“FIRRMA marks the most extensive change to the CFIUS process in 30 years.”
The national security landscape has radically shifted in recent years – and that means major changes ahead for parties engaged in cross-border transactions.
In response to growing national security risks posed by China and other foreign countries, Congress passed the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).
The sweeping legislation, signed into law last year, significantly expands the power of the Committee on Foreign Investment in the United States (CFIUS), a multi-agency government body chaired by the Treasury Department. CFIUS is responsible for reviewing foreign investments to assess the impact these transactions might have on national security.
“FIRRMA marks the most extensive change to the CFIUS process in 30 years,” said V&E’s partner Damara Chambers who co-chairs the firm’s National Security and International Trade practice alongside V&E’s partner David Johnson.
This past September, the Treasury Department issued proposed regulations to implement FIRRMA. These regulations are required by FIRRMA to go into effect by February 13, 2020. Chambers recently sat down to discuss five key takeaways from the proposed regulations. Here’s what she had to say.
CFIUS is expanding its authority over companies involved in technology, infrastructure, and data
Historically, CFIUS has focused exclusively on foreign investors that gain controlling interests in U.S. businesses. Under the proposed regulations, even a non-controlling investment by a foreign person in a U.S. business might fall under CFIUS, if it meets certain criteria.
Specifically, CFIUS is expanding its jurisdiction over companies engaged in three high-risk sectors: critical technology, critical infrastructure and sensitive personal data. Collectively this group has been dubbed “TID.” How do you know if your company fits the bill? CFIUS provides extensive definitions, lists, and parameters.
The smallest non-controlling foreign investment in a TID U.S. business could be considered a “covered investment” triggering CFIUS jurisdiction under the new rules, but a purely passive investment would not. The foreign investor would have to gain certain rights from the transaction, such as access to material nonpublic technical information or a board seat.
Consider the following example. Let’s say a foreign company will take a 2% equity stake in a company that owns or operates a liquified natural gas export terminal – a type of business that has been identified by CFIUS as constituting critical infrastructure. In addition to the equity investment, the investor also will receive a board seat. Given these factors, there’s a high likelihood CFIUS would have the authority to review the transaction.
For some foreign investments in TID U.S. businesses, CFIUS filings will be mandatory
Filing with CFIUS has traditionally been voluntary. While some parties voluntarily filed with the goal of securing “safe harbor” from CFIUS, there was no requirement to do so.
The proposed regulations require TID U.S. businesses and their foreign investors to file with CFIUS if the transaction would result in a foreign government gaining a “substantial interest.”
Some TID U.S. businesses are already familiar with mandatory CFIUS filings. Under a pilot program CFIUS put in place in November of last year, parties engaged in transactions involving foreign investments in certain U.S. “critical technology” companies in key industries are now required to file with CFIUS.
CFIUS is casting its shadow over real estate too
Is the property you plan to lease to a foreign tenant situated near a military installation? If so, CFIUS could be knocking on your door.
For the first time, CFIUS will have the authority to review certain real estate transactions, even if a U.S. business is not involved.
CFIUS is concerned about real estate where national security might be compromised. There are two broad categories: property that is located within, or is part of, certain airports and maritime ports; and real estate that is situated near certain military installations and other sensitive U.S. government-owned facilities or property.
“Parties need to consider whether the real estate a foreign investor seeks is close to a government installation that has been identified by CFIUS and whether CFIUS may want to review the real estate transaction,” Chambers said.
There are exceptions. For instance, if a U.S. homeowner wants to lease or sell a house with ordinary fixtures like a garage to a foreigner, the transaction is exempt.
“If you lease or sell a house that’s within one mile of the Pentagon to a foreign person, you’re fine,” Chambers said. “But if the house includes a radio tower in the backyard, the transaction may not be exempt from CFIUS.”
A new filing option could make life easier – for some
CFIUS is offering a new filing option with potentially shorter reviews, but it’s not right for everyone.
The new filing mechanism allows companies to voluntarily submit a short “declaration” of about five pages in length, as opposed to the traditional lengthy CFIUS notice. Another potential perk: CFIUS is obliged to assess a declaration in 30 days vs. a standard review which can take as many as 90 days.
There’s a catch. At the end of the 30 days CFIUS might require that you file a standard notice, meaning you may have just added 30 days or more to your timeline.
In fact, many of those who have tested the declaration option haven’t been successful. As part of the pilot program, businesses that are now required to file with CFIUS may do so with the short filing.
“Among those who have chosen this route, the vast majority were not approved on the declaration,” Chambers said. Many had to file formal notices after completing the declaration process.
Keep in mind, this group of filers were engaged in transactions involving highly sensitive U.S. businesses. Parties involved in deals that don’t present as many potential national security concerns may indeed benefit from filing declarations.
The bottom line: Carefully consider the type of investment involved before making a filing decision.
“Voluntary declarations will save time for benign transactions,” Chambers said. “But if you have a transaction that involves complicated national security issues, or one that will potentially require negotiation of mitigation, you might want to consider filing a full notice.”
Yes, there is expanded CFIUS jurisdiction, but some “friendly” countries will be exempt
If you’re engaging in a transaction with an investor from a country that is on good terms with the U.S., you might be in luck.
The proposed regulations would exempt certain foreign investors who come from “excepted foreign states” from CFIUS’s expanded jurisdiction. In order to qualify, countries eventually will be required to have their own robust foreign investment review process and they must coordinate with the U.S. on security matters. CFIUS will publish a white list of excepted countries by the time the new rules go into effect, and the list is expected to be relatively short.
But just because a foreign investor hails from a white list country doesn’t mean a transaction is in the clear. Foreign investors are required to have a substantial connection to the excepted country, and they must meet a number of strict requirements.
For instance, each member of the board of directors of the foreign investor and of the foreign investor’s parents must be a U.S. national or a national of one or more excepted foreign states. In addition, a non-U.S. board member cannot also be a national of any foreign state that is not an excepted foreign state.
Foreign investors must continue to meet these criteria for three years after a deal closes or risk being subject to a CFIUS review.
Also, a foreign investor will not qualify under the white list if the investor has been the subject of certain types of enforcement actions by the U.S. government in the five years prior to the closing of the transaction. Examples of this include being penalized for certain U.S. export controls or sanctions violations, or being convicted of, or entering into a deferred prosecution agreement with the Department of Justice for a felony crime (e.g., an FCPA violation).
“You can’t assume that just because your investor is from a white list country, that your transaction is not subject to CFIUS,” Chambers said. “Determining where you stand requires a careful analysis.”