Sheppard Mullin Discusses the Future of CFIUS After Proposed Reforms

‘Tis the season to wonder, what will 2018 bring? We may speculate on things like a private company making a moon landing or a peace accord with North Korea. We may be certain of things like well-intentioned gym memberships and a host of new-you products.

Somewhere between speculation and certainty we find the U.S. Government’s scrutiny of foreign direct investment in the United States. The recently proposed Committee on Foreign Investment in the United States (CFIUS) reform introduced in Congress sheds some light on the future of CFIUS reviews.

Congress Proposes CFIUS Reform

As discussed in Sheppard Mullin’s March 2017 CFIUS blog, CFIUS reviews of acquisitions by foreign parties give the Trump administration the an ideal means to make good on his campaign stance as tough on China. As discussed in our most recent [CFIUS update][ßlink Reid’s December CFIUS blog], CFIUS is has seen a surge in the number of foreign investments submitted for review. That wave of submissions is resulting in taxing CFIUS’s resources. For those reasons, we expect that proposed CFIUS reform, backed by bipartisan support, may result in significant changes to the function and practice of CFIUS reviews.

Proposed CFIUS Reform Highlights

The key highlights of the proposed bill, titled the Foreign Investment Risk Review Modernization Act (FIRRMA), are as follows:

  • Expand CFIUS jurisdiction. The bill would expand CFIUS jurisdiction to cover more transactions. FIRRMA would include the following transactions for CFIUS review:
    • Joint ventures involving technology transfers to a foreign entity;
    • Minority position investments;
    • Real estate transactions near military bases or other sensitive national security facilities; and
    • Other types of arrangements designed to evade or circumvent CFIUS review.
  • Target countries for review. The bill would instruct CFIUS to consider transactions from any “country of special concern.” Country of special concern is defined in no certain terms as “a country that poses a significant threat to the national security interests of the United States.” Although not mentioned by name, it does not stretch the imagination to envision that provision applied regularly to China.
  • Add 9 factors for CFIUS analysis. The bill would add nine new national security factors for CFIUS to consider in its review. Those factors include the above-mentioned country of special concern as well as factors relating to:
    • Market share;
    • Cost to the U.S. Government;
    • Facilitation of criminal or fraudulent activity;
    • Technological advantage;
    • Cybersecurity;
    • Foreign investor’s compliance with law;
    • Security of personal data; and
    • Security of other sensitive information.
  • Increase the review period. The bill would extend the initial transaction review period from 30 to 45 days and allow for a 30-day extension at the request of a federal agency for “extraordinary circumstances.” The proposed changes could result in an initial review reaching 75 days and a total CFIUS review of up to 120 days.
  • Expand presidential authority. The bill would expand presidential authority by explicitly authorizing the President to “take any additional action the President considers appropriate to address the risk to the national security.”
  • Add CFIUS mitigation tools. The bill would give the CFIUS agency new authority to suspend transactions, impose conditions pending review, and implement mitigation agreements even where the transaction has been abandoned.
  • Authorize exemptions. The bill would authorize CFIUS to exempt certain transactions from review in order to reduce the burden on CFIUS’ resources.
  • Introduce a new lighter filing. The bill would add “light filings” to CFIUS for certain types of transactions.

How To Prepare for CFIUS Reform

The proposed CFIUS reforms present higher hurdles for foreign investors. Those hurdles include the expansion of CFIUS jurisdiction with a catchall built in for transactions designed to avoid CFIUS review, targeting countries for review, adding analysis factors, increasing the review period, expanding presidential authority, and adding mitigation tools including some even where the transaction has been abandoned. For those reasons, non-U.S. companies and individuals will likely require more planning and preparation to successfully make investments in the United States.

Accordingly, the best placed non-U.S. companies will be those that work with experts to navigate the CFIUS requirements. Certain proposed CFIUS tools, including the exemptions and lighter filing, may enable outside counsel or a consultant to reduce the burden of a review on a non-U.S. investor.

This post comes to us from Sheppard, Mullin, Richter & Hampton LLP. It is based on the firm’s memorandum, “The Future of CFIUS: Perhaps Not So Happy a New Year,” dated December 29, 2017, and available here.