On September 17, 2019, the U.S. Department of Treasury issued two new proposed rules for the Committee on Foreign Investment in the United States (CFIUS) implementing the Foreign Investment Risk Review Modernization Act (FIRRMA), which was enacted in August 2018. The first proposed rule covers, among other things, FIRRMA’s expansion of CFIUS’ jurisdiction to non-controlling investments in U.S. businesses engaged in critical technology, critical infrastructure and sensitive personal data. The second proposed rule addresses FIRRMA’s expansion of CFIUS’ jurisdiction over certain real estate transactions.
Recent comments from Bureau of Industry (BIS) officials at the BIS Update indicate the U.S. Government is progressing towards more detailed proposed rules with respect to both “emerging” and “foundational” technologies that will become subject to future export controls. This required rulemaking is part of an interagency effort mandated by the Export Control Reform Act (ECRA) of 2018.
The Committee on Foreign Investment in the U.S. (CFIUS) has cleared the acquisition of Beijing OmniVision Technologies Co., Ltd. by Shanghai Will Semiconductor Co., a PRC-listed company, according to an April 16, 2019, filing with the securities regulators in China. This is welcome news after a string of negative decisions by CFIUS.
On November 19, 2018, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) issued a proposed rulemaking seeking public comment on criteria for identifying emerging technologies that are essential to U.S. national security.
The U.S. Department of the Treasury issued temporary regulations establishing a partial pilot program implementing two key changes to the jurisdiction and review of transactions by the Committee on Foreign Investment in the United States (CFIUS). The pilot program (1) expands the scope of transactions subject to review by CFIUS to include certain “other investments” involving foreign persons and critical technologies (though not critical infrastructure or companies with personal identifier information); and (2) makes effective a mandatory declaration provision for all transactions that fall within the specific scope of the pilot program. The pilot program will largely impact investments in companies involved in critical technologies pertaining to a specified list of industries by NAICS code, including the aircraft, semiconductor, nuclear, and telecommunications sectors. It also makes filing declarations a mandatory requirement for covered transactions involving these companies, which include acquisitions of control as well as non-controlling investments (including investments of less than 10%) that afford the foreign investor certain rights.
Importantly, the pilot program will commence on November 10, 2018 and will apply on a global basis (i.e., there is no country exemption at this time). The pilot program will not apply to transactions completed prior to November 10 or to transactions for which the parties have executed a binding written agreement or other document establishing the material terms of the transaction prior to October 11, 2018.
On August 13, 2018, President Trump formally signed the 2019 National Defense Authorization Act, signaling a number of substantial changes on the horizon for government contractors and foreign investors in the United States. In “President Trump Signs FY 2019 NDAA,” our colleagues Richard B. Oliver, Glenn Sweatt, Alexander B. Ginsberg and Kevin Massoudi offer a roundup of Pillsbury’s coverage of the key issues.
House and Senate negotiators have agreed on proposed reforms to the Committee on Foreign Investment in the United States (CFIUS) foreign investment review process, which has been added as Title XVII of the FY2019 National Defense Authorization Act (NDAA). The final bill makes a number of changes intended to improve the efficiency of national security reviews and investigations, although a significant increase in staff and funding will be required in order to handle the increased caseload. Importantly, outbound technology transfers in the context of joint ventures and other collaborative arrangements will not be added to the “covered transaction” definition, but will instead be addressed by U.S. export controls.
Recently, the U.S. Senate overwhelmingly passed the 2019 National Defense Authorization Act, H.R. 5515 (NDAA). The Senate version contains several differences from the NDAA as passed by the House, and these discrepancies must now be resolved through a joint conference committee. Notably, the Senate attached to the NDAA its proposed Foreign Investment Risk Review Modernization Act (FIRRMA), which would update and alter the CFIUS review process. The House had not attached its CFIUS reform bill, H.R. 5841, but recently passed this bill as a standalone piece of legislation. Both bills would expand CFIUS jurisdiction to include certain types of non-controlling investments, affecting foreign investors in U.S. businesses. However, impacts would vary depending on whether the investor is from a country of special concern or an allied nation.
While there are also commonalities, important differences between the Senate and House proposed CFIUS reform legislation are described below.
There are several legislative proposals pending in Congress targeting trade and investment involving China. If enacted, the proposals would prevent Chinese entities from acquiring certain U.S. technologies, prohibit U.S. government procurement from ZTE and Huawei, and limit U.S. issuers from receiving investments from Chinese parties.
Recent reports suggest that the Administration may declare an emergency under the International Emergency Economic Powers Act (IEEPA) to grant the Committee on Foreign Investment in the United States (CFIUS) authority to review transactions involving the transfer of U.S. technology and intellectual property (IP) to foreign entities, even where there is no transfer of “control” as currently required under existing CFIUS regulations. This executive action would follow a memorandum issued by President Trump directing the U.S. Government to propose possible restrictions on Chinese investment in U.S. companies due to concerns outlined by the Office of the United States Trade Representative (USTR) in connection with its Section 301 investigation. The potential CFIUS review of U.S. technology transfers to foreign entities would mirror one aspect of the pending Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA).