On August 13, 2018, the President signed the National Defense Authorization Act for Fiscal Year 2019 which includes the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) updating national security reviews performed by the Committee on Foreign Investment in the United States (CFIUS).

Some FIRRMA provisions are effective immediately, but the effective date of others requires formal rulemaking to be completed within the next 18 months. Included in the provisions effective immediately is a lengthening of the review process (including the ability to provide limited 15-day extensions) and express authority to suspend transactions pending review or to enter into interim mitigation while the review proceeds.

The FIRRMA provision authorizing a filing fee of up to $300,000 is effective immediately, and could perhaps be implemented sooner than the other regulations mandated by the Act. Awaiting rulemaking and industry input are such reform provisions as providing for voluntary (and in some cases mandatory) short form declarations.

Implementation of the provisions arguably expanding the Committee’s jurisdiction, or at least codifying CFIUS’s broad interpretation of its existing authority, such as review certain real estate transactions and non-controlling investments involving “critical technologies,” “critical infrastructure” or “sensitive personal data of U.S. citizens” will also be addressed in rulemaking. The CFIUS Chair has 180 days to submit an implementation plan to Congress.

On January 24, a day ahead of a Senate Banking Committee hearing on reforming the Committee on Foreign Investment in the United States (CFIUS), the White House issued its official endorsement of Senator John Cornyn’s (R-TX) bill, “Foreign Investment Risk Review Modernization Act” (“FIRRMA,” S. 2098). Congressman Robert Pittenger (R-NC) has introduced companion legislation in the House of Representatives (H.R. 4311).

In its press statement, the White House noted that CFIUS modernization as outlined in FIRRMA would “achieve the twin aims of protecting national security and preserving the longstanding United States open investment policy.” If passed, FIRRMA would expressly expand CFIUS’ scope to review certain additional transactions, such as purchases of land near sensitive U.S. military facilities and joint ventures where U.S. firms share technology with foreign entities, although as a practical matter, CFIUS already reviews many such transactions. Of particular note, FIRRMA would direct CFIUS to more closely examine foreign investment in “critical emerging technologies,” which may have military uses in the future.

Critics of the FIRRMA legislation point to the bill’s broad and vague language as potentially deterring foreign investment into the United States. The statement from the White House emphasized the importance of maintaining an open investment environment – a theme that was echoed during President Trump’s speech at Davos when he claimed America was “open for business.”

Given the need to strike the right balance between protecting national security and attracting foreign investment, Congress has convened several hearings within the past three months to debate how best to approach CFIUS reform. Conveying a sense of urgency to address the perceived gaps within current CFIUS review, some Members of Congress have even indicated that they would like to put a bill on the President’s desk before the August recess. FIRRMA remains the most widely supported legislation both within Congress and the Trump administration. However, a difficult legislative year and mixed reactions from the U.S. business community could delay passage of a final bill.

The following lists the key takeaways from witness testimony during the four most recent Congressional hearings on CFIUS reform:

• China dominates the conversation: Across Members of Congress and witnesses, there is agreement that China’s aggressive industrial policy is a real threat that can come from the private sector in addition to state-owned enterprises. Proponents of FIRRMA suggest that China has weaponized foreign investment in emerging technologies to erode U.S. military advantage and U.S. dominance in high-tech industries. These proponents further assert that an expansion in CFIUS’ scope will help close perceived gaps in the U.S. investment review process that have allowed potentially malicious Chinese firms to invest in emerging critical technologies.
• Critics of FIRRMA worry about the impact on U.S. enterprise: Among some in the U.S. business community, there is concern that an expansion of CFIUS’ review of minority investments and joint ventures would disadvantage U.S. firms. The regulatory burden imposed by FIRRMA on transaction reviews might dissuade foreign companies from entering into deals with U.S. partners, which could diminish U.S. competitiveness in the long run.
• Export controls vs. CFIUS: Other critics of FIRRMA emphasize that CFIUS was meant to act as a complement to existing export control regimes that already regulate technology transfers to countries of concern and that the CFIUS process is a blunt instrument that cannot and should not attempt to supplant those controls. Existing export controls can be updated to encompass new categories of critical technologies and would also invite coordination with other advanced markets like Europe and Australia to ensure consistency and thoroughness of control.
• CFIUS needs more resources: There is a near-unanimous plea for more resources for CFIUS. FIRRMA would introduce filing fees at 1 percent of the transaction value (capped at $300,000) for each written notice and would and facilitate the addition of staff to undertake what will likely be an increase in the transactions identified to the Committee through the new contemplated process of voluntary and in some cases mandatory declaration.

Even without FIRRMA, Chinese transactions have faced increased scrutiny over the past few years, a trend continuing under the Trump administration. In September 2017, President Trump acted on a recommendation from CFIUS and blocked a $1.3 billion M&A deal between Oregon-based Lattice Semiconductors and Canyon Bridge Capital Partners – a private equity firm with Chinese backers. More recently this year, a $1.2 billion transaction between Dallas-based MoneyGram and AliPay (the financial payments subsidiary of Chinese internet giant Alibaba) collapsed after CFIUS indicated that it would not clear the proposed acquisition by AliPay.

While the Lattice-Canyon Bridge deal raised concerns about the dual-use capabilities of Lattice’s semiconductor technologies, the MoneyGram-AliPay transaction drew national security concerns around access to personal data. If AliPay had successfully acquired MoneyGram, then it (and presumably its parent company Alibaba) would have received access to the personal information of U.S. citizens. CFIUS’ failure to clear the transaction demonstrates the broad view of U.S. national security that the Committee has taken.

On November 8, 2017, Senator John Cornyn (R-Tex), the second-ranking Republican in the Senate, Senator Dianne Feinstein (D-Cal) and Richard Burr (R-NC) jointly introduced legislation (S. 2098) to amend the Defense Production Act provision, 50 U.S.C. § 4565, that provides for review of “covered transactions” by the inter-agency Committee on Foreign Investment in the United States (CFIUS). The bill, entitled the “Foreign Investment Risk Review Modernization Act” (FIRRMA), does not go as far as many had expected in expanding the jurisdiction of CFIUS, but it does address some of the issues currently impeding and delaying CFIUS review of foreign investment.

Below are some key changes included in FIRRMA:

1. Mandatory & Voluntary Declarations: The CFIUS review process has long been largely a voluntary system. While the definition of “covered transaction” broadly captures any acquisition that would result in foreign control of an existing U.S. business, a party likely would not submit for review transactions that have little nexus to national security. Increasingly, where CFIUS learns of a transaction and seeks more information, it can reach out to the parties and “encourage” a notice, or at least responses to specific questions, backed by the implicit threat that it can rely on its statutory authority to initiate its own investigation.
   The proposed legislation would alter this calculus and provide new tools for CFIUS to monitor foreign investment transactions that may present national security concerns. Specifically, it introduces the use of abbreviated (up to 5-page) “declarations” that would provide “basic information” about the transaction. CFIUS could review and conclude a case based simply upon that declaration or invite the party to submit a formal notice. Parties wanting certainty currently need to prepare and submit a complete notice even for cases marginally implicating national security concerns.

   Retreating somewhat from the current voluntary approach, certain transactions will require a “mandatory declaration” meaning that CFIUS would get at least some notice (45 days prior to closing) of any covered transaction:

   • Of at least a 25 percent interest in a U.S. business by a foreign person that is itself at least 25 percent owned by a foreign government.
   • Meeting criteria to be established by CFIUS in regulations considering various factors such as the technologies, economic sector involved and other national security concerns.

   Failure to comply with the mandatory declaration provisions may subject the parties to penalties. A party subject to the mandatory declaration provision can elect to provide a voluntary written notice instead, but must do submit that notice at least 90 days prior to closing the transaction.

   In addition, the proposed legislation charges CFIUS with a duty to monitor non-notified or non-declared transactions – a practice that CFIUS already employs.

2. Extended Timeline & Resources: For the past few years, as notices have increased, CFIUS has struggled to keep up, with more notices extending beyond the 30-day initial review and a number, particularly involving China, having been withdrawn and refiled to restart the clock. FIRRMA acknowledges the time pressures under the current statute and proposes some limited steps to address:
   • the time for completion of the initial review is lengthened to 45 days; and
   • the subsequent 45-day investigation period may be extended for an additional 30 days in “extraordinary circumstances.”

   FIRRMA also provides for additional staffing and special hiring authority. And, for the first time, FIRRMA would introduce a Filing Fee of 1% of the value of the covered transaction (capped at $300,000) on written notices submitted – but apparently not for the voluntary or mandatory declarations. Those funds would remain available to CFIUS and its member agencies for accomplishing its mission.

3. Treatment of Certain Countries: Given the national security issues addressed in the CFIUS process not all countries are treated equally. FIRRMA would expressly acknowledge this de factodiscrimination in two respects. First, it adopts the concept of “countries of special concern,” and although diplomatically excusing CFIUS from maintaining a list of such countries, this concept is well understood to include China. One way this concept is employed is by broadening the list of “critical technologies” that must be evaluated to include those emerging technologies that would increase the U.S.’s technological advantage over “countries of special concern.” FIRRMA would also encourage the President initiate multilateral efforts to address the aggressive industrial policies of such countries. A commonly expressed concern, acknowledged in Senator Cornyn’s press release, is the perception that China is degrading the United States’ military edge by acquiring and investing in U.S. companies.On the other side of the equation, FIRRMA authorizes CFIUS to exempt from the definition of “covered transaction” certain transactions from countries to be identified. How CFIUS would effectively implement this authority remains to be seen but this provision provides hope that at least some transactions from some close allies (FIRRMA suggests allies with effective safeguarding and foreign investment review procedures be considered) might be relieved from the increasingly onerous CFIUS review process.
4. Judicial Review: The existing statute provides that the actions and findings of the President shall not be subject to judicial review. Nonetheless, in 2014, in the Ralls Corporation case, the United States Court of Appeals for the District of Columbia read that language to apply only to the final actions the President takes to suspend or prohibit a covered transaction, and held that the statutory language did not bar a company from bringing a judicial challenge under its constitutionally protected due process rights. Based on Ralls’ state law property interest in the acquired companies and their assets, the court found that it was entitled to notice of and access to unclassified evidence on which the President relied, and an opportunity to rebut that evidence (prior to the President reaching a non-justiciable and non-judicially reviewable determination). In reaction to the Ralls case, FIRRMA would codify a judicial review process, restating that actions and findings of the President or the President’s designee are not subject to judicial review, but expressly allowing for judicial review of Committee actions and findings under limited circumstances; i.e., where the parties submitted a joint voluntary notice or a declaration initiating the review, or where the Committee determines that such a notice or declaration was not required.

FIRRMA has received bipartisan support in Congress and has support of at least some Administration officials. But there are other bills and concepts out there and a Congressionally-mandated Government Accountability Office report in the works. Many of the other proposals seek to expand CFIUS review (or add a parallel review process) focused on economic security. How these competing interests will play out remains to be seen as we begin the New Year.