Three Key Aspects of the Proposed Reform to the CFIUS Process
On November 8, 2017, members of the U.S. House and Senate introduced companion legislation that would update the Committee on Foreign Investment in the U.S. (CFIUS) and the national security review process. The bill, entitled the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA), would change the scope of what is considered a “covered transaction” and add a new “declaration” process that would be required in certain cases. Below are three of the most significant changes contained in the proposed bill.
1. New Definition of “Covered Transaction” Captures New Types of Transactions and Clarifies Others
Currently, a “covered transaction” includes a transaction by or with a foreign person that could result in control of a U.S. business. The bill broadens the definition of a “covered transaction” to include five additional types of transactions, though some of the new additions clarify what CFIUS already considered to be “covered” under existing regulations:
- The purchase/lease by a foreign person of real estate located in the U.S. in close proximity to military or other U.S. Government sensitive national security facilities;
- Note that CFIUS traditionally has reviewed acquisitions of physical property located near sensitive facilities. For example, China’s Anbang Insurance Group Co.’s attempt to purchase the Hotel del Coronado in San Diego, California was called off due to CFIUS concerns as the hotel is located near a U.S. naval base.
- Any non-passive investment by a foreign person in any U.S. critical technology company or critical infrastructure company subject to regulations further defining the term by reference to technology, sector/subsector, transaction type, or other characteristics;
- FIRRMA would also clarify what is a considered to be a “passive” investment, narrowly construing the term to exclude transactions involving observer seats on the company’s board, or where the foreign investor has access to nonpublic technical information or nontechnical information not available to all investors.
- Any change in a foreign investor’s rights regarding a U.S. business, if it could result in either foreign control of the U.S. business or in a non-passive investment;
- This would likely be viewed as a covered transaction under existing regulations.
- The contribution by a U.S. critical technology company to a foreign person of both intellectual property (IP) and associated support through a joint venture or other arrangement; and
- CFIUS considers a covered transaction to include an acquisition of U.S. assets that constitute a “U.S. business.” However, FIRRMA would clarify and expand this authority to include joint ventures and licensing arrangements that would not be covered under the current rules.
- Any other transaction, transfer, agreement, or arrangement the structure of which is designed/intended primarily to evade/circumvent CFIUS.
- This is a new concept and it remains to be seen how CFIUS will interpret and enforce this provision.
2. New “Declaration” Process Imposes a Voluntary or Mandatory Filing Requirement Depending on the Transaction
FIRRMA creates a new, streamlined “declaration” that can be filed in lieu of a formal CFIUS notice. The declaration must be filed no later than 45 days before the completion of the transaction. The exact contents of the notification are to be determined by regulation, though the declaration is designed to be an “abbreviated” document no longer than five pages in length. Following submission of a declaration, CFIUS would have to “endeavor” to do one of the following within 30 days:
- Request a formal CFIUS notice;
- Inform the parties CFIUS is unable to complete action and that the parties may file a notice seeking a written notification that CFIUS has concluded all action with respect to the transaction;
- Initiate a unilateral review of the transaction; or
- Clear the transaction.
While voluntary in some cases, the bill outlines the following circumstances where a declaration is mandatory:
- Where the transaction involves the acquisition of at least 25% of the voting interest by a foreign person in which a foreign government directly or indirectly owns at least a 25% voting interest; and
- Any covered transaction identified by CFIUS in its discretion based on appropriate factors (e.g. the technology or industry of the U.S. business, the difficulty of remedying the national security harm if the transaction were completed, and the difficulty of obtaining information on the type of covered transaction through other means).
Note that where a declaration is required, the parties may elect to submit a written notice instead, which must be filed no later than 90 days before the completion of the transaction.
The mandatory filing requirement is a significant departure from the historically voluntary nature of the CFIUS process. Moreover, companies will need to elect whether to file a declaration or to submit a formal notice. For parties that assume CFIUS will clear the transaction following an abbreviated declaration, significant timing complications can arise should CFIUS require a formal notice.
3. Longer Review Periods with Limited Extensions Add Certainty to the CFIUS Timeline
FIRRMA extends the initial review period from 30 days to 45 days and would authorize CFIUS to extend any investigation for one 30-day period in extraordinary circumstances (to be defined by CFIUS in regulations), at the request of the head of a lead agency.
Based on the above, there would be a new 45 + 45 + 30 framework. While less sensitive transactions would now be subjected to a longer review period, more complex transactions may be resolved more quickly presuming there would be no longer be a withdrawal and re-file option.
The bill contains several other significant reforms, including expanded authority to address non-notified transactions or even suspend transactions pending CFIUS review, as well as other administrative changes. For example, CFIUS would be able to assess a filing fee for notices (though not declarations), capped at the lesser of 1% of the value of the transaction or $300,000.
While expected to have bipartisan support, the future of the bill and timing for possible enactment remain uncertain. Now that the bill has been introduced and referred to committee, the next step would be for a markup to occur by the relevant congressional committee. Sen. Mike Crapo (R-ID), chair of the Senate Banking Committee indicated that a markup will only take place once interested parties can reach an agreement on the language of the bill. It is also uncertain whether the bill will continue as a standalone piece of legislation or will be added to another existing bill.
FIRRMA’s introduction also comes as the U.S.-China Economic and Security Review Commission, a bipartisan 12-member congressional commission, released its 2017 annual report. In the report, the Commission recommends that Congress consider legislation to update CFIUS in order to address current and evolving security risks. Issues raised by the Commission include certain recommendations already in FIRRMA (e.g., expanding coverage to include joint ventures and licensing arrangements), but in some cases goes even further. For example, the Commission recommends Congress consider whether to prohibit the acquisition of U.S. assets by Chinese state-owned or –controlled entities and to add a net economic benefit test to the CFIUS review process. It remains to be seen whether any of these other issues will be addressed by FIRRMA.