On July 8, 2024, the U.S. Treasury Department (“Treasury”), as the lead agency of the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”), issued a proposed rule to expand the Committee’s jurisdiction over certain transactions by foreign persons involving real estate in the United States. This proposed rule would add over 50 military installations to the existing list of installations around which CFIUS has jurisdiction.

Specifically, the proposed rule would:

• Expand CFIUS’s jurisdiction over real estate transactions to include those within a one-mile radius around 40 additional military installations;
• Expand CFIUS’s jurisdiction over real estate transactions to include those within a 100-mile radius around 19 additional military installations;
• Expand CFIUS’s jurisdiction over real estate transactions between 1 mile and 100 miles around eight military installations already listed in the regulations;
• Update the names of 14 military installations already listed in the regulations to better assist the public in identifying the relevant sites; and
• Update the location of seven military installations already listed in the current regulations to better assist the public in identifying the relevant sites.

In addition to the above expansion of CFIUS jurisdiction, the proposed rule would also amend various definitions within the regulations.

Please contact our CFIUS team if you need assistance navigating these latest developments.

CFIUS reviews “certain transactions involving foreign investment into businesses in the United States and certain transactions by foreign persons involving real estate in the United States” to understand the effect of such transactions on the United States’ national security. CFIUS enforces compliance with statutes, regulations, and negotiated agreements, using its ability to impose civil monetary penalties and other remedies.

The proposed rule has three key components. First it expands the subpoena authority to acquire information from “third persons not party to a transaction notified to CFIUS and in connection with assessing national security risk associated with non-notified transactions.” This will allow CFIUS to obtain more information for non-notified transactions, which CFIUS indicated would help it better assess which non-notified transactions require further review. Second, CFIUS would have increased authority to impose harsher penalties on those that provide incomplete or misleading information or otherwise violation CFIUS rules and regulations. The base maximum would be raised from $250,000 to $5,000,000. Lastly, the rule would institute an extendable timeline for parties to respond to risk mitigation proposals to allow CFIUS to conclude reviews or investigations within “the statutory time frame.” Importantly, parties will only have three business days to respond to risk mitigation proposals, which could create time crunches for negotiating with CFIUS.

Other items in the proposed rule include:

• Expanding the scope of information CFIUS can require of transaction parties and other persons on transactions not filed with CFIUS.
• Extending the deadline for submissions for reconsiderations of penalties.

Parties affected by the rule have until May 11th to submit comments to Treasury. Those who frequently engage in the CFIUS review process may wish to submit comments during this time.

Please contact our CFIUS, export controls, and sanctions team if you need assistance navigating these latest developments.

To the extent the recommendations are accepted, industry could see even further restrictions on dealings with China. In particular, the proposals could result in more export controls enforcement and the granting of fewer licenses. Industry could also see additional scrutiny for Chinese investment into the United States.

A select summary of the report’s key findings and recommendations is below.

Export Controls. The Commission found that, even where coordinated with allies, current U.S. export controls are “insufficient” to stem the flow of knowhow and capital into China’s defense sector. The effectiveness of export controls is diluted by China’s MCF strategy, which combines the capabilities and innovation of civilian sectors “to drive military development through . . . policies and government-supported mechanisms.” This MCF strategy necessitates a “renewed focus on dual-use technologies, particularly in current multilateral regimes, which focus mainly on preventing the spread of military technologies that currently exist rather than preventing the development of new ones.”

The Commission recommended that Congress evaluate the possibility of establishing a single export licensing system. This system would integrate the Commerce Control List and the U.S. Munitions List, which refer to dual-use technology and armament licensing systems managed by the Commerce Department’s Bureau of Industry and Security (BIS) and the State Department’s Directorate of Defense Trade Controls, respectively. In evaluating the feasibility of a single export licensing system, the Commission advised that Congress evaluate, among other factors, (1) the commercial impact of combining the licensing systems, (2) which technologies to include in a combined system, and (3) which U.S. government agency should be in charge of the new system.

Additionally, the Commission recommended that Congress direct the General Accountability Office to evaluate the effectiveness of the recently imposed semiconductor export controls. These controls are designed to prevent China from acquiring or developing the capacity to manufacture certain advanced semiconductors. Last month BIS published interim final rules seeking to address certain gaps BIS found in its existing controls on advanced computing items, semiconductor manufacturing equipment, and items that support supercomputing applications and end-uses.

The Commission found that, following the implementation of BIS’s controls on the semiconductors that go into artificial intelligence (AI), MCF allowed China to expand its circumvention of U.S. restrictions by “scaling up thousands of intermediaries to [procure high]-end chips, including from U.S.-based NVIDIA.” This allowed the Chinese military to make rapid advances in AI for defense applications through its partnerships with civilian entities, and that “investment and procurement patterns suggest the [China] aims to use AI-enabled weapons systems to counter specific U.S. advantages and target U.S. vulnerabilities.”

Committee on Foreign Investment in the United States (CFIUS). The Commission recommended that CFIUS, an inter-agency committee that screens U.S.-bound investments, be granted the authority to “review investments in U.S. companies that could support foreign acquisition of capabilities to attain technological self-sufficiency or otherwise impair the economic competitiveness of the United States.” These “capabilities” would include investments in technology that are prioritized in the industrial policies of adversarial countries and investments in U.S. firms that have received funding from the U.S. government for projects critical to national security.

This recommendation from the Commission, if enacted, would complement an Executive Order issued by the Biden Administration last year directing CFIUS to consider additional national security risks in its evaluations of transactions. Importantly, the U.S. Treasury Department, which chairs CFIUS, is also in the process of drafting regulations to restrict U.S. outbound investment to countries that pose a risk to U.S. national security. CFIUS itself, as well as this forthcoming outbound investment screening mechanism, would have the effect of limiting China’s ability to procure technology that could go into the development of AI.

China’s Influence Over Foreign Militaries. China is keen to advance its technological prowess, partly through the acquisition of U.S. technologies. Because of this, there is a risk that U.S.-controlled technology could be supplied to the foreign militaries that China partners with. The Commission found that China seeks to deepen its influence over foreign militaries to undermine U.S. interests and “pursue relevant combat support capabilities in communications, logistics, survival skills, military medicine, and other basic military skills. Further, in addition to being a major exporter of small arms, “China has both improved the quality of its exports and expanded the range of equipment it provides, with the most notable advances in aircraft and ships.”

To that end, the Commission recommended that the U.S. Department of Defense (DOD) submit a report to Congress “detailing measures DOD is taking to mitigate the risk of the [Chinese military] gaining indirect knowledge of U.S. Armed Forces’ equipment and operational tactics, techniques, and procedures through interactions with the militaries of U.S. allies and partners.” The Commission also recommended that the report identify the steps necessary for end-use monitoring to ensure compliance.

In summary, U.S.-based firms should take the above issues raised by the Commission into account when considering sales to China or investments involving Chinese entities. Opportunities being pursued with China now may come under additional scrutiny or restrictions later as the Commission’s proposals are reviewed and potentially implemented.

Please contact our sanctions and export team if you need assistance navigating these developments in the course of certain sales to China.

On October 20, the Committee on Foreign Investment in the United States (CFIUS or the Committee) issued a press release laying out new guidance to provide clarity about how the Committee assesses violations of the laws and regulations that govern transaction parties, including potential breaches of CFIUS mitigation agreements.

Penalties are possible for the following behavior:

• Failure to File – After the 2018 and 2019 amendments to the CFIUS rules, certain CFIUS filings are now mandatory, including those where the U.S. target makes or holds information related to making items that are controlled for export. Many companies (especially those that don’t export) are not aware that their products (or existing know-how) are controlled for export. Moreover, the scope of export controls has been expanding, which in turn expands the scope of covered CFIUS transactions.
• Non-Compliance with CFIUS Mitigation – When CFIUS has national security concerns about a transaction that it believes can be mitigated through restrictions on foreign national access to technology and via other limiting steps, it will sometimes agree to allow the transaction to proceed, but only if specific, agreed mitigating steps are are fully followed, often described in national security agreements. The new guidance emphasizes that CFIUS will be watching more carefully for compliance with those agreements and that penalties await companies that do not comply.
• Material Misstatement, Omission, or False Certifications to CFIUS during a Review Process – If a party to a CFIUS review makes material misstatements, omissions, and/or false certifications in their documentation filed with CFIUS, then that party could be seen as inhibiting the Committee’s ability to conduct a comprehensive review, and that risks imposition of a penalty.

We expect to see announcements of penalties going forward.

Supply Chain Resilience. The EO directs the Committee to consider a covered transaction’s effect on supply chain resilience and security, both within and outside of the defense industrial base. The underlying message is that CFIUS should look broadly at supply chain effects of proposed acquisitions and not just focus on direct national security effects. The concept of the U.S. supply chain writ large as a CFIUS national security concern is relatively new and could lead to CFIUS reviews of more proposed transactions.

U.S. Technological Superiority. The EO identifies sectors crucial to the U.S.’s global technological advantage, including, but not limited to, microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies, and the agricultural industrial base. The EO directs the Committee to consider whether or not a transaction would compromise the manufacturing capabilities, services, critical mineral resources, or technologies of the listed sectors.

Industry Investment. The EO also directs the Committee to consider the risks arising from a covered transaction in the context of multiple acquisitions or investments in a single sector or in related sectors in order to safeguard any given sector from compromise / control by an adversarial foreign entity.

Cybersecurity. The EO directs the Committee to consider whether a covered transaction may provide a foreign person, or a third-party, with access to conduct malicious cyber activities, in addition to the cybersecurity posture, practices, capabilities, and access of all parties to the transaction that could afford a foreign person, or third-party, the ability to achieve such activities.

Sensitive Personal Data. The EO directs the Committee to consider whether a covered transaction involves a U.S. business with access to U.S. persons’ sensitive data, and whether the foreign investor has the ability to exploit such information to the detriment of national security, including through the use of commercial or other means.

This EO instructs CFIUS to pay attention to many areas that are already the focus of Committee activity – as reflected in the Committee’s regulations and in much of itsrecent activity. That said, the instruction on supply chains will encourage CFIUS to think more broadly in that area. The EO is also intended as a message to U.S. acquisition targets and to non-U.S. companies thinking about acquisitions, including Chinese companies that have been contemplating a stricter CFIUS landscape, that scrutiny of proposed transactions in the key areas listed will be enhanced even further. The EO is also a message that can be referenced in forthcoming mid-term election races that this administration is intent on protecting U.S. national security as defined very broadly by this EO.

The new approach implements the requirements of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA, which amended the prior CFIUS statute) to clarify whether a review will be required of foreign investments by CFIUS for "critical technology businesses." In short, mandatory review requirements now turn on whether an export license would be required to release export controlled “critical technology” (the know-how required to develop, produce and in some cases to use export controlled items) to the foreign investor country/personnel. There are a few wrinkles related to export license exceptions, but those can be evaluated on a case-by-case basis for proposed acquisitions and investments.

This new approach provides more certainty for both U.S. and non-U.S. companies evaluating proposed investments in the U.S. as it relies on a long-established approach to the identification of export controlled know-how. That said, many U.S. companies make products that are subject to export controls and this new approach makes it clearer than ever that more foreign investment in the U.S. will be subject to mandatory CFIUS filings. The ruling also puts some additional pressure on BIS to continue its progress toward identifying emerging and foundational technologies that should be added to existing traditional export control lists, which are primarily based on multilateral agreements, with some important additional unilateral U.S. controls. As part of that effort, Commerce re-started its moribund Emerging Technologies and Research Technical Advisory Committee as one part of its effort to identify new technologies for export control.

The recent expansion by BIS of controls on a series of relatively low level technologies for military end use and end users (and those who provide “support” for those users) in China, Russia and Venezuela is likely to trigger even more mandatory filings, particularly for proposed Chinese investment. The newly expanded scope of controls for military end users includes a broad swath of relatively basic products, including such common items as stainless steel plate, most industrial pumps and a variety of commonly used valves, items that are commonly traded and not typically thought of as sensitive from a national security standpoint. That said, not all of the newly-listed control categories have associated technology export controls. Sorting out what is controlled for export and what is not for a particular proposed investment will be critical to determining CFIUS filing strategy.

The new regulations follow Treasury’s issuance of a proposed rule on May 21, 2020, as discussed in greater detail in our previous blog post. These final regulations take effect October 15, 2020, and would not apply to transactions completed before October 15, 2020.

The new regulations will result in an increased number of mandatory CFIUS filings for certain countries, especially China and Russia, that have stringent export control requirements. Companies will need to shift from conducting due diligence based on the industry of the target business to analyzing whether an export license would be required to release the U.S. business’s critical technology either to the non-U.S. company acquirer or to a person with 25 percent or more voting interest in the acquirer. CFIUS notes that this voting percentage can apply in certain cases to the acquirer’s general partner, or equivalent.

Where a mandatory declaration is required, it must be filed prior to the completion of the transaction. Failure to timely file can result in significant penalties - up to the transaction value.

We are happy to help your company understand how this final rule or related CFIUS developments may impact your business.

Pursuant to amendments implementing the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which expanded CFIUS jurisdiction in several respects, certain types of transactions are subject to mandatory declarations with CFIUS. Currently, one type of transaction that requires a mandatory filing is one in which: 1) the target company produces, designs, tests, manufactures, fabricates, or develops a “critical technology.” A “critical technology” is an item that is included on one of the U.S. export control lists, including the Commerce Control List (“CCL”), included within the Export Administration Regulations (“EAR”); and 2) the target company uses the critical technology in a sensitive industry, identified in Appendix B to the CFIUS regulations (31 C.F.R. Part 800). This two-prong test is slightly more strict than the export control regulations themselves because an item included in the CCL is not generally restricted for export to all destinations. For example, transactions with NATO allies are generally subject to more permissive restrictions than are transactions with other countries. The current CFIUS mandatory declaration framework does not account for this distinction.

The proposed rule would more closely align the mandatory filing obligations with the export control analysis. Under the proposed rule, the mandatory declaration obligation would be amended to apply to transactions in which the export, re-export, or transfer of a critical technology would require an authorization from one of the export controls regulators. Specifically, CFIUS would consider the nationality of the transaction parties and non-U.S. parties in the ownership chain of the acquiring entity. Further, under the proposed rule, CFIUS would no longer consider the industry in which the target company operates. Overall, we expect that the proposed rule would result in fewer mandatory declarations from countries subject to relatively permissive U.S. export controls.

If implemented, this rule would increase the importance of transaction due diligence clearly identifying what export-controlled items and know-how a target company produces or develops. Because mandatory declarations are required prior to the completion of a transaction and failure to timely file can result in a penalty of up to the transaction value, all parties must clearly understand the export controls implications of a proposed transaction well in advance of a transaction’s close.

Trade rules and surrounding circumstances are changing quickly. For example, the Administration very recently appeared to be seriously considering suspending or lowering certain import tariffs, but backed away from that approach given the complexity of administering a revised system on short notice, among other problems. You are likely also seeing reports about various countries’ restrictions on exports of medicine, medical equipment (including protective equipment and ventilators), and food, among other products. How do you keep up with what is actually happening that may affect your company and what is just rumor that you do not need to react to?

One step companies are taking is to include key personnel from their trade compliance and legal teams in the decision processes related to changing international transactions. You need to move quickly, but including a team member who knows trade rules can help keep things on track and help avoid clear compliance errors.

Here are four substantive areas of U.S. trade regulation that should continue to be part of international transaction diligence: U.S. anti-corruption, export controls, and sanctions laws (that permit most exports of medicines, medical devices, and food to sanctioned locations), and U.S. Customs rules on personal protective equipment and medical devices (among other imported items).

1. Foreign Corrupt Practices Act (FCPA):

2. Importation, Exportation or Re-exportation of Controlled Pathogens and Medical Equipment

Moreover, certain “equipment capable of use in handling biological materials” (e.g., those used for manufacturing vaccines) and “protective and detection equipment and components” related to biological threats may also require a license for export or re-export. [3] There are also potential licensing requirements for software specially designed or modified to enable such biological detection systems.

Next, companies should be aware of potential licensing requirements to export “technology” related to controlled items. Controlled technology includes information related to the production, development or use of controlled items, such as vaccines. For example, technology related to the production of certain protective gear to prevent against controlled pathogens or for manufacturing a vaccine might also require a license. Additionally, releasing controlled technology to a foreign person (e.g., foreign person working in a U.S. laboratory on a vaccine) would be considered a “deemed export” under the EAR and may require a license. There might be a license exception or license available, but, even in an emergency, it is necessary to check to ensure compliance with applicable laws.

Finally, many countries, like the European Union countries,[4] have imposed stringent export control restrictions on certain medical supplies due to COVID-19.[5] While the United States has not yet imposed similar measures on such items as respirators and face masks, they may do so in the future so it is necessary to monitor U.S. policy as the response to the pandemic evolves.

3. Office of Foreign Assets Control (OFAC) Sanctions Concerns, including humanitarian exports of food, medicine and medical devices

Note that there are certain medicines and medical devices that are not covered by the GLs, and would require a specific license.[7] Before exporting to a sanctioned country, companies need to evaluate whether a particular general license is applicable in its entirety or whether they need to request a specific license.

Finally, transactions with, including exports to, any individual or entity on OFAC’s Specially Designated National List remain generally prohibited, so it is important for companies to continue their general denied party screening processes.

4. Remote Work Arrangements

As companies are struggling to maintain normal business operations due to the numerous disruptions created by the COVID-19 pandemic, it is important to ensure that any necessary adjustments do not compound these difficulties by creating violations with strict liability U.S. international trade compliance laws and regulations. Because of the constantly changing circumstances, companies could very easily commit inadvertent violations in an attempt to solve business challenges as they arise. As companies develop strategies to cope with the disruptions caused by the pandemic, international trade compliance must be an element of those discussions. Should any of the above considerations apply to your company, we are happy to discuss.

[1] 15 U.S.C. §§ 78dd-1, et seq.

[2] https://www.bis.doc.gov/index.php/documents/pdfs/2532-severe-acute-respiratory-syndrome-coronavirus-2-sars-cov-2-faq/file

[3] Examples include fermenters, centrifugal separators, freeze-drying equipment, aerosol challenge chambers, cross-flow filtration equipment and components, among others. These items can be subject to very restrictive controls, such as “Chemical and Biological Weapons” (CB) controls, and require an authorization for export to most destinations. Note that some related items could be controlled for export under the International Traffic in Arms Regulations, see, e.g., Category XIV of the U.S. Munitions List at 22 C.F.R. § 121.1.

[4] https://eur-lex.europa.eu/legal-content/GA/TXT/?uri=CELEX:32020R0402

[5] https://www.marketplace.org/2020/03/30/countries-race-to-limit-ban-exports-of-masks-ventilators-other-gear/

[6] For example, see our March 11, 2020 post on Iran General License 8, which authorizes transactions involving the Central Bank of Iran where such transactions involve the authorized export of food, medicine, and medical devices to Iran.

[7] See, e.g. https://www.treasury.gov/resource-center/sanctions/programs/documents/iran_gl_med_supplies.pdf

Under FIRRMA, CFIUS is authorized to impose filing fees that may not exceed the lesser of one percent of the value of a transaction or $300,000. The proposed rule would authorize CFIUS to collect fees pursuant to a set schedule tied to the value of a notified transaction. Specifically, the filing fees are:

• $750 for transactions between $500,000 and $5 million;
• $7,500 for transactions between $5 million and $50 million;
• $75,000 for transactions between $50 million and $250 million;
• $150,000 for transactions between $250 million and $750 million; and
• $300,000 for transactions over $750 million.

The filing fees would be required for any full joint voluntary notice filed with CFIUS, however, would not apply to short-form declarations filed with CFIUS or to CFIUS-initiated reviews. If after review of a declaration CFIUS determines that a full joint voluntary notice is necessary, the filing fee would be required. The fee would be required prior to the Committee’s acceptance of a joint voluntary notice for review.

CFIUS is accepting comments regarding the proposed rule until April 8, 2020.

Covered real estate transactions

To qualify as a “covered real estate transaction” transaction within Part 802, a transaction must confer certain property rights to covered real estate. Specifically, a transaction is covered only if it allows a foreign person at least three from the following property rights: 1) access the real estate; 2) exclusion of others from the real estate; 3) improve and/or develop the real estate; 4) attach fixed or immovable structures and/or objects to the real estate. Holding these rights concurrently with another party, including a U.S. party, does not remove such a transaction from CFIUS jurisdiction.

Exceptions

• Excepted real estate investors: certain individuals, governments, and entities meeting a series of factors, provided that they are from an “excepted real estate foreign state.” Currently, the excepted real estate foreign states are Australia, Canada, and the UK, though this list has the potential to expand.
• Urbanized areas and urban clusters: real estate transactions that are within urbanized areas or urban clusters, as defined by the U.S. census, are excepted unless they are in close proximity to a military site or within, or functioning as a part of, a covered port.
• Other exceptions are available for certain commercial office space and individual housing units, among other enumerated exceptions.

These final rules become effective February 13, 2020, and will be located at 31 C.F.R. Part 802.

[1] Transactions in real estate that qualify as controlling investments in a U.S. business continue to be subject to CFIUS jurisdiction pursuant to 31 C.F.R. Part 800 under the traditional “control” analysis.

The primary jurisdictional expansion in FIRRMA is CFIUS jurisdiction over certain non-controlling investments in technology, infrastructure, and data U.S. businesses (“TID U.S. businesses”), including U.S. businesses that: 1) produce, design, test, manufacture, fabricate, or developed a “critical technology”; 2) own, operate, manufacture, supply, or service “critical infrastructure”; or 3) maintain or collect “sensitive personal data” of U.S. citizens.

The final rules maintain the pilot program mandatory declaration concept for critical technology investments, with a few changes (including by moving the rules from 31 C.F.R. Part 801 to 31 C.F.R. Part 800). For example, the final rules include the following exceptions from the mandatory filing requirements: 1) transactions involving excepted investors (excepted investors include a foreign national who is a national of one or more “excepted foreign states,” among other specified entities); 2) transactions involving encryption technologies that qualify for license exception ENC under 15 C.F.R. Part 740 of the Export Administration Regulations; 3) entities that are already subject to a foreign ownership, control, or influence mitigation agreement pursuant to the National Industrial Security Program regulations; and 4) transactions involving investment funds managed by a U.S. general partner, managing member, or equivalent that is either not a foreign person or is ultimately under U.S.-person control; among other exceptions. “Critical technology” includes technology controlled for export under the International Traffic in Arms Regulations, Export Administration Regulations, or is designated as an emerging or foundational technology, among other related controls. Further, the final rule anticipates a future rulemaking that changes the jurisdictional hook from industry designations determined by reference to NAICS codes to a focus on export control requirements.

The final rules also modified some of the proposed rules’ treatment of “sensitive personal data.” The treatment of genetic information as a subset of sensitive personal data has generally become more permissive in the final rule by stating that covered genetic information must be “identifiable data,” or traceable to a specific individual.

Finally, broad exceptions are available to “excepted foreign states” and “excepted investors.” Beginning on the effective date, Australia, Canada, and the United Kingdom will qualify as excepted foreign states, and qualifying investors from those countries are free from FIRRMA’s broadened jurisdiction related to non-controlling investments. This list may expand in the future.

These final rules expand and substantially complicate CFIUS jurisdictional analysis. The regulations include significant detailed guidance regarding the rules’ interpretation and implementation, which often limits what appears to be very general applicability. Further, certain aspects of FIRRMA implementation remain incomplete (including the ultimate scope of “critical technologies”), even after this final rule, and CFIUS acknowledges in the rulemaking that periodic review and amendment of these rules will be appropriate. Accordingly, careful review and analysis of the new rules is vital when assessing potential transactions from a CFIUS perspective.

Jurisdiction over non-controlling investments

The draft regulations identify several company types that satisfy the first part of the test. The first type is a business that produces or otherwise deals in certain “critical technologies.” A separate statute[2] authorizes the Department of Commerce to identify these critical technologies. Although the Department of Commerce did identify examples of these technologies in a 2018 rulemaking, that process is not yet complete.

The second type is a business that maintains or otherwise deals in sensitive personal data of U.S. persons. The scope of sensitive personal data is likely to be very broad in practice, but must be able to be used to identify a person by a “personal identifier.” There are limited exceptions that include anonymized data. In practice, financial firms, insurance firms, firms collecting medical information, and firms in industries that collect similar types of personal identifier information, including certain internet and media firms, are very likely to fall within this type of company.

The final type is a business that owns, operates, manufactures, or otherwise performs a function specified in the regulations in critical infrastructure, which includes infrastructure that, if incapacitated, would have a “debilitating impact” on U.S. national security. Examples of such “covered investment critical infrastructure” includes certain internet protocol networks; certain internet exchange points; certain submarine cable systems and facilities; satellite systems that provide services directly to the U.S. Department of Defense or a related component; certain specialty metals and carbon, alloy, and armor steel plates; systems related to the storage of electric energy comprising the bulk-power system; and several others

The draft regulations specify that, to satisfy the second part of this test, the foreign investor must gain access to certain enumerated rights. These enumerated rights include access to material, non-public, technical information, which includes information that provides information regarding critical infrastructure, or provides information regarding critical technology; membership or observer rights on the U.S. company’s board of directors; and any involvement, outside of voting rights provided by shareholding, in substantive decision making processes.

Mandatory filing types

The expanded jurisdiction regarding critical technology was initially rolled out in the Pilot Program prior to these draft regulations, which identified 27 specific technologies subject to the rules. These draft regulations do not alter the Pilot Program, though we do expect that the final version of the regulations will include information about the Pilot Program.

Further, any transaction resulting in a foreign government obtaining a “substantial interest” in a critical technology, critical infrastructure, or personal data company is subject to a mandatory filing. In general, if the foreign government owns at least a 49 percent voting interest in the foreign person acquiring the U.S. business, and the foreign person is acquiring at least 25 percent of the U.S. business, that would qualify as a substantial interest.

Putting the mandatory filing provisions aside, in general, the proposed FIRRMA implementing regulations codify, rather than expand, the current jurisdiction already exercised by CFIUS in practice. The rulemaking is a clear indication, however, that CFIUS intends to continue to review non-U.S. investments in critical infrastructures and technologies. Moreover, other aspects of FIRRMA – including those related to the imposition of penalties – suggest a more proactive CFIUS going forward.

[1] Currently, the proposed regulations are in a notice and comment period, and there are likely to be some changes in the final rules. However, the basic outline of the changes are unlikely to change substantially.

[2] The Export Control Reform Act of 2018, which was also part of the broader National Defense Authorization Act package that included FIRRMA, is this authority.

Expansion and clarification of jurisdiction

FIRRMA both expands CFIUS jurisdiction and codifies certain existing practices. CFIUS reviews certain “covered transactions” to determine whether proposed foreign investments in a U.S. business would impair U.S. national security, and has the authority, along with the president, to block or amend transactions. Under current law, a “covered transaction” requires that a foreign person have effective control over a U.S. business.[2] FIRRMA expands CFIUS jurisdiction to several non-controlling transactions, if the investment involves:

• Critical technologies. This includes items or technology that are subject to export controls under either the International Traffic in Arms Regulations (“ITAR”) or the Export Administration Regulations (“EAR”), as well as certain undefined “emerging and foundational technologies.”[3]
• Critical infrastructure. The Committee will “enumerate specific types and examples” of critical infrastructure, and will presumably include defense and military, energy, telecommunication, and financial infrastructure, among others. However, because the regulations will likely enumerate a non-exhaustive list, the Committee may interpret this term broadly.
• Sensitive personal data of U.S. citizens. This will broadly include consumer data, as well as information regarding financial services, insurance, and health care.

Other expansions of CFIUS jurisdiction include the Committee’s ability to review certain changes in a foreign investor’s existing rights in a U.S. entity, which could allow the Committee to review both the initial investment by a foreign person, as well as any future investment or change to an entity’s governance structure or authorities. Further, CFIUS may review transactions in real estate located near military facilities, ports, or other sensitive national security facilities. These expansions largely formalize our experience with current CFIUS practices. though it may signal the Committee’s intention to assert this jurisdiction more aggressively.

Administrative procedures and appeals

FIRRMA made significant changes to the CFIUS process, including changes regarding expedited reviews for less sensitive transactions, mandatory filings for certain transactions, timing of the review and investigation procedures, and transparency.

• Expedited reviews. CFIUS will permit parties to file a short “declaration,” rather than a full joint voluntary notice, describing less sensitive transactions. CFIUS will then have 30 days to respond to the declaration by either clearing the transaction or demanding a full joint voluntary notice.
• Mandatory filings. Under current law, submitting a transaction to CFIUS for review and investigation is a voluntary process. Although most transactions will remain subject to voluntary filing, CFIUS will require notification of transactions in which the U.S. business involves either critical infrastructure or critical technology, and a foreign government has a substantial interest in the foreign investor. CFIUS will define “substantial interest” in subsequent rulemakings.
• Review and investigation timelines. When considering a transaction, CFIUS currently has a 30-day review period and an additional 45-day investigation period, if necessary. FIRRMA extends both of these timeframes, automatically making the review period 45 days and allowing the Committee to extend the investigation phase to 60 days, if necessary.
• Increased transparency. CFIUS currently provides an annual report to Congress, but focuses almost exclusively on broad, aggregated statistics (such as the nationality of foreign investors and the economic sector of the U.S. business). FIRRMA will require CFIUS to report at least basic details regarding all reviews that include a full notice, which will include the results of the case. CFIUS will also be required to provide statistics on the length of time the CFIUS review process takes. The increased transparency will offer parties significantly more information regarding how CFIUS has handled transactions in the past and may allow the development of some baseline precedents.
• Judicial review. Currently, only very limited substantive due process appeal rights exist in the CFIUS context.[4] FIRRMA will allow appeals of CFIUS determinations to the DC Circuit Court of Appeals, though presidential determinations are not included in the right to judicial review.
• Filing fees. CFIUS will establish by regulation a filing fee for full notices, though the fee may not exceed either $300,000 or one percent of the value of the transaction. These fees will allow CFIUS to increase its staff to handle CFIUS’ notoriously heavy workload.

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[1] Although the majority of the statutory provisions will come into force 180 days after FIRRMA’s effective date, some provisions will be in force immediately after the president signs the bill, including the changes to the review and investigation period timeframes and the right to judicial review.

[2] In our experience, any transaction not meeting the regulatory 10 percent foreign ownership threshold has been potentially subject to CFIUS review.

[3] An interagency committee will be established to identify emerging and foundational technologies.

[4] See Ralls Corp. v. CFIUS.

CFIUS is an inter-agency committee that has jurisdiction to review transactions that could result in control of a U.S. business by a foreign person If CFIUS determines the transaction presents a national security risk, it can take action to mitigate the risk or refer the case to the President for further action. The reforms under FIRRMA would expand CFIUS’s jurisdiction to review foreign minority investments in start-ups in key sectors, certain sensitive real estate transactions, and joint ventures – all of which are currently not subject to examination. The FIRRMA bill passed in the House specifically notes that the “national security risks related to foreign investment, particularly those emanating from countries such as China and Russia, warrant an appropriate modernization of the processes and authorities of {CFIUS}.” FIRRMA would also expand existing export controls that govern trade in sensitive technologies.

President Trump’s statement this week comes after a May 29, 2018 statement from the White House regarding the implementation of investment restrictions on China. Press reports and statements by Administration officials had suggested significant increased investment restrictions that may apply to more countries than China. While the FIRRMA amendments that President Trump now supports are not limited to China, his June 27^th statement ties backing of the legislation directly to the recent Section 301 action in response to China’s unfair trading practices with respect to U.S. intellectual property and technologies.

The White House statement this week also indicates that President Trump may take alternative action if FIRRMA is not passed by Congress. That could include an executive order that would ban companies with at least 25 percent Chinese ownership from U.S. investment, and would restrict companies with an even lower threshold of Chinese ownership from gaining a board seat on a U.S. company or obtaining access to certain technology through a merger or acquisition of a U.S. firm.

This development is the latest in a series of steps taken by the Trump administration to curtail Chinese investment in the U.S. The recently proposed Foreign Investment Review Modernization Act (“FIRRMA”) would expand the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”) to include investments in “critical technology” and “critical infrastructure”, and would also make it easier for regulatory agencies to review investments made by state-owned enterprises. This legislative proposal is largely viewed as focused on regulating Chinese investment. The Trump administration already exercised existing CFIUS-related authority to block the acquisition of Lattice Semiconductor Corp. by Canyon Bridge Capital Partners, a Chinese firm.

Several experts have cautioned that the Senator’s ask exceeds the review authority of CFIUS, which reviews transactions that could result in control of a U.S. business by a foreign person to determine the effect of such transactions on the national security of the United States. It remains to be seen whether the President would be willing to stretch the limits of CFIUS for broader foreign policy objectives, such as pressing China to get tougher on North Korea. While Trump may be open to considering an aggressive interpretation of Committee authority – particularly to achieve a desired outcome – the calculation may change under circumstances where the suggestion comes from a leader across the aisle, not to mention an evaluation of the scope of the Committee’s authority. At this point, it is not clear that CFIUS’s approach to Chinese company acquisitions of U.S. businesses will change.

Insights from the data include:

• Total first year investment in U.S. Businesses was $373 billion in 2016, 6 billion in 2015, and 260.6 billion in 2014.
• In all three years, the leading type for foreign investment was U.S. manufacturing business. Within manufacturing most spending went to chemical manufacturing, including makers of pharmaceuticals and medicines as well as manufacturers of basic chemicals.
• Companies from English speaking countries spend the most to purchase U.S. businesses with nearly half of all investment coming from Canada, the UK, and Ireland.

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This follows two recent proposed real estate transactions involving the Chinese company Anbang that did not close.

Senators say they are concerned about use of real estate deals to ‘launder’ illicit finances, among other national security concerns.

In short, the scope of CFIUS national security concerns, and the focus from the Hill, is expanding and real estate deals are a focus.