of a joint notice by the parties to a covered transaction. The joint notice must contain detailed information about the transaction and the parties, as prescribed by CFIUS regulations.  FIRRMA would change this procedure by allowing parties to submit “voluntary declarations,” containing basic information regarding the transaction, in lieu of a detailed joint notice.  (A declaration would be mandatory if a covered transaction involves the acquisition of a voting interest of at least 25% in a U.S. business by a foreign person owned at least 25% by a foreign government.)

A declaration must be submitted not later than 45 days before completion of a transaction, whereas a written notice must be filed not later than 90 days before completion.  CFIUS would have several options for responding to a declaration in lieu of a written notice.  It could, within a targeted period of 30 days from receipt of a declaration:

  • Request the parties to file a written notice;
  • Inform the parties that it cannot complete action on the transaction on the basis of the declaration and that the parties may file a written notice;
  • Initiate a unilateral review of the transaction; or
  • Notify the parties that it has completed a review. 
  1. Timing of Review

Under current law, CFIUS conducts an initial review of a covered transaction within 30 days of initiation.  If it determines that the transaction poses no national security threat to the United States, it will terminate the review, allowing the parties to proceed with the transaction.  If it determines that further investigation is required to assess the national security implications of a covered transaction following the initial 30-day review, it commences a 45-day investigation.  CFIUS cannot extend the investigation period even if it determines that more time is needed to conclude the investigation or to negotiate a mitigation agreement with the parties to address national security concerns.  In these circumstances, CFIUS practice is to have the parties withdraw and then refile their notice, thereby initiating new initial review and investigation periods, as needed.  FIRRMA would allow CFIUS to extend an investigation for one 30-day period. 

  1. Other Key Changes
  • CFIUS is authorized to suspend a proposed or pending covered transaction that may pose a national security risk for such time as the covered transaction is under review;
  • CFIUS may, at any time during a review or investigation of a covered transaction, refer the transaction to the President for action as authorized to address the national security risks identified by CFIUS (i.e., suspend, prohibit, order divestment, etc.);
  • Although confidential information submitted by the parties is generally protected from disclosure, CFIUS would be authorized to make exceptions for (1) information relevant to any administrative or judicial action or proceeding, (2) information for any committee of subcommittee of either house of Congress or (3) information to any domestic or foreign governmental entity necessary for national security purposes;
  • Parties to a mitigation agreement required by CFIUS as a condition of clearing a transaction may engage an independent entity to monitor their compliance with the agreement; and
  • CFIUS may require filing fees not to exceed the greater of (1) 1% of the transaction value or (2) $300,000,  as adjusted annually for inflation.

A number of Administration officials have called for updating the CFIUS foreign investment review process, and Treasury has reportedly been closely involved in drafting the FIRRMA bills.  Despite the bipartisan congressional support for the legislation and the Administration’s apparent backing, the bills will be vetted in hearings and committee meetings, so interested parties will have the opportunity to weigh in on its provisions and possible impacts.  The final outcome is far from determined.