Regulations Expanding Review of Foreign Investment in the US
Eighteen months after the enactment of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), the law’s expansion of the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”) became fully effective in February 2020.
The regulations have far-reaching implications for transactions involving foreign investors and formally expand CFIUS’s jurisdiction to new types of transactions. While the CFIUS process will remain largely voluntary, the new regulations impose a mandatory filing requirement on certain transactions involving “critical technologies” as well as certain transactions in which a foreign government has an interest, including through state-owned enterprises. The new regulations also permit a short-form filing process, a “Declaration,” which parties to all transactions may utilize.
CFIUS’s Expanded Jurisdiction
Pursuant to the new regulations, CFIUS now has jurisdiction over three types of transactions:
- Greenfield real estate transactions by a foreign investor in which the real estate at issue is located in proximity to specified ports and specified sensitive government and military installations;
- “Covered control transactions,” which are transactions “by or with any foreign person which could result in foreign control of any U.S. business” (i.e., the traditional scope of CFIUS jurisdiction); and
- “Covered investments,” which are small, non-controlling investments by foreign persons in US businesses that deal in critical technologies, critical infrastructure or sensitive personal data and in which a foreign person gains certain rights with respect to the US business at issue. These businesses are referred to as “TID US businesses,” those dealing in certain Technology, Infrastructure and Data.
In most instances, the CFIUS review process will remain technically voluntary, though CFIUS retains the ability to initiate its own review of transactions, including those that have been completed, as well as the ability to impose after-the-fact conditions on, or require the divestment of, an already-closed transaction to mitigate any perceived risks to US national security.
The new regulations make a CFIUS filing mandatory in two situations.
- First, the new regulations largely subsume a pilot program introduced in November 2018, and require a mandatory filing for covered control transactions and covered investments in TID US businesses that produce, design, test, manufacture, fabricate or develop “critical technologies” and which then either use or specifically design such technologies for use in one of 27 specified industries. However, CFIUS noted that sometime soon they will be phasing out the latter part of this test.
- Second, the new regulations require a mandatory filing for the acquisition of a “substantial interest” (in this context, defined to mean a voting interest of 25 percent or more) in a TID US business by a foreign person in which a foreign government has a “substantial interest” (defined here to mean a voting interest of 49 percent or more).
Implications for Foreign Investors
The new CFIUS regulations represent a major expansion of CFIUS’s jurisdiction and significant changes to the CFIUS review process. As a result, parties to cross-border transactions should carefully consider CFIUS at every step of the process.