United States: CFIUS Reform: Legislation Proposed To Strengthen National Security Reviews

A little-known but powerful U.S. government committee is gaining the attention of Congress. In November 2017, members of the U.S. House and Senate introduced companion legislation that would update the national security review process of the Committee on Foreign Investment in the United States (CFIUS). The legislation, entitled Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA), was introduced, according to its authors, for purposes of "modernizing" CFIUS's conduct of national security reviews of investments and acquisitions in U.S. businesses by foreign persons. The last time Congress addressed CFIUS through legislation was a decade ago. Some in the United States consider the proposed updates to be long overdue in light of perceived threats to U.S. national security posed by foreign investment in U.S. companies (particularly Chinese investment, which increased more than 900 percent between 2010 and 20161). Others fear that the updates portend difficulty in obtaining foreign investment, often the lifeblood of U.S. technology companies.

Overview of key proposed changes

FIRRMA, if passed in its current form, would amend key provisions in the current CFIUS implementing statute, specifically Section 721 to the Defense Production Act of 1950, as amended. The proposed legislation would greatly expand CFIUS's authority and the scope of its reviews of the national security implications of foreign investments. Below is an overview of certain key aspects of the proposed legislation:

  • Introduction of mandatory filings, expansion of review timelines, and possible imposition of filing fees. Currently, CFIUS filings are "voluntary," reviews are time-limited to 75 days in most instances, and there is no filing fee. FIRRMA would:

    • Introduce an abbreviated "declaration" filing (which would be mandatory for covered transactions involving, for example only, the acquisition of a 25 percent or greater voting interest in a U.S. business by any foreign person in which a foreign government holds a voting interest of 25 percent or more);
    • Lengthen CFIUS's potential review timeline from 75 days to 120 days by (i) extending the initial review period from 30 to 45 days, (ii) retaining the current second 45-day investigation period, and (iii) authorizing CFIUS a one-time 30-day extension for further investigation in "extraordinary circumstances"; and
    • Permit CFIUS to assess and collect filing fees for any covered transaction, capped at one percent of the value of the transaction or $300,000, whichever is less.
  • Expansion of the definitions of "covered transaction" and "critical technology." FIRRMA would expand the types of transactions over which CFIUS has authority to include (a) certain joint ventures, (b) minority investments in "critical technology" (see below) or infrastructure companies, and (c) real estate transactions near military bases or other sensitive government facilities. The legislation would also significantly expand the definition of "critical technology" by allowing CFIUS, in its discretion, to review proposed investments involving any technology that it considers "emerging." Furthermore, the legislation would require CFIUS review of all transfers of technology and accompanying support by any U.S. critical technology company as part of a collaboration (strategic partnership, joint venture or R&D initiative) with a foreign person. The above additional new areas of authority would not apply to investors from "identified countries" that meet criteria – to be determined by CFIUS – that are favorable to U.S. national security interests (e.g., investors from countries with which the U.S. has a mutual defense treaty, such as the North Atlantic Treaty.
  • Increase in national security factors. FIRRMA would nearly double the number of national security factors that CFIUS must assess in its review of investments originating from certain countries, likey China and Middle Eastern countries (although specific countries are not identified in the legislation). Such factors would include the proposed foreign investor's history of compliance with U.S. regulations, U.S. cybersecurity vulnerabilities, and the potential to expose sensitive data of U.S. citizens. In addition, the legislation introduces new concepts, including "critical materials" and "technology and industrial leadership," into the review criteria.

Background to the rise of FIRRMA

CFIUS is an inter-agency committee authorized to review the national security implications of transactions that could result in control of a U.S. business by a foreign person. By current statute, CFIUS is authorized to block covered transactions or impose measures to mitigate any threats to U.S. national security. Some believe that CFIUS's current statutory and regulatory frameworks hinder CFIUS's ability to review an increasing number of foreign investments targeting sensitive technologies in the U.S., particularly by China. According to Sen. Dianne Feinstein (D-Calif.), one of the original authors of FIRRMA, gaps in CFIUS's current review process "have allowed foreign adversaries to weaponize their investments in U.S. companies and transfer sensitive dual-use U.S. technologies, many of which have potential military applications."2

The aforementioned concerns predate President Trump, who campaigned on a promise to stem foreign, particularly Chinese, investment in the U.S. For instance, in January 2017, the Obama-appointed Council of Advisors on Science and Technology stated that a "concerted push by China to reshape the market in its favor, using industrial policies backed by over one hundred billion dollars in government-directed funds, threatens the competitiveness of the U.S. industry and the national and global benefits it brings," and that such a push was distorting the domestic semiconductor market in ways that "undermine innovation, subtract from U.S. market share, and put U.S. national security at risk."3 Furthermore, a confidential Department of Defense report given to policymakers in 2017 reportedly concluded that the U.S. must increase its screening of Chinese investments in U.S. technology companies to protect U.S. economic well-being and national security.4 Then, on September 13, 2017, President Trump blocked a private equity firm backed by Chinese investors from acquiring U.S. Lattice Semiconductor Corporation (only the fourth time a U.S. president has blocked a transaction under CFIUS). Even more recently, on January 3, 2018, Ant Financial, the Chinese payment unit of Alibaba, terminated its attempt to acquire U.S. money transfer company MoneyGram International Inc. after CFIUS rejected the companies' proposed mitigation measures designed to address CFIUS concerns over the safety of data that may be used to identify U.S. citizens.

Key takeaways and recommendations

Contrary to the notion that FIRRMA would radically alter CFIUS, a significant number of the "modernization" aspects of FIRRMA reflect current CFIUS practices. For example, several recently proposed real estate transactions near sensitive U.S. government facilities (or that included leases to sensitive U.S. government agencies) have received heightened scrutiny by CFIUS, and even requests by CFIUS to terminate or withdraw the proposed transactions. In addition, CFIUS already incorporates many of the proposed expanded and new national security factors into its analysis, including with respect to the potential exposure of sensitive data related to U.S. citizens. Finally, FIRRMA's reference to "countries of special concern" simply codifies CFIUS's current heavy scrutiny of investments from China, Russia, and the Middle East.

Nevertheless, FIRRMA, if enacted in its current form, would broaden CFIUS's mandate and lead to greater scrutiny of a broader range of proposed foreign investments and other activities involving U.S. businesses and technology. Accordingly, it behooves U.S. businesses and potential foreign investors to maintain a close watch on the legislation and prepare to adjust their activities associated with foreign investment in the U.S. While Chinese investment will certainly remain a focus of CFIUS and its constituent agencies, investors from all countries will be impacted due to CFIUS's broadened jurisdictional reach and new mandatory filings processes. U.S. companies that are or may in the future be interested in receiving foreign investment, as well as foreign parties that are or may be interested in investing in the U.S., should evaluate whether the subject products, services, and associated technologies fall under the proposed new definitions of "covered transaction" and "critical technology." In addition, there will be a renewed premium on artfully crafted filings and effective advocacy before cognizant U.S. government agencies, particularly where sensitive technologies and/or countries of concern are at issue.


1 Rhodium Group, Record Deal Making in 2016 Pushes Cumulative Chinese FDI in the US above $100 Billion (Dec. 30, 2016).

2 Press Release, U.S. Sen. Dianne Feinstein (Nov. 8, 2017).

3 President's Council of Advisors on Science and Technology, Ensuring Long-Term U.S. Leadership in Semiconductors (Jan. 2017).

4 See Doug Palmer, Cornyn debuts bill to reform CFIUS and stem tech transfers to China, Politico (Nov. 8, 2017).

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