The Committee on Foreign Investment in the United States (CFIUS) has for many years examined some acquisitions of U.S. industries for their impact on national security. Following a recommendation from CFIUS, the President has the authority to block proposed transactions and to order the divestiture of completed acquisitions.
New Legislation and Scope of Review
Recently the framework for CFIUS review has changed dramatically with the passage of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) and new rules (the “Interim Rules”) issued by the U.S. Treasury Department. In the past, filings with CFIUS in connection with a transaction were always voluntary, although a filing that was unexamined after a certain time period was supposed to be safe from a divestiture order. This safe harbor would not be available if a filing was not made.
Filings are now required by a pilot program for transactions that fall within certain industry sectors and those that involve “critical technologies.” These industries include, among others, aircraft manufacturing, computer storage device manufacturing, optical instrument and lens manufacturing, nanotechnology research and development, and primary battery manufacturing.
While the CFIUS review is supposed to be limited to areas closely related to national security, the view of which areas are crucial for national security seems to have widened with the recent legislation. “Critical technologies” in the Interim Rules are now defined to include “emerging and foundational technologies” under the Export Control Act of 2018. “Emerging and foundational technologies”, however, remain undefined as of now, and may be subject to a new pilot program.
Evasive Transactions and Non-Controlling Investments
The Interim Rules also expand the scope of CFIUS review to include “non-controlling investments” and “evasive transactions” (any transaction whose structure is “designed or intended to evade or circumvent CFIUS review”). Transactions involving minority stakes in the areas of critical technology, critical infrastructure, or sensitive personal information could be subject to review if the transaction allows the foreign investor “access to any material non-public technical information in the possession of a US business.” These non-controlling structures could include “any involvement, other than voting of shares, in substantive decision-making” of a business involved in critical technology, critical infrastructure, or sensitive non-public information. The involvement could also include “membership or observer rights on a board” or access to “material non-public technical information.”
Some investors have considered entering through investment funds a way to avoid the CFIUS review process. The Interim Rules now address fund investments: an indirect investment by a foreign person in an investment fund will not be covered by the pilot program as long as the foreign person is not the general partner or managing member of the fund. The foreign investor must have no ability to control the investment fund. This means no authority over investment decisions of the fund; no ability to control decisions made by the general partner or managing member of entities in which the fund invests; and no ability to unilaterally dismiss, select, or determine the compensation of the general partner or managing member.
Real estate investment is also now a focus of CFIUS review. FIRRMA expands “covered” transactions to include any purchase or lease of real estate that is part of a port or airport, is near a military installation or other sensitive government facility, or that could provide intelligence or expose national security on nearby facilities. “Covered transactions” will not include, according to FIRRMA, single family housing or real estate in urbanised areas--although these still might be subject to review if they involve national security.
Despite the increased attention paid to Chinese investment, the CFIUS clearance rate for acquisitions involving Chinese buyers appears to have held steady in 2018, even as new investments into the US from China fell by 95 percent. Early 2019 has seen increased political friction in the US, with a resulting government shutdown affecting approvals. Any agreement between China and the US, should one materialise, could lead to a surge in new filings.