After months of deliberation, Congress has passed the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) as Title XVII in the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“2019 NDAA”). President Trump signed the 2019 NDAA into law on Monday, August 13.
FIRRMA is compromise legislation between the Senate and the House that attempts to address perceived weaknesses in existing federal law regarding review and approval of foreign investments that may implicate U.S. national security. FIRRMA will likely have broad effects on foreign investment in the United States generally and will especially impact Chinese investments.
Background of CFIUS
FIRRMA amends significantly Section 721 of the Defense Production Act of 19501 (“Section 721”) which authorizes the President to investigate, suspend or prohibit any transaction resulting in control of a U.S. business by a foreign person where the President determines such transaction threatens to impair U.S. national security and no other adequate means are available to address the identified threat. Since 1988, Section 721 has governed the work of the Committee on Foreign Investments in the United States (“CFIUS”), a federal interagency committee. CFIUS is comprised of cabinet-level executive officers from the Departments of the Treasury, Homeland Security, Commerce, Defense, State, Justice, and Energy. The Secretary of Labor and Director of National Intelligence also have roles in CFIUS as nonvoting, ex officio members.
Under Section 721 and the pre-FIRRMA regulations (“Regulations”),2 the President already has vast power to investigate and to prevent, amend or even dissolve and reverse a transaction covered by Section 721. A “covered transaction” under the Regulations means “any merger, acquisition, or takeover … by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.” This broad definition effectively captures all foreign investments or acquisitions that could lead to a change in control of a U.S. company. Importantly, “control” is defined as “the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity.”3 The Regulations also provide an extensive list of factors that CFIUS may consider when determining if the transaction will result in foreign control of a U.S. company.
The majority of cases reviewed by CFIUS begin when the transaction parties submit a joint voluntary notice to CFIUS asking for such a review and clearance under the Regulations. Under the pre-FIRRMA rules, once a voluntary notice was submitted, CFIUS had a 30-day “review” period to raise any questions from its member agencies. At the end of that initial 30-day review period, CFIUS could have either allowed the transaction to proceed as the parties intended or moved the transaction into a further 45-day “investigation” period. During that investigation period, CFIUS could have continued to request additional information from the parties and could have requested an actual meeting. If, at the end of the 45-day investigation period, CFIUS had not reached a determination, then it would have recommended to the President whether to allow the transaction to proceed. The President then had an additional 15 days to make a final determination. While almost all notified transactions reached a final disposition within the 45-day investigation period, the whole process under the pre-FIRRMA rules could have potentially taken 90 days after the parties had filed their voluntary notice.
Significant Changes after FIRRMA
Filing Fees Authorization. Since 1988, the Department of the Treasury has not charged any filing fee or processing charge to handle a CFIUS notice filing despite the many hours of government personnel time needed to manage such a filing and the obvious financial gain that the parties hope to achieve through the transaction. In FIRRMA Section 1723, Congress did not mandate a filing fee but has now authorized CFIUS, at its discretion, to add to the Regulations the requirement for such a filing fee. If CFIUS were to decide to require a filing fee, Congress has stipulated that such a fee may not exceed an amount equal to the lesser of (a) one percent of the value of the transaction or (b) $300,000, adjusted annually for inflation. It is not clear whether the Administration will use this authority, but, since the number of such filings is expected to rise due to the increased jurisdiction of CFIUS over more transactions, the imposition of such fees might help to offset the costs of the likely additional staff that the Treasury Department and other agencies may now need to handle that higher volume of cases.
Expanded Jurisdictional Scope. FIRRMA amends the threshold definition of “covered transactions.” FIRRMA Section 1703(a)(4) specifically adds the following categories of transactions by foreign persons that are subject to review by CFIUS:
- Section 1703(a)(4)(B)(ii) will cover real property transactions that relate to any real estate “located within, or [that] will function as part of, an airport or maritime port” in the United States;
- Real property transactions (that is, both sales and leases) relating to property4 that either is “in close proximity” to any military or other national security installations or allows spying on such locations, although the definition of “close proximity” in this context will not be specified until CFIUS adopts new implementing regulations later this year5;
- “Any other investments” in an unaffiliated U.S. enterprise that “owns, operates, manufactures, supplies, or services critical infrastructure”; “produces, designs, tests, manufactures, fabricates, or develops” critical technologies; or “maintains or collects sensitive personal data of U.S. citizens”; and
- Any change in rights of a foreign person in a U.S....
