United States: What Corporate Lawyers Need To Know About Changes In U.S. Foreign Investment Laws

Last Updated: April 16 2019
Article by Olga Torres and Maria Alonso

On August 13, 2018, President Trump signed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 “NDAA”) into law.1 The NDAA contains the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”),2 which is new legislation that significantly impacts foreign investments in the United States by expanding the jurisdiction of the Committee on oreign Investment in the United States (“CFIUS”). FIRRMA became effective on August 13, 2018, and the U.S. Department of the Treasury (“Treasury”) is in charge of issuing FIRRMA’s implementing regulations on a rolling basis. To that effect, on October 10, 2018, Treasury issued two temporary regulations. The first interim rule includes several amendments to existing CFIUS regulations, 31 C.F.R. Part 800, to conform to FIRRMA provisions that became effective upon enactment.3 The second interim rule establishes the FIRRMA pilot program, which will be effective November 10, 2018.4 The temporary regulations are designed to protect critical American technology companies and intellectual property.5 This article will discuss how FIRRMA significantly changes foreign investments in U.S. businesses and the temporary Pilot Program, which addresses specific risks of U.S. critical technologies.

Background: What is CFIUS and What are the Relevant Changes under FIRRMA?

For context, CFIUS is a United States federal interagency body that reviews foreign investments (or “covered transactions”) in U.S. companies for national security implications. The Committee is chaired by the U.S. Secretary of the Treasury and composed of nine members from the federal executive branch, two ex officio members, and other members as appointed by the U.S. President. CFIUS operates pursuant to section 721 of Title VII of the Defense Production Act of 1950, commonly known as the Exon-Florio Act of 1988. In 2007, section 721 was substantially revised by the Foreign Investment and National Security Act of 2007. And now in 2018, section 721 was again significantly revised by FIRRMA, which became effective August 13, 2018.

FIRRMA passed both houses of Congress with overwhelming bipartisan support and it is intended to ensure CFIUS has the necessary tools to address national security concerns arising from foreign investments.6 FIRRMA has significantly expanded the term “covered transactions” to now include four new types of covered transactions: 1) real estate transactions; 2) non-controlling “other investments” involving “critical infrastructure,” “critical technology,” or “sensitive personal data” of U.S. persons; 3) change in foreign person’s rights; and 4) evasion. Before FIRRMA, CFIUS’ review of “covered transactions” involved any merger, acquisition, or takeover in which a foreign person could obtain control of a U.S. business.7 In other words, CFIUS was mainly concerned with the “control” factor of a “U.S. business.”8 As previously discussed FIRRMA significantly expands CFIUS’ jurisdiction and the “control” factor is no longer determinative for CFIUS review.

The expansion of CFIUS jurisdiction pursuant to FIRRMA was primarily to address the concern that foreign investors, particularly Chinese investors, were obtaining sensitive U.S.-based technology and know-how simply by entering into joint ventures with, or making minority investments in, U.S. businesses. These business transactions did not trigger CFIUS review because the foreign investors were not acquiring a controlling stake in a U.S. business. Consequently, one of the most noteworthy changes under FIRRMA is that a covered transaction now includes “other investments,” including non-controlling foreign investments in U.S. businesses involving U.S. critical infrastructure, critical technology, or personal data, if it gives the foreign investor certain rights (as discussed below).

Furthermore, as mentioned above, FIRRMA includes additional types of covered transactions. Real estate transactions are now covered transactions and subject to CFIUS review. The real estate transactions now covered under FIRRMA include those in which a foreign person leases or purchases private or public real estate either: 1) at an air or maritime port; or 2) in close proximity to a U.S. military base or other sensitive U.S. government facility from a national security perspective.9 The real estate transactions now include “greenfield” purchases of empty land, whereas previously these transactions were not covered since empty land is not a “U.S. business.” Although under FIRRMA real estate transactions are now considered “covered transactions,” real estate transactions related to single-family housing units or real estate in “urbanized areas” (as defined by the Census Bureau in the most recent census) are exempt. 

The expansion of CFIUS jurisdiction pursuant to FIRRMA was primarily to address the concern that foreign investors, particularly Chinese investors, were obtaining sensitive U.S.-based technology and know-how simply by entering into joint ventures with, or making minority investments in, U.S. businesses.

In addition, a covered transaction now includes a foreign person whose rights have changed with respect to a U.S. business, if it results in foreign control of the U.S. business or it meets the criteria of an “other investment,” which is a non-controlling investment involving critical infrastructure, critical technology, or sensitive personal data of U.S. persons. Finally, any transaction or arrangement that is designed or intended to evade or circumvent the jurisdiction of CFIUS is also subject to CFIUS scrutiny.

In addition to FIRRMA’s significant expansion of “covered transactions” now subject to CFIUS review, there have been a number of changes impacting foreign investments, among others, modifications to the CFIUS review and investigation process, including: 1) the modification of CFIUS timelines to expedite certain reviews while strategically targeting others for more in-depth review (e.g., Chinese transactions); 2) new filing fees up to $300,000 per transaction12 and potential “fast track” fees to resumably expedite filings for parties who pay an additional fee; 3) additional resources for CFIUS staffing;13 4) more authority for CFIUS to investigate transactions for which it was not notified; and 5) the introduction of “light” CFIUS filings, which will streamline the CFIUS notification process and aim to reduce the resources and costs involved in conducting the filing.

Notably, CFIUS is now instructed to review the foreign person’s history of compliance with U.S. laws and also evaluate whether the proposed transaction could create cybersecurity risks for the United States. FIRRMA also requires CFIUS to establish formal plans to monitor mitigation plans imposed on approved transactions and is now empowered to impose penalties if the parties fail to comply with mitigation plan conditions imposed by the CFIUS clearance process. 

FIRRMA Pilot Program 

As previously discussed, FIRRMA expands CFIUS’ jurisdiction to review “other investments” made by foreign persons and authorizes CFIUS to conduct pilot programs to implement the FIRRMA provisions. Consistent with FIRRMA, on October 10, 2018 Treasury issued interim regulations to conduct a Pilot Program, which authorizes CFIUS to review noncontrolling foreign investments in U.S. businesses involved in critical technologies related to specific industries (referred to in FIRRMA as “other investments”).

Additionally, the Pilot Program makes effective FIRRMA’s mandatory declarations provision for transactions that fall within the specific scope of the Pilot Program. Starting November 10, 2018, CFIUS will be empowered to review non-controlling critical technology foreign investments, including any equity interest in which a foreign person has access to sensitive personal data of U.S. persons or membership/ observer rights on a governing body.15 The Pilot Program goes into effect on November 10, 2018 and the Pilot Program will not affect any transaction: 1) completed prior to November 10, 2018; or 2) where, prior to October 11, 2018 (i) parties to the transaction have executed a binding written agreement or other document establishing the material terms of the transaction; (ii) a party has made a public offer to the shareholders to buy shares; or (iii) a party has solicited proxies in connection with a board election or requested the conversion of convertible voting securities.16 The temporary Pilot Program will end no later than March 5, 2020. 

Under the new temporary Pilot Program foreign investors are now required to file mandatory declarations for transactions that fall within the scope of the Pilot Program, and failure to do so could result in civil monetary penalties up to the value of the transaction. The mandatory declarations are abbreviated notices that generally should not exceed five pages in length. Foreign investors, from any country, are required to make the mandatory declarations either by making the mandatory declaration at least 45 days before the expected completion date of the transaction or by filing a notice under CFIUS’ standard procedures. CFIUS will have 30 days to act. 

Parties can determine whether a proposed foreign investment in a U.S. business triggers the mandatory declaration under the temporary Pilot Program by determining two important matters: 1) whether the U.S. business is a Pilot Program U.S. Business (as defined below); and 2) whether the transaction is a Pilot Program Covered Transaction (as defined below).

The Pilot Program only covers a Pilot Program U.S. Business,17 defined as any U.S. business that produces, designs, tests, manufactures, fabricates, or develops a critical technology that is either: 1) utilized in connection with the U.S. business’s activity in one or more Pilot Program industries; or 2) designed by the U.S. business specifically for use in one or more Pilot Program industries. Additionally, the term “critical technology” as defined by FIRRMA includes:

  •  Defense articles or defense services included on the U.S. Munitions List of the International Traffic in Arms Regulations (“ITAR”); 
  •  Items included on the Commerce Control List of the Export Administration Regulations (“EAR”) that are controlled by multilateral regimes or for reasons relating to regional stability or surreptitious listening; 
  •  Nuclear equipment, facilities, materials, software, and technology subject to export regulations by the Department of Energy or Nuclear Regulatory Commission; 
  • Select agents and toxins; and 
  •  Emerging and foundational technologies controlled pursuant to the Export Control Reform Act of 2018.19

After determining that the proposed investment in a U.S. business is a Pilot Program U.S. Business, then the parties need to decide whether the covered U.S. business involved with critical technology is related to the 27 industries covered under the Pilot Program. The Pilot Program covers 27 specific industries, identified by their respective North American Industry Classification System (NAICS) code.20 Annex A21 to Part 801 lists the 27 industries. The 27 identified industries range from manufacturing operations for aircraft and space vehicles to high technology businesses focused on computer storage devices and semiconductor machinery; and defense manufacturing including military armored vehicles, among others.

Finally, if the proposed foreign investment in a U.S. business is a Pilot Program U.S. Business and it is related to one of the 27 Pilot Program industries, then the parties must evaluate the structure of the business transaction to determine whether it is a Pilot Program Covered Transaction. A Pilot Program Covered Transaction is defined as any Pilot Program Covered Investment, or any transaction by or with any foreign person that could result in control of any Pilot Program U.S. Business.22 Furthermore, the Pilot Program Covered Investments are investments in a Pilot Program U.S. Business by which a foreign person obtains control, or alternatively where the investment would give the foreign investor:

  • Access to any material nonpublic technical information in the possession of the target U.S. business; 
  •  Membership or observer rights on the board of directors or equivalent governing body of the U.S. business, or the right to nominate an individual to a position on the board of directors or equivalent governing body of the U.S. business; or 
  • Any involvement, other than through voting of shares, in substantive decision-making of the U.S. business regarding the use, development, acquisition, or release of critical technology.

In short, if a foreign investor gains control of a Pilot Program U.S. Business (as defined above), or if the foreign investor of a Pilot Program U.S. Business satisfies any of the three conditions of the Pilot Program Covered Investments, then the business transaction is a Pilot Program Covered Transaction. Therefore, as required by the FIRRMA Pilot Program the parties must file a mandatory declaration, or a voluntary notice in accordance with existing CFIUS regulations.


In sum, FIRRMA expands the foreign investments (covered transactions) that are subject to CFIUS review. The temporary Pilot Program only applies to non-controlling critical technology foreign investments in Pilot Program U.S. Businesses. As discussed, FIRRMA also expands CFIUS jurisdiction to transactions involving real estate, and non-controlling investments in critical infrastructure and sensitive personal data of U.S. persons, and contemplates mandatory declarations for certain critical infrastructure transactions. However, the Pilot Program does not apply to non-controlling investments in critical infrastructure and sensitive personal data of U.S. persons, nor to real estate investments: regulations implementing these FIRRMA provisions are expected to be issued at a later date. The temporary Pilot Program is just one of the several regulations that Treasury will be implementing to conform to FIRRMA. All of the future regulations that will be implemented pursuant to FIRRMA will significantly impact foreign investments. Therefore, any company involved in international mergers and acquisitions and other types of foreign investment transactions involving the Pilot Program U.S. Businesses and any U.S. businesses in critical infrastructure/ technologies and sensitive personal data of U.S. persons needs to be familiar with FIRRMA and its implementing regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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