Congress Set to Expand Scrutiny of Foreign Investment in the United States

July 11, 2018

On June 26, 2018, the U.S. House of Representatives passed its version of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”).

Just over a week earlier, the U.S. Senate passed the National Defense Authorization Act for Fiscal Year 2019, which incorporated its version of FIRRMA. The bills, which passed their respective chambers by very wide margins, would update the statute authorizing reviews of foreign investment by the Committee on Foreign Investment in the United States (“CFIUS”) to reflect changes in CFIUS’s practice over the ten years since the last significant reform, expand CFIUS’s jurisdiction, and make significant procedural alterations to the CFIUS process. Introduced to “modernize and strengthen” review of foreign investment in the United States, FIRRMA would cement a relatively aggressive approach to foreign investment review. However, ultimately FIRRMA’s changes to current CFIUS practice are modest, and many of the changes merely codify practices in place since the later years of the Obama Administration.

The bills are similar but not identical and will have to be reconciled in a conference committee. Both the Senate and the House versions of FIRRMA would:

  •  Expand the scope of transactions covered by CFIUS to include:
    • a broader range of non-controlling foreign investment involving critical technology and critical infrastructure (bearing in mind that CFIUS already routinely reviews investments falling far short of majority control).
    • most transactions involving real estate at (or functioning as part of) ports in the United States or proximate to (or otherwise permitting surveillance of) military or sensitive government facilities located in the United States;
    • any transaction or change in rights of an existing investment that would result in foreign control of a U.S. business or result in an investment involving critical technologies or critical infrastructure that does not meet heightened standards of passivity;
    • bankruptcy proceedings and other defaults on debt; and
    • transactions structured to “evade” CFIUS review;
    • Permit parties to submit declarations (i.e., short-form descriptions of transactions not to exceed 5-pages) in lieu of the standard written notice;
    • For the first time, create mandatory filings of declarations (or notifications) prior to investments related to U.S. critical technology by non-U.S. persons in which non-U.S. governments have a “substantial interest”;
    • Add additional national security factors for CFIUS to consider;
    • Extend the official time allotted for CFIUS reviews and investigations;
    • Authorize CFIUS to impose filing fees to fund its operations;
    • Update CFIUS enforcement powers, including with respect to mitigation agreements; and
    • Create new exceptions to CFIUS’s overarching requirement to keep information provided by transaction parties confidential.

Equally importantly, neither version of the bill incorporates earlier proposals to give CFIUS broader authority over export controls, technology joint ventures, and other non-equity transactions. Earlier proposals to do so, strongly resisted by U.S. technology companies, were dropped from both bills.

Although the House and Senate versions of FIRRMA are broadly similar, they differ in a few respects that will need to be reconciled in conference. Among the most notable are the following:

  • In expanding review of non-controlling investments involving critical technology or critical infrastructure, the House bill targets a “blacklist” of jurisdictions subject to the expanded review while the Senate bill exempts a “whitelist” of jurisdictions, and the House bill adds “sensitive personal data” to the areas of concern.
  • The House bill would create a list of “jurisdictions of special concern” subject to heightened scrutiny; the Senate bill permits, but expressly does not require, CFIUS to maintain such a list.
  • The Senate version of FIRRMA provides an exemption from mandatory review of government-linked investments for private equity limited partnership investments meeting heightened passivity criteria.
  • The Senate bill includes a mechanism for limiting the pre-notification period for CFIUS reviews (i.e., the period of informal review by the CFIUS staff that precedes the formal acceptance of CFIUS notices).
  • The Senate bill includes adjustments to the available judicial review of CFIUS decisions.
It remains to be seen how Congress will reconcile these differences and whether any last-minute changes will be inserted.