Every foreign investor interested in investing in the U.S. need sit up and take notice of the newly enacted Foreign Investment Risk Review Modernization Act ("FIRRMA"), part of the John S. McCain National Defense Authorization Act (NDAA) recently signed into law by President Trump on August 13, 2018. FIRRMA expands the role and responsibilities of the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency Committee, originally established in 1950. Its charge is to review inbound foreign investment ("covered transactions") in U.S. interstate commerce [specifically, any "merger, acquisition, or takeover…by or with any foreign person" or with a foreign government or foreign government controlled entity] which may potentially affect the national security of the United States and to block or enforce any agreement or condition to mitigate any such threats to national security. FIRRMA adds "teeth" to how CFIUS can review potential investments which in the past have been outside its jurisdiction and to more effectively provide timely reviews of submissions.
FIRRMA's key provisions were adopted in response to growing foreign investments, particularly from China, in real estate acquisitions in sensitive areas and in U.S. companies which provide access to sensitive information or technologies critical to U.S. security, even if the investment is non-controlling and represents a minority investment. Other significant changes include an extended timeline for review, short form "declarations" to speed up the review process, mandatory submissions for certain transactions and initiation of filing fees and funding for CFIUS.
While some changes will take effect immediately, many changes will not take effect until CFIUS prescribes their implementing regulations. Current regulations are in force until CFIUS provides guidance on the specifics of the new regulations, which is the earlier of either 18 months of the date of enactment or the date that is 30 days after publication in the Federal Register after a determination that the regulations, organizational structure, personnel, and other resources necessary to administer the new provisions are in place.
However, in this new environment, foreign businesses and their legal advisors need to understand the emerging U.S. framework for national security and economic impact review, with a new, expanded bureaucratic role for CFIUS. These changes will impact due diligence, deal structuring, risk allocation, execution and post-execution deal breakup scenarios.
"Covered Transactions." Covered transactions have been expanded to include:
a. Any merger, acquisition or takeover carried out through a joint venture;
b. U.S. real estate purchases, leases or concessions by a foreign person:
- 1. "Located within or will function as part of, an air or maritime port;"
2. In close proximity to a U.S. military installation, government facility/property that is sensitive for reasons relating to national security, such as at risk of foreign surveillance of national security activities or collection of intelligence on activities being conducted at the facility/property.
a. any change in the rights of a foreign person if that change results in control of a U.S. business;
b. any "other investment" by a foreign person in any unaffiliated U.S. business, that:
- 1. Owns, operates, manufactures, supplies, or services critical infrastructure;
2. Produces, designs, tests, manufactures, fabricates or develops one or more critical technologies;
3. Maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.
However, FIRRMA gives CFIUS the ability to limit the scope of these type of non-controlling passive investments. Some waivers and exemptions exclude the financial information of a U.S. business' performance, indirect other investment in funds where the fund is managed by the general partner, managing member or equivalent and is not a foreign person or where the foreign person does not have the ability to control the fund or has access to any material nonpublic technical information.
By adding "other investment," FIRRMA appears to be more likely to capture small investments which may have escaped prior notice.
While broad in scope, it is still incumbent on CFIUS to prescribe regulations that govern much of the terms, such as "foreign person" and to "enumerate specific types and examples of such critical infrastructure." Critical technologies also includes "emerging and foundational technologies," as yet to be defined in section 1758 of the "Export Control Reform Act (ECRA) of 2018," another part of the NDAA.
Non-Declared Transactions. FIRMMA authorizes CFIUS to establish a process to identify covered transactions for which a notice or declaration was not submitted..
Extended Timelines. Effective immediately, CFIUS' initial review period for written notices is extended from 30 to 45 days and its subsequent investigation period of 30 days can be extended by 15 days in "extraordinary circumstances." However, it also mandates comments from CFIUS to all parties within 10 days of a draft or written notice, enabling parties to respond on a more timely basis. In the past, CFIUS had no such requirement.
"Declaration" Filings. Certain transactions may be submitted to CFIUS by one party as a declaration with basic information, not to exceed 5 pages in length (instead of a written notice), which could result in shorter review times since CFIUS must respond to such declarations within 30 days. It may request a written notice for review, initiate a unilateral review and approve the transaction.
Mandatory Declarations. In the past, written notices to CFIUS were voluntary, although CFIUS had the power to compel parties to file a written notice for review. Now, certain covered transactions are mandatory declarations. These involve a foreign person's investment that results in a substantial interest in a U.S. business by a foreign government or any investment by a foreign person in a U.S. business that develops one or more critical technologies. If CFIUS determines that the foreign person demonstrates that the investments of the foreign person are not directed by a foreign government and the foreign person has a history of cooperation with the Committee, it may waive review.
Filings Fees and Funding and Staffing. FIRMMA requires dedicated CFIUS staffing and allows agencies to appoint new staff. Its initial budget is $20,000,000 to perform the functions of CFIUS. In addition for the first time, it institutes filing fees for written notices (not declarations) and sets limits on these fees. However, it leaves the implementing regulations for prescribing these fees and procedures for CFIUS to define.
Remedies. Expanded choices include: suspension of the covered transaction while under review or investigation; referral to the President for a decision at any time; or negotiate, impose, enforce any agreement or condition with any party to a completed covered transaction to mitigate any interim risk after a risk based analysis. Any agreements or conditions are to be effectuated in a compliance plan, that must be monitored for adherence and kept updated. If non-compliant, the CFIUS may impose penalties, injunctive relief or negotiate a plan to remediate the lack of compliance.
Reporting Requirements. FIRRMA significantly increases the number of reports to be made to Congress, including a much more detailed review of all covered transactions completed, especially monitoring and compliance plans, as well as all declarations. Other reports include Chinese investment in the U.S. (every 2 years), how it compares to the Made in China 2025 plan and any difficulties in collection of the data, the national security risks of foreign state-owned or controlled entities in the manufacture or assembly of rail systems in the U.S. and a briefing on transactions reviewed by CFIUS in the past 5 years which would have allowed foreign persons to inappropriately influence democratic institutions and processes within the United States and in other countries; and the disposition of such reviews.
Planning for Cross-Border Investment and Exclusive Licensing Deals. Corporate counsel should manage several issues when engaged in cross-border transactions under these new regulations.
Plan. Planned transactions should include a pre-negotiation analysis of the suitability of the deal under CFIUS. Management needs to understand national security vulnerabilities and threat factors, SOE risk analysis, transparency, and disclosures by the acquirer and the costs, risks, and contractual allocation of risks in case the deal is blocked.
Understand Timing Expectations. The parties should expect delays of up to four months (the maximum timeline for CFIUS reviews and referral to the President is 105 days), yet be able to respond to CFIUS information requests in three days, regardless of languages and time zones. Sensitivity to delays should be managed. If either buyer or seller is a publicly-traded company, investors will need to be informed under applicable securities disclosure laws.
Manage Foreign Financing Risks. Foreign buyers subject to foreign exchange control must ensure the timing of CFIUS review does not kill the financing. They must also account for the advent of filing fees to be added to their budgets.
Manage CFIUS-Based Risks. The parties should identify and manage the impact of CFIUS delays, mitigation and outright denials. Contractually, such risks should be defined and allocated to the foreign buyer in an enforceable manner. Sellers might insist on a reverse-breakup fee if CFIUS blocks the deal. To secure payment, an escrow could be imposed. To secure CFIUS consent, before negotiating any definitive agreement, the parties should negotiate conditions under which buyer would accept CFIUS-imposed mitigations to clear the transaction.
Investors and business alike interested in cross-border deals should continue to monitor the development and implementation of the new regulations by CFIUS. FIRRMA enables CFIUS to more effectively and efficiently address national security concerns with foreign investment once it finishes its rulemaking process which should provide greater transparency and predictability for investors and businesses as they design their global strategies. It also provides the opportunity to work more closely with foreign investors in countries allied with the U.S. as its new declarations notices allow CFIUS to expedite reviews, thus reducing time and cost in closing these cases.
CFIUS operates pursuant to section 721 of the Defense Production Act of 1950, as amended (section 721), and as implemented by Executive Order 11858, as amended, and regulations at 31 C.F.R. Part 800. https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius
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