US Finalizes CFIUS Reform: What It Means for Dealmakers and Foreign Investment

After significant deliberation and discussion, Congress passed and the president is expected to shortly sign the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA),¹ the first legislation in over a decade to reform national security reviews through the Committee on Foreign Investment in the United States (CFIUS). The resulting legislation will, in large part, codify certain CFIUS regulations and practices of the past several years. But FIRRMA also expands CFIUS’ jurisdiction to cover several previously uncovered transactions, most notably over certain noncontrolling transactions. In addition, FIRRMA provides statutory clarification of CFIUS’ jurisdiction over private investment funds. The legislation also ushers in a number of administrative changes, including updates to review timing, the authorization of filing fees and — in significant departures from current requirements — mandated short-form filings for certain foreign investments and annual disclosures of filers and outcomes of CFIUS cases involving long-form notices. Finally, FIRRMA provides a statutory pathway for judicial review and acknowledges the advent of multilateral national security reviews of cross-border investments.

The practical results of most of these provisions will not be seen for up to 18 months, as CFIUS has been granted that time to engage in formal rulemaking to implement many of these changes. Some changes, however, come into effect immediately. The table below summarizes the new provisions and when they will take effect.

Codification of Existing CFIUS Practice and Incremental Jurisdictional Expansion

CFIUS jurisdiction extends only to “covered transactions,” generally defined until now as transactions that could result in foreign control of a U.S. business. In several ways, FIRRMA largely codifies what has become CFIUS’ interpretation of previous authorities and provides marginal expansion of its jurisdiction, but likely not in ways that will radically change CFIUS’ practices.

Real Estate

CFIUS has historically scrutinized transactions in which a foreign party seeks to purchase real estate that is sensitive for national security reasons because it houses sensitive tenants or is in proximity to sensitive sites such as U.S. military installations and training areas. FIRRMA codifies CFIUS’ jurisdiction to review the purchase of U.S. business-owned real estate while also expanding CFIUS’ jurisdiction to include leases and other real estate transactions as well as purchases of vacant land (i.e., true “greenfield” investments). Subject to exceptions to be defined in regulations, the new provisions omit single housing units and properties in certain urbanized areas and no longer include real estate transactions that involve proximity to land ports (i.e., border crossings), as had been previously proposed by some lawmakers. CFIUS is authorized to issue regulations narrowing the scope of these new real estate provisions to investors from certain countries.

Sensitive Personal Data

CFIUS has in recent years also heavily scrutinized transactions in which a foreign party could gain access to personal information of U.S. citizens, especially when it is in bulk form. FIRRMA codifies CFIUS’ jurisdiction over transactions that provide investors access to the sensitive personal data of U.S. citizens, with specifics to be defined in CFIUS regulations.²

Definition of US Business

FIRRMA also broadens the definition of a U.S. business — the key asset that must be involved in order for CFIUS to have jurisdiction — by requiring merely that it be a person “engaged in interstate commerce” in the U.S. This approach eliminates some prior elements of the U.S. business definition, although in practice CFIUS was routinely aggressive in its interpretation of what constitutes a U.S. business.

Significant Expansion of CFIUS Jurisdiction Over Noncontrolling Investments

In its most significant jurisdictional expansion, FIRRMA now provides CFIUS authority to review transactions that are not “controlling” investments — an increasing area of concern in the executive and legislative branches.³ Although CFIUS has long aggressively interpreted what constitutes a “controlling” and hence covered transaction,⁴ FIRRMA expressly provides that certain smaller, noncontrolling investments will fall within CFIUS’ jurisdiction. Such noncontrolling investments only apply in cases in which the foreign acquirer is investing in a U.S. business that involves “critical technologies,” “critical infrastructure,” or “sensitive personal data of U.S. citizens.” This significant expansion will, however, only apply to countries specified by subsequent CFIUS regulations, which should — according to FIRRMA — “limit the application” of this jurisdictional expansion to countries of particular concern.

Largely consistent with current CFIUS regulations, FIRRMA also provides further definition of “critical technologies,” principally centered on restrictions imposed by the Commerce (Export Administration Regulations) and State (International Traffic in Arms Regulations) departments. In addition, FIRRMA calls on CFIUS to develop regulations narrowly interpreting a broad statutory definition of “critical infrastructure.” With respect to personal data of U.S. citizens, we expect CFIUS will continue to focus — as it previously has — on financial services, health care and insurance information, as well as other consumer data.

Although CFIUS will engage in further rulemaking to clarify how these provisions will work in practice, we expect this aspect of FIRRMA to have a potentially significant impact on deal structuring. Not only does this aspect of FIRRMA create an entirely new area of jurisdiction, it will — in certain cases — also limit the use of a common phased-structuring of transactions in which a foreign buyer immediately acquires 9.9 percent of a U.S. business but then pauses further investment or governance rights pending CFIUS approval. In cases involving this jurisdictional expansion, such an approach would be problematic given even the initial investment would constitute a covered transaction.

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